political economy and debt

The reason why we have not made more progress in social matters is that these problems have not been tackled by the practical man of high ability, like those who have worked on industrial inventions and enterprises. We need social inventions, each of many able men adding his work until the invention is perfected. -- Louis Brandeis

With the rise of Greece to the front pages(that's a bit of an anachronism these days isn't it?) the question of debt, both national and private, has come to the front. Most importantly, it begs the question of how much debt is sustainable, and that is not an easy question. Many professed "Keynsians" have stated and they are not incorrect, that in a time of economic recession, the government needs to step-in to mitigate the slow down and help get the economy moving. One thing most Keynesians leave out is Keynes, despite being quite radical thinker on many fronts, was also very much a classical economics thinker. He believed at some point the books needed to be balanced, and after all, accounting is really the only scientific aspect of economics, if you throw that out, there's really no foundation for anything else to rest on.

For Keynes and many of his adherents, the magical elixir for balancing the short-run books over the long-run is growth, and this is where the world of 2010, particularly for the developed world, has tremendous problems. If we look at growth rates for the US economy in the 1950s they averaged 4.2%, the 1960s 4.4%. However in the 1970's, it was down to 3.2%, the 1980s 3.1%, the 1990s 3.2%, and finally the 2000s 1.9%. Two of the reasons for this decline in growth are first oil, which spiked in the 1970s and then came roaring back in the mid-2000s. The second is the limits for growth in an established industrial economy. Of course this isn't just an American problem, for example in the 2000s, the German economy expanded on average 1.2%, while the Japanese since their financial bubble burst have barely squeezed out 1%. Those three economies together comprise almost a third of global GDP.

The new twist that has been added to the American and Japanese picture is the astounding rise in debt over the past two decades, an attempt to keep the economy growing at what previously would have been considered slow rates of growth. The argument of how to deal with this question basically falls into two camps. The first states we need to increase debt. We eventually will grow out of it, despite the facts this simply no longer seems the case. The second is what is now being prescribed for the Greeks. They need to start cutting their living standards so they can pay-off the debt they have accrued. The important thing to understand is the two camps, the deficit-spenders and the deficit-cutters, look somewhat differently at who benefits. The deficit-spenders look more at wage earners and how to keep the economy working for the greatest number. The deficit cutters are predominately looking at the financial component and most concerned about keeping the value of established debt so they will get a return on their investment.

However, we need to start looking at things a new way. I'd suggest people start with reading Keynes excellent Economic Possibilities of our Grand Children. Here, Keynes deals with the question of industrial society reaching the limits of productive growth and asks where do things go from there. For older industrial nations are, while maybe not quite where Keynes thought we could be, nonetheless, close enough that it is essential to begin moving beyond the thinking and restrictions of industrial finance and production. The debt problem allows us the opportunity to do just that.

We must come to the conclusion that a significant portion of debt created in the past several decades is simply not going to be paid back. We need to write it down. Simply piling up more debt on top of this already bad debt is going to restrict the future--your children and grandchildren--in a way that really is unconscionable. Along with writing down the debt, we're going to have to reshape how our political economy works. In his Treatise on Money, Keynes writes:

Entrepreneurs are induced to embark on the production of Fixed Capital or deterred from doing so on the profit to be made. Apart from the many minor reasons why these should fluctuate in a changing world, Professor Schumpter's explanation of the major movements may be unreservedly accepted. He points to "the innovations made from time to time by the relatively small number of exceptionally energetic business men -- their practical applications of scientific discoveries and mechanical inventions, their development of new forms of industrial and commercial organisation, their conquests of new markets, exploitation of new resources, shifting of trade routes and the like. Changes of this sort, when made on a large scale, alter the data on which the mass of routine business men have based their plans. But when a few highly-endowed individuals have achieved success, their example makes the way easier for a crowd of imitators. So, once started, a wave of innovation gains momentum.

It might come as a surprise to the segregated orders of our economic priesthood that Mr. Keynes could agree with Mr. Schumpter. Of course Keynes was speaking exclusively of industrial economy, and there is no doubt, we are in massive need of "creative destruction", particularly in the energy sector and most specifically with oil. Today, The FT points out renewed economic growth would shortly send oil to a $100 a barrel. Make no mistake, whatever you think about debt, the American economy as presently structured, nor the corporate globalization of the past several decades can operate on a $100 a barrel oil.

We need "creative destruction" across our political economy. If we can no longer simply rely on growth? If automation loses as many jobs as off-shoring? If physical limits of a finite planet demand an end to unbridled consumption? If all these add-up to a necessary and vital rethinking of political economy, how do we begin? I would suggest by rethinking the citizen, that we redistribute the roles of decision making in society, loose it from the mega-corporate executive suites and the marble mausoleums of DC and bring it into the capable but now empty hands of the citizenry. Create new institutions and processes of democracy, that value the hard work of politics at the same level we value work now associated with the economy. We must go about the business of building a new political economy. If we continue on, chained to industrial thinking, both the deficit-spenders and the deficit-cutters will be proved wrong. Wage earners will continue their slide and the debt will not be paid. The more we pile on debt to save the status quo, the more we lose the future.