Nov 20, 2009
Don’t Worry. We’re Crowding Out Private Borrowers!
This is Treasury Secretary Larry Summer’s calming message, as explained by David Leonart at the New York Times:
Lawrence Summers, the top White House economic adviser, made a point recently that I have not seen anywhere else. Speaking at the New York Economic Club a few weeks ago, he said:
… even with the dramatic action of the Treasury and the Federal Reserve, the total level of borrowing in our economy is actually lower than in normal times, not higher. Accordingly, the volume of securities that have to be absorbed by market participants is lower, not greater, than normal.
To translate: Even with the big recent increase in government debt, the total amount of debt generated by the United States economy has not been growing especially fast. That’s because the amount of debt being taken on by households and companies has been falling, as they have cut their spending during the recession.
So we should all be relieved, right? If only it were so simple. This is good news only if government borrowing falls as private need for capital recovers. But of course government borrowing is projected to increase, not only if ill-conceived entitlements like national health care pass, but also due to the unfunded liabilities embedded in Social Security and Medicare. (These liabilities aren’t trivial. Current unfunded federal liabilities are 10x the entire national debt, $107T—yes, Virginia, that T stands for 1,000 billion, or 1,000,000 million—and growing.)
Then there is that pesky question of whether government borrowing is even effective. This is the dreaded “fiscal policy multiplier” debate in Keynesian economics. Even if that multiplier is positive (with current levels of waste and graft—read: pork—I suspect that multiplier is negative), it’s unlikely to be as positive as the multiplier for private investment. The multiplier for private investment is so positive because private enterprises cannot go on indefinitely consuming more capital than they create. There is no such “survivors create value” feature embedded in your average government program.