February 7, 2013

Problems, Problems, Problems

Remember that old Everly Brothers song, "Problems?" Problems, problems, problems all day long. Always there seems to be more problems than there are answers. But, as has often been noted in this space, you can't get the right answer if you don't ask the right question.

If you listen to certain pundits and politicians, the biggest problem we face is the federal deficit. Right behind that in most people's minds would be Social Security. But some argue that the real problem is the continuing obsession with the federal deficit on the part of some politicians. So which is it? Well, you'll have to decide that for yourself, but I did come across a couple of articles that I found interesting in that they both ended up pretty much in the same place.

First up is an article in the Wall Street Journal's Market Watch, written by Rex Nutting. The article begins by asserting that the federal debt is no longer a pressing problem, that we have, in fact, already taken more than enough measures to bring debt under control.

The above graphic from the Center on Budget and Policy Priorities purports to show that we already have stabilized the debt to Gross Domestic Product ratio, a basic measure of debt as a share of the national wealth. Mr. Nutting argues that pursuing even greater debt reductions means that other, more pressing problems will receive short shrift. To him, these problems are far more urgent than dealing with debt:
  • Unemployment. In some states, the rate of unemployment and underemployment is nearly 20 percent. That is an enormous amount of human capitol going to waste.
  • Climate Change: We all are beginning to see that climate change will cost billions of dollars. Drought, floods, rising tides, extreme weather: the future is now.
  • Infrastructure: Next time you see an overpass or a bridge, take a good, long look. You will see flaking paint and rust scales blooming like algae. And then there are the costs associated with avoiding future devastation wrought by a changing climate.
  • Democracy: Low turnouts, money in elections, gridlock, you name it. Washington, we have a problem.
  • The Wealth Gap: The gap between the richest and the middle class is widening at an ever-increasing rate. Mr. Nutting writes: "Between 1979 and 2007, the share of national income going to the top 1% of earners more than doubled, while the share of income earned by the bottom 80% declined."
The other article, by economist L. Randall Wray, talks about funding Social Security. He begins by making the argument that there is no crisis. Instead, the idea that Social Security was in crisis was drummed up by advisers to President George W. Bush, who was advocating privatizing Social Security. (Wouldn't that have been a nice move right before the bubble burst in 2008?) In fact, Mr. Wray argues:
"A useful way to measure the burden of Social Security on our productive economy is to look at the ratio of the program’s spending relative to GDP. On current projections made in the 2012 annual report of Social Security’s Trustees, that ratio is expected to rise from the current 5% of GDP to 6.4% in 2035 (with retirement of all the baby-boomers already completed). After that the ratio actually falls to about 6% and remains there through 2086—as far out as the Trustees care to project."
He argues that we have already absorbed a far larger increase than 1.4 percent, the rate having already doubled since the 1950s. That doesn't mean we don't need to be taking measures to care for aging Baby Boomers. He argues that the best way to reduce the future burden of supporting retirees is to increase capitol. As used by economists, capitol means "more human capital (education and training), more public capital (infrastructure such as roads, public buildings, and airports), and more private capital (productive plant and equipment, farms, telecommunications infrastructure, etc.)."

Mr. Wray points out that private companies only invest when there is the prospect of an immediate return on that investment. (The same could be said of politicians, who generally only act if it means something for the next election.) Businessmen are reluctant to invest today's profits in projects that won't generate revenues for  ten or twenty years down the road.

That is precisely what government can do and has done in the past: provide incentives to invest in future problems. The public works projects under the New Deal. The GI Bill. Eisenhower's National Defense Highway system. The answer from critics of federal spending is to cut aid to education, cut spending on infrastructure, and stop any sort of stimulus spending.

The next few weeks will be spent debating these very points. Do we have to sacrifice everything at the altar of deficit reduction? Is the federal deficit really that big a crisis? Is Social Security really in that much trouble? Can we cut federal spending in a meaningful way if we don't take a major bite out of defense spending? Can America have a future if we don't invest in it?

This is the debate America needs to have. Philosophers from Socrates to Descartes to Kant have urged us to question everything. We could do worse than to follow their advice.

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