Saturday, October 8, 2011

The Budget Deficit, Spending and Taxes: A Lecture by Erskine B. Bowles

By: Maple Seawright

An Insider's Look at the Public Debt Crisis

Erskine B. Bowles, former UNC-system President, spoke at Gerrard Hall about the nation’s budget deficit, government spending and the effects of public debt on the economy as a part of the Thomas Willis Lambeth Distinguished Lectureship in Public Policy.

In 2010, Bowles — who was also chief of staff for President Bill Clinton — was named co-chairman of President Barack Obama’s National Commission on Fiscal Responsibility and Reform. The commission’s responsibility was to address the deficit and develop policy to effectively deal with America's public debt. I felt fortunate that I able to attend the lecture because it’s important to hear personally about the direction of the economy. I think that many Americans aren’t informed about the severity of the deficit, which is why many politicians have been able to dodge the issue.

No Procrastination or Denial Allowed!
Bowles delivered a grave message about the state of our economy and the crushing effects of debt. The debt hasn’t been productively regulated by recent politicians and has continued to balloon in such a way that America will have to undergo major sacrifices just to reduce it. Bowles gave a comparison to demonstrate what it means to have a bloated debt as opposed to a manageable sized debt. He explained that at the end of the Clinton Administration we had a debt to GDP ratio of 35%. Now we have an astonishing debt to GDP ratio of 67 % and a gross GDP ratio of over 100%. What does this mean for the growth that we need to encourage jobs? Bowles describes the dilemma, “Any economist will tell you, When the size of your debt size of debt equals size of your economy, you expect that you’re going to have less economic growth by 1-2% percent than what you would have had otherwise.”

Generally when politicians speak about reducing the debt, the assumption is that we are trying to establish a solid economy for our children and grandchildren. However Bowles reminded the public that the threat of debt is imminent and that we are also doing this for ourselves. “Now that I have familiarized myself with our nation’s finances, I am really worried,” Bowles said. “This deficit is like a cancer. It’s going to literally destroy our country from within if we don’t do anything about it quick.” The overall message of the lecture was that there needed to be a collectively fast, bold and strategic effort to reduce the debt. If America continues to sustain the status quo, we will be “facing the most severe fiscal crisis that this country has even seen.” The path that we are going on is not sustainable. Even in recent news, economists have been predicting a double dip recession.

Debt = No Investment for America’s Future
Bowles informed the audience that in 2010 our entire revenue was consumed by interest from our massive debt and mandatory spending. The money that was used for infrastructure, research, war, education, etc was from borrowed money and half of the money was from foreign countries. This irresponsible behavior is a “formula for failure”. In fact by 2020 Bowles predicts that we will be spending a trillion per year in interest. That’s money that America won’t be able to use for innovation, infrastructure or jobs or as Bowles frames it, “A trillion that will be used helping other countries” reach their goals. 

Try to imagine a household that is riddled with debt. Instead of the parents using their income to save towards their children’s college, purchase quality organic food, do much needed maintenance, save money to open a business in the future or invest in their children’s cognitive, social and emotional development, all the extra money is used towards debt. Even worse is that emergencies would become disasters. America seems to forget that the unexpected could topple us over economically and socially. It’s also similar to a business saddled with so much debt that they can’t expand, hire or innovate. The workplace becomes a hostile environment, the threat of bankruptcy hinders creativity, policies are enacted that enrage customers (ex. Bank of America’s recent debit card usage charge) and products and/or services office are no longer at a premium (ex. the post office is closing processing centers to avoid debt which will slow their deliveries and decrease their competitiveness). All of these conditions exacerbate the debt and cause many businesses to eventually shut their doors permanently or get acquired. Imagine those negative event affecting America as a whole. The debt will hinder America’s growth, our ability to remain globally competitive and put a strain on Americans emotionally. Just the emotional stress from the economic effects of debt is a burden enough that could incite mass conflict, reduce our ability to logically encourage economic growth and increase mental health issues in America.

Phony numbers = Votes?
Politicians often use rhetoric to appeal to their voter base by stressing only to raise taxes or to only cut spending. However this is not about following one ideology to solve this issue. Instead, any policy that could be effective needs to be implemented. The policy needs to be balanced therefore it would be wise focus on growth and taxes . Bowles explains that we can’t slowly grow our way out of this problem. We could have double growth for a decade, and just using growth would not address the deficit. In order to tax our way out we could have to use astronomical rates, 80% marginal rate and 70% corporate rate. This will mean that this Democrats and Republicans will have to somehow put politics aside and work together. 

Oftentimes politicians are too afraid of publicly supporting the other side because that decreases their own legitimacy and almost implicitly states that the other candidate is a better choice. Therefore is it up to America to encourage politicians to support one another for the greater good. Reward politicians that show genuine concern for the America and are not focused on tearing down positive politicians. 

The National Commission on Fiscal Responsibility and Reform are not behaving haphazardly. Instead they are making calculated steps towards balancing the budget. I've posted Bowles's goals for reducing the budget and the consequences that he wanted to avoid if you want to check it out. What do you think about the current debt crisis?
  • UNCChapelHill. (2011). YouTube: Erkskine Bowles: 2011 Lambeth Lecture
  • Seaman, Jessica. (2011). The Daily Tar Heel: Bowles Warns National Deficit is “Like a Cancer”.
  • Strategy Sessions. (2011). CNN Money: Double-Dip Recession ‘Imminent'
  • Huffington Post: Bank of America Plans to Charge Monthly $5 Debt Card Usage Fee. 2011.
  • Miller, Zeke. (2011). Business Insider: Post Office Battles to Avoid Bankruptcy.

Vuk said...

There is an excellent book about debt crises from a historical perspective that I would recommend - "This Time Is Different" by Reinhart and Rogoff.

Essentially, their argument is that banking crises, especially when coming from the global financial centers, tend to squeeze credit worldwide thereby making harder for other emerging market economies to service their debts, pushing them into sovereign debt crises. As less and less money is available, they need it even more, and are willing to build more short term debt to service their liabilities. The downward spiral of debt is what is disabling a proper recovery, which is becoming more and more obvious in the current recovery..

Vuk said...

@ Diane,
you're welcome :)

I only recently started my blog, so it will be handling more and more material soon enough.

And I agree, during times of crisis, structural issues of an economy become more visible than ever. All the eurozone peripheral economies are a clear confirmation on this, as they need a serious restructuring of their labour market and a tax reform, rather than short-term quick-fix policies that will eventually do more harm than good.

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