Do unto others – just don't stick 'em with the bill
A friend forwarded an article by a doom-and-gloom author who surmised that because we went off the gold standard while the Federal Reserve kept interest rates artificially low for too many years, nations and individuals built piles of debt and we're now facing economic Armageddon.
Well good morning to you, too!
Have nations built mountains of debt? Yes – some more than others. Have individuals mortgaged their future? Some individuals – yes, but collectively I don't think so. Has going off the "gold standard" doomed posterity? Not in my view nor that of many others. But let's step back from the precipice for a moment.
From a peak of over 19 percent in June 1981, the effective Federal Funds rate has settled near zero percent since 2009. Why? Because inflation was tamed and we had a damaging recession starting in January 2008 for which low interest rates are one salve.
With the cost of money near zero what's the logical thing to do? Borrow – just as you would buy more of something when it becomes cheaper. So, since the beginning of the Great Recession and because our economy is so large, nominal Federal debt has doubled to about $18 trillion. And because the economy has now gotten better (in spite of Congress), tax receipts now are up and debt increases have leveled.
For household debt the narrative is a bit different: households shed debt during the recession and began to add debt as the economy turned up. "Deleveraging" during the downturn probably occurred as households tightened their belts, curtailed new purchases, and paid off old debts; it also resulted from tightening lending standards that made it harder to incur mortgage debt.
Going back to Mr. Doom-and-Gloom, what's all this imply for public policy? First and foremost: don't subsidize debt. Period. This goes for explicit tax subsidies for housing via the mortgage interest deduction, lower-than-market rates for education loans, or implicit tax subsidies for corporations via expensed interest. Debt subsidies invite us to borrow more than we would normally ("Let's see how much you qualify for!") and skew our purchasing preferences (for example, buying instead of renting a house).
Second, government should borrow when the costs of borrowing – interest rates – are low and pay off debt when tax receipts go up. But as we see from this chart and the gray areas showing economic downturns, Congress kept borrowing in good times and bad. Strong action by the Federal Reserve and strong faith in our people have helped restore the economy. If there's any doubt in our future it stems from Congressional weakness in failing to back off the accelerator when our economic engine is purring along nicely.
Prudence. There, I said it yet again. Congress lacks it. And perhaps, because we continually elect imprudent representatives, we lack it too. Sure, we all have a weakness for the Federal Sugar Daddy. I always roll my eyes when I hear someone complain about government intrusion or overstep while they screech about losing subsidies for their business or home. And I want to throw a shoe when I hear a member of Congress contemplating default on past debts.
As leaders, our representatives need to level with us: the end is not nigh, the future is bright, but it's gonna take some work and honesty to get back on track. That's the new gold standard.