Our Sense About Dollars

I have always harbored a vague suspicion about economic populism. Any idea that has the capacity to unite the Tea Party and union activists is more than a little unsettling. But populism is, well, popular. The notions that drive the ideology have a general appeal that, like much of today’s politics, come from the general direction of the gut rather than the brain. What makes the idea so especially popular, however, is that today’s media is unable to see through the nonsense and report the truth.

If it sounds like I am raising an alarm on populism, it is because I am. The guiding principles of populism, on their own, pose a real danger to the economy of the United States. Taken together, the guiding principles of populism could bring our economy down. Is it really that bad? Is populism really that dangerous? Yes. Populism is about vanity, simplicity, and the pride of the working class perverted for power. Happily, the philosophy is easily set aside, and is not linked to either the Republicans or the Democrats.

Looking at our economy in the 21st Century, the villains (according to populists) are easy to identify. First, they are typically foreign; the “Made in China” label ubiquitous in Wal-Marts coast to coast, the Asian names on our home electronics. Second, the villains are consistently reported in our media; the “strength” of our dollar, the amount of our “foreign debt”, the size of our “trade deficit”. Finally, these items are neatly tied up by populists into conveniently misapplied labels; free trade deals are especially easy to use. That all of these factors play a role in the state of the U.S. economy is a fact. But populism misinterprets the role these factors play, and misdiagnoses their effect on our economic lives. The result is predictable; if your doctor misdiagnoses your disease, he or she will prescribe the wrong medicine.

Populist Rule Number 1: The U.S. Dollar Must Be Strong

There is a growing panic that our deficit or economy is going to cause the dollar to (insert your favorite description of panic); “precipitously fall”, “plummet”, “crash”, or “weaken to the point of irrelevance”. When this happens, the story goes, rampant inflation and general chaos will rule the day, and Americans will be forced to speak Mandarin. A strong dollar is really good for American tourists travelling abroad but, beyond that, has only one major effect. The strong dollar is the single biggest cause of our massive trade deficit.

There is a feeling that a falling dollar will hasten calls for a new world reserve currency, but it isn’t immediately apparent why that notion should trouble a populist. The economy of the European Union in its totality is strong, and the Euro is not the world’s reserve currency. The economy and corporations of Japan are strong, and the Yen is not the world’s reserve currency. Finally, if you have populist leanings, and want to see the United States extricate itself from the problems of the rest of the world, why would it be vital for the U.S. dollar to be the currency of the world? The strength of a nation’s economy should define the value of its currency, when it doesn’t, problems arise. Our overvalued dollar creates a daily vacuum which pulls cash out of our economy and sends it around the world. Once gone, that cash ends up in no American paychecks, public or private.

Populist Rule Number 2: Free Trade Is Evil

This is a good one, especially when you dig into the dueling motivations. For many Americans, “free trade” is the reason that manufacturing jobs are leaving the nation. For other Americans, “free trade” is the way American companies oppress the sweating masses of the Third World. For myself, I would wager that most Americans have no real concept of what “free trade” really means. We live in a nation, after all, where the mere mention of the phrase “tax cut” is enough to elect the most pernicious criminals to high office. Yet free trade agreements are tax cuts, pure and simple. Even better (and this is for you Tea Party/Libertarians out there in The Rational Middle), free trade agreements are the establishment of ultra-low flat taxes on goods that cross national borders.

For many, the ideas of free trade and globalization are the insidious plots of global conspiracy made manifest. But this is what we humans do…this is what we have done for millennia. We reach out and create relationships. We share goods and ideas, religions and culture. Our globe is defined by caravan routes and shipping lanes, and yes, there are always complications. Religions and cultures clash, corporations seek to dominate, people make mistakes. One central lesson of history, however, is that no society can long endure that closes itself off from the world. The problem with free trade agreements isn’t the lack of protection for domestic markets, it is the lack of preparation and investment in those domestic markets.

Populist Rule Number 3: All Debt Is Inherently Bad

This is the toughest rule to deal with, primarily because it is the rule that is closest to fact. Too much debt, at certain times, is bad. How much is too much? When is it bad to carry debt? Is debt held by foreign countries or individuals dangerous? This is a popular issue in populist circles because the absolute value of our debt is at an all-time high. But our debt is not is high as it was, as a percentage of GDP, after WWII. Also, other nations (Japan, for example), have run much higher levels of national debt for long periods of time without ill effect. The key, as with any debt, is the ability to service it effectively. Even now, our nation pays a far lower portion of its income to debt service than the average business or household does.

When is it bad to run high deficits? When the economy is booming. You can visualize an economy as a bucket of water; deficit spending adds water to the bucket. In a struggling economy (like the one we have now), the bucket isn’t full, and the water added by deficit spending can help to fill it up to capacity. When the economy is booming, that added water would spill out and create a mess that we recognize as inflation. As our economy starts to fill up, the Federal Reserve can slowly add sponges to the bucket (by raising interest rates or increasing the reserve requirements of the banking system). Well-managed deficits are not problematic.

But what about foreign ownership of debt? The Chinese government is not going to be towing away Air Force One anytime soon. Foreign entities cannot “call in our markers” and crash our economy. Despite this, there is a current and constant theme in populist circles that our debt is now considered risky; but that theme falls flat in the face of the popularity of government debt. Our debt still sells, and the market is willing to buy it at very low interest rates. This is proof positive that the market considers U.S. debt to be a low risk (and so low return) investment. And what of S&P and the notion of U.S. debt being downgraded? Friends, these are the same geniuses that told the world mortgage backed securities were just hunky-dory.

Populism is all about retrenchment and a withdrawal from the wider world. Populism is all about the application of a tourniquet with no thought of fixing the hemorrhaging vessel. The United States needs to be in the business of rebuilding our commercial and human infrastructure. We need to be in the business of developing our 21st Century economy. We need to be in the business of competing with an energized emerging world. What we don’t need is to run and hide from the rest of the world. Let the cowards hide behind locked doors; we are Americans after all.

The Rational Middle is listening…

3 thoughts on “Our Sense About Dollars

  1. Thank you Ben, and welcome. I appreciate your points, but would offer three follow up thoughts for your consideration.

    1) “Excess” spending and/or taxation during boom times only creates pools of wealth with little ongoing effect if such spending does not take the form of commercial or human infrastructure projects. Commercial infrastructure and education have long term resonant effects on the economy…it is these areas that have been largely ignored by the major deficit producers prior to our current administration.

    2) When I say debt isn’t fundamentally a bad thing, it is decidedly not from the perspective of a college freshman coming off a beer and pizza binge (although I wouldn’t mind terribly being that age again). All major companies and most households utilize debt as a tool for growth and improvement. It is the how and the when of that tool’s use that is critical…and the what. I would argue that the return on investment of a new energy grid or an expansion in the number of primary care doctors far exceeds that of an F-22 (no matter how much I may like that airframe).

    3) I must take exception on one specific statement; “…the 90’s (surplus was)…negligible compared to our deficits and our debt.” Much of the boom of the 90’s, largely the result of a number of asset bubbles, did end up in those pools of wealth you described. But in the terms of the public debt we are speaking of, it can not be called negligible as it did serve to balance the budgets at the end of that period.

    What all of this does show is that the root causes of no or low ROI debt must be addressed. This, of course, will go to a place of basic disagreement between good libertarians like yourself and liberals like me. I believe smart public investment, as a component in a majority capitalist economy, to be smart investment. The causes of the debt are not then the simple idea of government spending, but rather government spending in inefficient or broken markets. Health care, which occupier something like 15% of our GDP (that number was closer to 7% in 1980…FYI), fits that description.

    I do look forward to more comments Ben….I suppose I will have to buckle down and post some more. Thank you!

  2. On debt…

    Although it seems stable, and, for the most part, if we look bond by bond, it is, debt is a very bad system to be under. For example, if we look at privately held bonds, they must be paid back on a timetable. They are often repurchased at the same value, allowing the government to retain enough pocket change for a long enough time to do things with it, but there is nothing stopping individuals from merely not renewing the loan in the form of not repurchasing the bonds.

    But, more importantly, on a fundamental level, debt must be paid back whether short term or long. The problem with this is that spending during any economy will boost production, while excess taxing (not necessarily by taxing more, but merely running a surplus as opposed to a deficit) causes a decrease in production. Now, in an economy that macroeconomics deems to be producing too much (under natural unemployment rates), a decrease in production is good. Without even debating that point, the recent trend has been to run such incredibly high deficits that, I would argue, could never possibly be matched in any booming period. We often talk of the ’90s as a time of surplus, but little thought is given to how much of a surplus it was. It was negligible compared to our deficits and our debt. Not only that, as a libertarian, I don’t believe that increased spending actually helps the economy in any sort of sustainable way. All it does is create wells of money in various places like commodities. I’m not going to call it inflation because it’s not truly inflation, but the price of base goods increases as the scarcity remains the same. I would argue that the increase in commodities prices merely feeds into so-called natural monopolies and further into their investors, who are typically wealthy. So, essentially, the wealthy make most of the money that is printed/borrowed/what have you when the deficit increases, which is taxed back to some extent, but that money just goes through a loop wherein the rich get richer and the poor get poorer. I’m not fundamentally against that, of course (libertarian), but when it stems from an ignorance of the poor to the way that this cycle works and then macroeconomists say “Debt isn’t a fundamentally bad thing”, I get quite a bit pissed off.

    Because the economy isn’t being positively affected in a long-term way, the economy is no more likely to be in a boom period than a bust period coming out of the excess government spending (assuming, of course, that the excess government spending ever ends, a likelihood that seems to decrease daily as more and more liberals insist that the stimulus packages, get this, weren’t enough). So, basically, let’s say that the deficit increases another 5 years, creating a streak of massive deficits, let’s simplify, from year 2000 to year 2015, and our deficits now aren’t just a couple million. They’re at about a trillion or more a year. That’s a RIDICULOUSLY large amount of money, even with our astonishingly high GDP. If every American gave all of their income to the government (gave. I always thought bonds were incredibly stupid for the government), the country wouldn’t be making a dime for more than a year, even without the next 5 years of assumed spending. Oh, and, when I say that, I mean if the government basically completely shuts down, offering no federal spending at all.

    So, sure, we can keep passing it down and pretending it’s okay like a college freshman keeps saying he/she’ll work off all that pizza and beer tomorrow.

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