Today, I received an email message from a former students. It reads in part:
I’ve been in an intellectual battle with a friends regarding the national debt. My position is that although massive government spending isn’t necessarily a good thing, if persistent and long term, perhaps the only way the economy could have stopped the downward spiral was to have a huge stimulus. We could disagree on the way the programs have been rolled out but, today, as last year, we needed something to be done. I like to think of education to be an example of how debt can satisfy current needs. I took small debt out while at Notre Dame to meet my financial needs. That was clearly an investment and I’m doing well enough now to meet my payments on debt.
My friends contend that if I could not afford Notre Dame—then I should have gone to a state school that I could afford. The argument would follow that, if the country cannot afford to take out debt—then we ought to work in other ways to satisfy our needs.
My question to you is—how can we objectively look at the national debt to make fair claims about it. Are there any papers you would recommend?
I have to confess that I’m tired of folks telling me I will have to pay for the debt when I’m older. I don’t think that’s a fair judgment. I recognize I will have to contribute in the future, and do so now, but to think that we can’t meet our obligations is incorrect. Please help, perhaps I’m misguided.
Dear former student,
Your messages raises many important issues and I’ll only be able to touch on them here.
You’re not at all misguided. One option, therefore, is to get new friends. But presuming you want to continue to talk with them, here are some things to keep in mind. . .
First, I don’t particularly like the comparison between an individual’s finances and the federal budget, since individuals (and, for that matter, local and state governments) are forced to balance their budgets but the federal government is not. And the U.S. federal government can, for a variety of reasons (including the size of the U.S. economy and the role of the dollar as the international reserve currency), can run persistent—and, right now, growing—deficits without causing a problem. You can read more about how the Chicken Littles on the Right are wrong in quite mainstream postings by Randy Wray and Robert Frank.
Second, the usual arguments from the Right are that fiscal deficits cause inflation (the monetarist position of too much money chasing too few goods) and/or a rise in interest rates (the so-called crowding-out effect), and therefore should be avoided. There are many problems with both arguments but, right now, they make no sense whatsoever. The threat right now, in the current recession (with tremendous unemployment and excess capacity), is deflation not inflation. And private investors are simply not investing, no matter how low interest rates are. Not only are they not being crowded out; the hope of the Obama administration and congress is that they’ll be crowded in by the deficit-financed stimulus plan and Wall Street bailout.
So, what’s left? Basically, the dogma that government intervention is bad, and that the only policy should be to lower taxes. That’s an attempt to shrink the federal government and to leave more profits in the hands of corporations and income in the hands of wealthy individuals. Such measures would, indeed, shrink government programs (like health and safety programs, food stamps, education, and so on) and raise the level of unemployment. That’s certainly not the kind of society I would want to live in—although, in recent years, we all have.
Here are a couple of questions to ask your friends: Would they have preferred a full-scale depression, in the absence of a stimulus plan? And, if they’re so serious about deficits, do they support the idea (currently being discussed within the Obama administration) of levying special taxes on “too big to fail” banks?
It’s also important to ask about the causes of the current deficits. According to the Center on Budget and Policy Priorities, only a small portion of the long-term deficit projections is attributable to the stimulus plan and TARP. The largest portion stems from the Bush tax cuts, the wars in Iraq and Afghanistan, and the current crises.
But it’s not just a matter of being for or against budget deficits. Having been a student in my Marxian economic theory course, you know there’s a fundamental tension between capitalism and full employment. Unemployment is one of the means by which capitalists assert control over the working-class. Without unemployment (or at least the threat of unemployment), the inherent contradictions of the system would exasperate the underlying political and social tensions. And, in the past, almost all capitalist economies took the easy way out and—sanctioned by conservative economists who argued the impotence of fiscal policy and the need for “sound finance”—abandoned the commitment to full employment. Now, as the pendulum swings in the opposite direction toward more liberal mainstream economics, the view is that balanced budgets have to be sacrificed so that unemployment can be lowered (if not now then eventually). But the fundamental tension between capitalism and full employment—and therefore the fate of fiscal budgets—remains.
The role of the state and deficit financing in a capitalist economy is an important issue. But, in all honesty, what I find most disturbing in your friends’ comments is the argument that, if students (actually, their parents) can’t afford private higher education, they should not go into debt and should enroll instead in a public institution. The problem is, large numbers of students at both private and public institutions are now finding it difficult to finance their educations, as investment portfolios at private institutions have gone south and state budget cutbacks have led to tuition increases at public universities. So, many in the current generation of students will either be saddled with debt or deprived of higher education. What will be left is a small minority who can afford to pay for aneducation, at a decreasing number of high-quality private or public universities. So, unless things turn around, and quickly, the brave new world your friends desire will be a reality.
I hope this helps. I know I’ve only briefly discussed some of the many important issues you raise, and for that I apologize. But don’t hesitate to contact me again if you have any additional questions. And best of luck in the battle of ideas with your friends.
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