The Catholic right is totally wrong on debt

For decades now, at least since William F. Buckley’s high-profile dissent over the teachings of Pope John XXIII, Catholics on the right have attempted to take the practical high ground over the moral high ground. Catholic social teaching means well, they would say, but the Church doesn’t really understand how economies work, and so should really take a back seat on these issues. But with every passing year, the wisdom of Catholic teaching on economics becomes more apparent (and for my friends on the left: the wisdom of Humanae Vitae become more apparent with each passing year too). And this is what I want to challenge – as well as getting moral priorities wrong, the right tends to get its economics ass-backwards. For this post, I will put aside the obvious moral issues and look only at the economics, one one particular issue in particular: public debt.

In the latest case of dissent on the right, Michael Sean Winters draws my attention to a blog post at National Catholic Register written by somebody called Pat Archbold. Archbold chastises the US bishops for their criticism of the Ryan budget. As Buckley said in the 1960s, as Novak said in the 1980s, and as Archbold says today – the bishops don’t get it. They don’t understand the problem. Here is Archbold:

“this letter does not address the real problems facing America, rather the Bishops sit on their high horses while simultaneously sticking their heads in the sand.

This massive accumulating debt has real consequences, and those consequences will be disastrous for the very poor the USCCB is concerned about.

If we continue to spend the way we are, we will have a Greek-style economy sooner rather than later, and with massive unemployment and massive shrinkage of the economy, where will the poor be then?

Ryan’s budget is just a modest (too modest maybe) step in the right direction to try and prevent America (and America’s poor) from going over the fiscal cliff. He should be applauded by the Bishops instead of scolded.

This letter was beneath the dignity of the USCCB and was widely considered merely a product of that body’s reflexive leftist tilt”.

Pretty much everything Archbold says is wrong. Here is the first misunderstanding – public debt is a consequence, not a cause of current economic malaise. When the US economy entered the worst downturn since the Great Depression, the deficit spiralled (mostly from revenues, I would clarify, but also some spending from income support mechanisms such as unemployment benefits). To put it another way: the crisis was caused by too much borrowing by the private sector (banks and households), which came toppling down. With the private sector trying to get rid of debt and cutting back drastically, the only way to stop the bottom falling completely out of the economy was for government borrowing to take up the slack – which it did. I would point out that most of this was automatic, with only a minor discretionary top-up in terms of cutting more taxes and spending a bit more.

This is why public debt jumped dramatically. If policymakers had tried to fight that rise, the result would have been a complete disaster. There is one nuance to make: things would look a lot better today if the budget had entered the slump in better shape. But it did not, on account of the Bush administration’s lack of prudence. Consider the numbers: the cumulative cost of Bush policies stands at about $5 trillion. Obama? Just under a fifth of that. The rest of the debt is due to the recession (I shall be charitable and not assign blame to Bush for that!).

When you think about it from this perspective, the finding that spending growth under Obama grew less in real terms than under any under presidential term in the postwar era starts to make sense. As does the finding that unemployment is about a percentage point higher than it would be if Bush-era rates of public employment growth had continued.

So much for diagnostics. Archbold’s main point is that “massive accumulating debt has real consequences”. What might those be? The basic answer is that rising public debt leads to rising interest rates, as people become less inclined to buy your debt. This crowds out private investment. And there could come a point when investors simply stop purchasing or rolling over your debt, for fear they would not get repaid. Then you get a full-scale debt and financial crisis, as in Greece.

But look at the United States. Are interest rates rising? No, they are falling – to some of the lowest levels on record. The US government is now in the unenviable position of being able to borrow for almost free. Even though its debt is much larger today, its debt payments (the key indicator of sustainability) remain remarkably low. The reason is simple: with so much turmoil in the world, the US dollar (alongside other currencies such as the Japanese yen) is considered a safe haven. Far from fleeing, investors are flocking.

Of course, it is always possible that things could change. But it is not really possible for the US to follow Greece. Why not? To answer that question, we need to understand the real problem with Greece. The problem is that euro adoption triggered a huge borrowing spree in peripheral Europe, as everybody thought that the euro got rid of all risk. Banks from the north clamoured to lend, people in the south clamored to borrow. And yes, it was mostly the private sector, not governments, that did the borrowing (Greece is possibly the one exception). At some point, people realized that this borrowing was still risky. Incredibly risky, actually. Then the dominoes started the fall.

But why did people think that Greece could not repay? Because the boom meant it had lost competitiveness, with wages and prices running far ahead of their neighbors to the north. Here’s the issue: in the old days, this would have been solved by a big currency devaluation. But that is no longer possible. So the only was to do it is by brutal austerity – wages cuts, spending cuts, deflation. Markets took one look at that and doubted it would work – aside from the social fallout, it would undermine growth and make the debt even less sustainable, with a vicious cycle settling in.

That’s Greece, and to some extent, the other peripheral countries in the euro zone. But this cannot really happen in a country with its own currency and its own central bank, because they have an exchange rate option and because – as a last resort – the central bank can simply buy up the debt. Markets realize this, which is why countries with independent monetary policies have a far easier time borrowing. Countries that borrow in their own currency can borrow cheaply.

So, a Greek-style meltdown is not possible in the United States. What about something milder, such as a big rise in interest rates? This is always possible, although I repeat my earlier point about interest rates being historically low. The problem is that the medicine to inoculate yourself against this possible future sickness – a medicine that Archbold is peddling – will undoubtedly do more harm than good to the patient. Everybody knows that the debt will have to come down eventually. Of course, the best way to do this is to get growth going again – this is a lesson from all past high debt experiences all over the world.

Aside from that, we should certainly not remake the mistakes of Bush – we should certainly strive to put underlying fiscal policy on a sounder footing by raising taxes (which are historically low), cutting military spending (ridiculously high) and dealing with the rise in health care costs over time. By all means, plan on this, and make the fiscal future look more sustainable and prudent.

But if you move too quickly and too imprudently, you will undermine the recovery today, and make growth and unemployment a lot worse. This is the real lesson of Greece. It is what Ryan wants to do. And it is what economists mean when they talk about the “fiscal cliff’ (a term Archbold doesn’t seem to understand) – driving the economy over the ledge with massive cutbacks.

What we need instead is a little St. Augustine – make us (fiscally) chaste….but not just yet!

  • David Agnew
    • Morning’s Minion

      Words fail!

  • Carl Diederichs

    Another wise man who can help us make the case to not abandon the poor in the name of saving the poor!

  • Richard Clarkson

    Your message is so important for American Catholics. You need to have a Facebook account to broaden your venue to a larger audience. The USCCB booklet on Forming Consciences for Faithful Citzenship is a good place to begin one’s formation on these election issues. When I was in college decades ago, it was John XXIII’s Mater et Magistra that made me wake up and smell the coffee. Thanks!


    • Cindy

      ^^Totally agree. Facebook account to broaden your venue to a larger audience!

  • Blackadder

    A public debt crisis in the United States would not unfold in the same way the Greek crisis has. That hardly means it’s impossible. You can read Barry Eichengreen if you are inclined to doubt this.

    Btw, you say that Paul Ryan wants to take us off the fiscal cliff in December. Yet as far as I’m aware Ryan wants to extend the Bush tax rates and to undo some of the sequester cuts. It’s Democrats like Obama and Patty Murray who want the cuts and tax increases to go through.

    • Morning’s Minion

      I’m familiar with Barry’s work. In fact, I believe that Americans are mostly unaware of the privilege they have with a reserve currency. They don’t appreciate the advantages. And sure, this will pass one day, as everything always does. But as Aragorn might say, that day is no today! Or any day soon. In fact, events over the last few years tend to strengthen the role of the dollar as reserve currency. Plus, if I recall, Eichengreen also sees little sign of change.

  • Bill Wilson

    You are as wrong as the bishops on economic issues. We cannot spend our way out of a recession. The wealth created by the private sector is the source of the tax revenues that enable Federal, state and local governments to do what they do. In and of itself, government creates nothing. Obama was dead wrong when he gave his “you did not build that” speech. (and he really said that. He was not misquoted, nor were those remarks taken out of context. Everybody gets the same infrastrucure, education and public safety, etc. These are funded by the wealth created in the private sector and taxed by government. Only the risk-takers and innovative create the new businesses and innovations that creat jobs. It’s no surprise the bishops are attacking those who are calling for fiscal responsibility. When is the last time a bishop earned a nickel, worked to meet a payroll, or spent his own money? All those guys do is take up an extra collection when they need more money. Maybe Burke could hock his $800 episcopal gauntlets,

    • Morning’s Minion

      Sorry, none of this makes sense.

    • Mark Gordon

      Austerity never helped a nation recover from recession. Never. That’s why both Reagan and Bush II both provided mild stimuli to recover from the mild recessions they inherited. Obama faced a much tougher recession and fully one-third of his stimulus was in the form of tax cuts, not counting the preservation of the Bush II tax cuts.

      • VQ

        Factually Incorrect.

        Canada aided its recovery from recession of the 1990s via *austerity*.
        Ireland aided its recovery from recession of the 1980s via *austerity*.
        Slovakia aided its recovery from recession of the 2000s via *austerity*.
        New Zealand aided its recovery from recession of the 1980s via *austerity*.

        Similarly, recovery has never worked due to increased government spending. It only works in the short term but creates more disastrous results in the long term.

        To make the point non-partisan, it didn’t/hasn’t work/worked during the Obama and Bush Jr. years.
        It didn’t work for Jimmy Carter.
        It didn’t work for Salvador Allende.
        It didn’t work for the Japanese in the 1990s.
        It didn’t work during the Great Depression.
        It has never worked ever.

        The only thing it does succeed in doing is to eventually create a devaluation of the currencywhich hurts poor people disproportionately, because most of them don’t know what inflation is.

        • Morning’s Minion

          This is incorrect. The idea of “expansionary fiscal contraction” was fashionable for a while, but it has been pretty much debunked at this point, even by one of the founders (Roberto Perotti). The issue is, in each of these cases, there was other stuff going on at the same time, especially loose monetary and exchange rate devaluation. The idea of “pure” negative fiscal multipliers simply does not happen. They are positive, and larger for spending than taxes (in other words, if you raise taxes, output falls, but if you cut spending, it falls more).

          Look at the UK today, a textbook case of a country undergoing an extended severe recession because David Cameron wanted to display his toughness and cut back viciously.

          Of course it worked during the Great Depression. Of course it worked all around the world during the Great Recession.

          And hello, if your country is running a current account deficit (eg US, Spain, Greece) then a devaluation is exactly the right answer.

        • VQ

          Dear Mr. Minion,

          No one here made the claim that a spending cut would make things good immediately, rather a spending cut will have the effect of short term suffering(because, obviously, numerous people become dependent on government spending), but this will be followed by long term economic growth.

          Further, the alleged counterexample of the UK is trivially false, simply because the UK has *not* engaged in austerity but rather just the opposite increased spending, but you don’t have to take my word for it the official numbers from the British government will do that, just look at page 102 of the budget:

          The common man on the street can see that spending has been *increasing* not decreasing, i.e. no austerity.

          With regards to the Great Depression, both Hoover and FDR engaged in various spending strategies, which did not work, so that what ended the Depression was the WWII(which does involve spending but a different kind).

          Finally, Greece and Spain cannot devalue their currency because their currency is the Euro.

  • Carl Diederichs

    Bill Wilson should know better. Or at least make sense.

  • A Sinner

    I suspect that, really, the Gordian Knot simply must be cut.

    All this tedious nonsense fighting over balancing debt and spending and interest rates…just makes me exasperated now, because it is all based on false and usurious premises.

    Debt IS the problem. But the solution isn’t somehow paying it back (either through austerity, or through becoming productive enough to do so).

    People should read up on Social Credit. What is physically possible should be made financially possible, debt free.

    If the production happens, then we are clearly not “living beyond our means” as if somehow we’re reaching into the future and producing more than we should be able to today.

    Credit should not be treated as a private good.

  • Pinky

    I disagree with most of this article, but there’s just one point I’d like to address, the first point. Surely one can agree that the debt is both a cause and an effect of the current economic situation? I’m not even going to argue the economic consequences of the debt. You can believe that the prior debt caused nothing but blue skies and sunshine, or that it was the worst thing in the world, but you’ve got to acknowledge that $12 trillion of anything has economic consequences. If you didn’t believe that, you wouldn’t be citing Bush’s contribution to the debt.

    So, without arguing the particulars, I just recommend that we be honest in this discussion. Common ground can’t be reached by blanket denials of things that both you and your opponents believe.

    • Morning’s Minion

      What point are you trying to make? The crisis was caused by too much private debt, not public debt. What happened was government debt rose when private debt fell – to stop the bottom collapsing out of the economy. That’s what’s meant to happen.

      All of this is standard economic theory. The problem is, most people don’t understand national income accounting, or how one person’s liability is another person’s asset. They think of government like a household, which is exactly the wrong way to think about it. When I hear Republicans say stupid things like “cut government spending to create more jobs”, i have no idea what logic they are applying. I suspect they don’t have any beyond some vague notion off “debt bad” (but not when coming from tax cuts, apparently).

      The Bush point is simple. It goes back to Keynes. Fiscal policy should be counter cyclical – the deficit should rise in bad times and fall in good times. The latter is hard, as when the money is rolling in, the pressure to spend it, or “give it back”, becomes very strong. Think of it as saving for a rainy day. And we didnt just get a rainy day, we got a one in a generation hurricane…

  • Jordan

    Morning’s Minion [August 16, 2012 10:20 pm]: Of course it worked during the Great Depression. Of course it worked all around the world during the Great Recession.

    Got a question for the economists: I remember reading (perhaps in a Paul Krugman editorial) that the finance minister of the last Weimar government indirectly (un/intentionally?) assisted in the rise of Hitler by imposing a strict austerity right as the Great Depression began to bite in the early 1930’s. From what I understand, Germany was just beginning to rise out of the Weimar hyperinflation, only to spiral back down economically because the government slammed the brakes on the monetary supply.

    From a layman’s standpoint I can see why many voters would support fiscal austerity even if quantitative easing/stimulus would assist growth. Intuitively, there’s not much sense in deficit spending especially when growth is flat or hegative. Continuing with a driving metaphor: when learning to drive I was taught that the worst thing to do in a skid is to slam the brakes. It’s safer to gradually decelerate and steer out of a skid. This is counterintuitive: the impulse is to try to stop the car from moving altogether. It seems to me that in a time of panic, an electorate will vote for the party which is willing to implement strict austerity even if doing so actually perpetuates a downward turn of an economy. As MM suggests in [August 16, 2012 4:27 pm], the “debt bad” intuition overtakes the more rational possibility that deficit spending might be necessary to redirect the economy.

    • Jordan

      With correction: Heinrich Brüning was the chancellor, not the finance minister, of the last Weimar government (1930 — 1932). Paul Krugman, during the course of his many criticisms of strong EU/ECB austerity policies, alludes in a number of articles to his conviction that “Brüning deflation”, and not the German hyperinflation of about a decade earlier, contributed directly to the rise of Nazism. Indeed, per Wikipedia, a number of historians contend that Brüning openly collaborated with Nazis. Thus moral evil also influenced his economic policy.

      With apology: While I should have been more sensitive about the topic, I merely desired to illustrate that economic policy is not merely an academic endeavor but also historical reality fraught with profound moral implications and even evil consequences. I suspect Krugman thinks similarly. For this reason he has repeatedly warned that national banks and the ECB must stress moral considerations and consequences when designing economic policies.

      • Morning’s Minion

        Yes, it was actually the harsh austerity of the 1930s, especially the spike in unemployment, that paved the way for Hitler – although he fed upon the legitimate resentment of the German people over the attempt to deliberately impoverish them with the Versailles Treaty (incidentally, two people understood the consequences of this from the beginning – John Maynard Keynes and Pope Benedict XV). It’s funny that it is the earlier hyperinflation of the 1920s which is forever etched in German minds, possibly because they would like to forget the 1930s.

  • David J. Walker

    The gratuitous mention of Humanae Vitae appears to be merely to show that you are not a “radical leftist.” I am not aware of any evidence that the teaching in that encyclical is “wisdom.”

  • Morning’s Minion

    Dear VQ – you are reading the UK Budget Report in a manner that is totally wrong. Of course nominal spending is rising. To assess austerity, you need to look at the change in the cyclically-adjusted balance, table 1.3. There you will see that is is falling steeply over time, in every year over the forecast horizon, with a cumulative adjustment of 8 percent of GDP over 5 years or so. That’s huge! In pounds, the Treasury says it themselves – an additional 40 billion in consolidation.

    This is precisely the problem we have here. People just don’t understand the issues.