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David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today's column:
"Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent."
He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!
Okay, let's try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?
Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.
Brooks may have some magical view of the world where jobs grow up magically in the private sector when the government reduces spending, but in the real world we need a chain of causation. Can anyone tell a story where firms will be motivated to increase spending and hiring when demand drops further due to government cutbacks? There aren't many business owners who see their demand plummet and then go, "hey, great time to expand."
In the real world, the government's spending is employing our kids' parents. This will improve their educational outcomes and life prospects, making the future richer, not poorer. The benefits for the future are even greater when government money is spent on forms of investment like infrastructure, education, and research and development.
Those who are troubled by the borrowing from China and other foreign countries need to start yelling about the over-valuation of the dollar and shut up about the budget deficit. The United States borrows from foreigners because of the trade deficit -- not the budget deficit. The trade deficit is in turn determined primarily by the value of the dollar. If borrowing from China or anyone else is upsetting, then you should want to see the dollar fall to make U.S. goods more competitive internationally. The budget deficit has very little to do with this story.
Just to circle back to Brooks' psychological explanation for borrowing, if NYT columnists were expected to have any clue on the topics on which they write, then Brooks would be familiar with the wealth effect. This means that people consume based in part on their wealth.
In the 90s, people consumed based on the wealth that was created by the stock market bubble. This required no change in people's psychology -- they always spent based on the wealth they had in the stock market. They just never had so much wealth as when price to earnings ratios soared from their trend level of around 15 to 1, to more than 30 to 1 at their bubble peaks.
The same story applied to the housing bubble in the last decade. Homeowners always spent based on their housing wealth. However they never had as much housing wealth as when the bubble drove prices by 70 percent above their trend level.
If Brooks knew a bit of economics, he could have spared his readers from the 750 words of misinformation in this column. We would have more live trees and fewer confused NYT readers.
btw, Brooks deserves special abuse for this assertion:
"Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls."
Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it's still silly. Countries that have had high debt to GDP ratios are largely in this category because of a weak economy. Think of Japan with a debt to GDP ratio that is now well over 200 percent. This was not due to fiscal excesses. This was the result of the collapse of its massive stock and housing bubbles in 1990.
A similar story can be told for most of the highly indebted countries. The causation went from slow growth to high debt. Brooks is just repeating a story from the one percent to rationalize the refusal by the government to take action to create jobs.
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Honestly, it does sound like he's half-mangling an Econ 101 lecture. When talking about debt and interest, it is often described conceptually as purchasing present-day dollars with future-money.
This helps to explain why interest rates are related to inflationary expectations, as future-dollars are worth less than present-dollars owing primarily to inflation, and interest rates exist, in part, to recapture this discount.
Of course, in bypassing this part of that explanation, Brooks completely misses the point. Interest rates are super-low right now, implying that nobody expects serious inflation in the medium term. This means that right now is a great time to be borrowing and spending to kick-start the economy, and a relatively poor time to worry about paying down debt at the expense of the economy.