Tuesday, January 3, 2012

What's the big deal about debt?

It's the discussion we hear Washington having all the time. The discussion has almost been entirely about reducing the deficit and debt. But as Paul Krugman points out in another great piece, the debt is not as big a problem as our politicians and media make it out to be.

Like most things, the idea of the debt has been blown out of proportion by people who don't really understand, and only have a vague notion of what it really means. Furthermore, the analogies that are made about the debt being like private family debt is incorrect, according to Krugman, because the government mostly owes debt to itself. A better example, then, would be a child who earns a weekly allowance, but spends more than that on a present for a friend for their birthday. Their parents give them the money to buy the gift because they know the child needs to have it, and they just detract that amount from the next week's allowance. Now, imagine that this child has a friend who has a birthday every week. The parent's keep giving the child an advance, and the child will never be able to make it up, but their allowance covers about 80% of the cost, so the parents keep loaning since they're only losing a portion of money on the deal. And, let's face it, they kind of have to. That analogy is, I think, more approrpriate to how our debt operates.

In that analogy, the accumulated debt does wear on the parents over time, but they never stop and demand that the child pay them back. The child may take on extra jobs to boost increase their allowance (akin to tax hikes for increased revenue), but the chances that they'll be able to make enough to cover their overhead is minimal. So, they have to keep borrowing.

As Krugman points out, this situation doesn't really change all that much in our society. Or, at least it shouldn't. As he says, dealing with the debt and deficit does not help create jobs in any sense. In fact, with an emphasis on paying off debt that uses things like austerity measures to reduce spending, the result can be job losses as businesses and individuals have to take on more of the financial burden for things the government covered to begin with.

Despite the rhetoric in Washington, focusing on the debt is not focusing on jobs. What I've noticed is that politicians (GOPers mostly) will talk on and on and on about the debt and the deficit and cutting spending. Then, when the Dems start talking about it, they suddenly switch gears and attack the dems for not focusing on jobs. The GOP meanwhile hasn't done anything to fix either and has instead decided that doing nothing is a better move politically even if not economically.

No comments: