For Every Dollar Borrowed, There is a Dollar Saved
By Michael Norman
In Paul Weinstein's column, "Next, Cut Spending or Debt Will Doom Our Future," (NY Post, 2/10/2009) it's at least nice to see that he acknowledges the need for a stimulus in the face of a frightening decline in output and employment. However, his comments on restoring order to America's fiscal house shows exactly why fiscal stimulus in the U.S. during the 1930s and throughout Japan's "Lost Decade of the 1990s" didn't work. In each of those examples the goal to restore fiscal discipline eventually undercut any stimulus that was applied. In his remarks today Treasury Secretary Geithner made note of this when he said, "previous crises lasted longer and caused greater damage because governments applied the brakes too early. We cannot make that mistake." The secretary is right.
Whether Mr. Weinstein likes it or not (and he apparently doesn't), government spending and investment is a component of GDP and a pretty significant one at that. The $2.9 trillion that the government spent in 2008 is nearly twice the level of private non-residential business investment that occurred. The notion that you can pare down government spending and have that lost output magically and fully replaced by the private sector is wishful thinking at best. Unless, of course, Mr. Weinstein is suggesting that we as a nation accept a lower standard of living: in essence, become poorer vis-a-vis the rest of the world.
The notion that government spending "crowds out" the private sector is a fallacy. Government spending has gone from $92 billion annually in 1946 to over $3 trillion currently, yet total industrial capacity utilization has dropped to 74 percent from 90 percent and the unemployment rate has climbed from 1.2 percent to nearly 8.0 percent in that time. In other words, despite a thirty-three fold increase in government spending, much of the nation's wealth producing capacity remains unused. Where, is the crowding out?
Nor do you see any evidence of crowding out in interest rates: U.S. Government bond yields are at historic lows, yet according to Mr. Weinstein's claims, we should be seeing record high interest rates due to record spending.
Mr. Weinstein's concerns over debt display a complete lack of understanding of double entry accounting, an accounting system that pretty much the whole world adopted about 500 years ago because it's superior to the single entry version. By definition, for every dollar borrowed there is a dollar saved and for every new liability created there is also a new asset. To focus exclusively on the liability side of the balance sheet is to miss half the picture.
The "greatest generation" may or may not have understood this, but it is a moot point. The debts they ran up to fight the war also went to producing factories, plants, equipment, training, educational facilities, infrastructure and many of the real assets that became part of the wealth of the current generation. The deficits came down not because they our grandparents "whittled it away," but because the spending created the real assets that produced wealth far in excess of whatever debt was created.
-Michael Norman is an economist and private investor