The Catholic right is totally wrong on debt

The Catholic right is totally wrong on debt August 15, 2012

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!

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