With Stimulus, Is It 'Beggar Thy Children'?
An important element of Martin Luther King’s dream is becoming a reality: to an ever-greater extent people are not judged “by the color of their skin but by the content of their character.” On Inauguration Day, as with the aftermath of the election itself, the country echoed with pride at the ascent of the first man of color into the White House. And yet, on both occasions, the capital markets crumbled in fear at the likely price tag of his proposed initiatives.
According to Wikipedia, the expression beggar thy neighbor “was originally devised to characterize policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports, or by competitive devaluation.” More generally, it can refer to any wealth transfer from our neighbors to ourselves, in which the consequence is less aggregate wealth for all: a bigger slice of a smaller pie.
Thomas Jefferson suggested that “democracy will cease to exist when you take away from those who are willing to work and give to those who would not.” Redistribution, when it is from those with good ideas and strong work ethic to those without, is a special form of “beggar thy neighbor.” As we visit restaurants with empty tables and stores with idle clerks, are we seeing the result of policies that “beggar thy client”? When we see resources siphoned from the public economy into financial institutions that misjudged risk, automakers that misjudged demand, airlines that misjudged costs, a health-care system drowning in paperwork, and so forth, are we “beggaring” the very engines of innovation and economic advancement, including any and all who do not feed at the public trough?
But, of course, the plan is not to pay for this government largesse with current taxes. The plan is to borrow the incremental cost. So, the argument goes, we are not beggaring our bosses, our clients, our innovators and the hardest working among us. But, if current taxpayers are not bearing the cost, then future taxpayers must. Is it possible that the capital markets are reacting to an ambitious agenda which tacitly seeks to “beggar our children”?
After the Napoleonic Wars and again after World Wars I and II, England owed more than 250% of its national income. It took England most of the 19th century to bring the Napoleonic debt burden back below 50% of GDP, and a third of a century to do so after World War II. Some have suggested that this debt burden ultimately cost Great Britain its supremacy in world commerce. In the 30 years after World War II, after flirting with socialism which sought equality through a 98% top tax rate, the UK finally elected Mrs. Thatcher, who recognized that growth requires entrepreneurs and innovators, not a centralized command economy. Eastern Europe has also, selectively and with many false starts, recognized the same in recent years.
So what? In mid-2008, the United States government debt – aggregating across national, state, county and city – owed a far more modest 120% of GDP. Or did it? If we add in the unfunded portion of our Social Security and Medicare entitlement programs, the debt is already past 400% of GDP. And if we add in our corporate and household debt, our total indebtedness is a truly remarkable 800% of GDP, up from 500% of GDP a scant decade ago. Surprisingly, the TARP program has made little initial difference on our national indebtedness, mostly shifting debt from the corporate sector to the government. But, the proposed spending surge, and the tacit nationalization of broad swaths of the private sector, will add mightily to our debt burden.
History is ambiguous in assessing the impact of large national debt. Those who decry any and all deficit spending overlook the fact that a deficit smaller than the average growth in GDP can lead to a shrinking debt burden relative to GDP. Those who take the opposite view, suggesting that deficits do not matter, overlook the fact that no nation has ever experienced a deficit larger than 100% of GDP without daunting consequences, ranging from depression to bankruptcy to war. Indeed, many have argued that the seeds of Nazism were sowed by Germany’s crushing debt burden from World War I, and the resulting depression and hyperinflation of the 1920s.
So, what are we to make of our fast-rising indebtedness?
• Do we intend to eliminate large swaths of the indebtedness by abrogating our Social Security and Medicare obligations? It’s hard to imagine that the largest-growing roster of voters, those over 55, will allow that to happen.
• Do we intend to reduce the real value of our indebtedness by debasing our currency? This reduces the cost of our debt, but often at a cost of stagflation or depression.
• Do we abrogate our foreign indebtedness? With most of our foreign indebtedness owed to Russia, China and the Middle East, this is not likely to lead to a benign outcome.
Alternatively, do we intend to grow our way out of this mess? That’s the obvious intent.
• Do we rely on the multiplier effects of Keynes to stimulate spending and growth? People spend when they (1) have money and (2) have confidence that they’ll have more in the not-too-distant future. There’s no serious lack of the former, but spending has plunged because of a lack of clarity on the latter.
• Viewed from the supply side of Adam Smith, growth becomes difficult when innovators and entrepreneurs have no confidence that they’ll enjoy the fruits of their ideas and their successes. A government that views success with suspicion, stifles innovation with regulation, and criminalizes failure (SarbOx) is no friend to entrepreneurs.
Individuals and businesses invest more wisely than governments. If Obama wants to lead from the center, he needs to reassure us that entrepreneurialism will not be discouraged and risk bearing will not be punished. The capital markets will react well if the Obama administration unleashes the power of human innovation; they have reacted badly after the election, and again with the inauguration, because the markets fears that this is not in the cards. To borrow another quote from Jefferson, “I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”