Lessons on Global Warming and the Debt for Thomas Friedman
|Wednesday, 09 January 2013 21:15|
Thomas Friedman apparently believes that global warming and the government debt are problems of the same nature, with a looming crisis getting worse every day it is neglected. This is wrong for two obvious reasons.
First, Thomas Friedman apparently doesn't follow the news closely, but the budget deficit is getting more attention than anything else in the world. In fact, Congress and President Obama have already taken substantial steps to reduce the debt, in contrast to the incredibly limited action on global warming.
This raises the second point, Friedman apparently missed the economic collapse that gave us the large deficits of recent years. The country in fact had very modest deficits until the collapse of the housing bubble sank the economy. This sent tax collections plummeting and spending on items like unemployment insurance soaring. We also deliberately increased the deficit with the stimulus to support the economy since sufficient demand was not being generated by the private sector.
The deficit reduction that President Obama and Congress agreed to in 2011 is already slowing the economy and adding to unemployment. Those who want more deficit reduction now may not realize it, but they in fact want to throw people out of work and make our children's parents unemployed.
It is difficult to understand why this would be good policy or how it connects to reducing greenhouse gas emissions to save the planet. We don't save the economy by having a generation of children raised in families with parents who can't find decent jobs.
The long-term deficit problem is due to three things: health care, health care and health care. We currently spend more than twice as much per person on health care as other wealthy countries. This is projected to grow to three or four times as much in the decades ahead. If these growth projections prove accurate then health care costs will devastate the economy. If our health care costs were comparable to those in other countries we would be looking at long-term budget surpluses, not deficits. This is why serious people talk about controlling health care costs, not the projected budget deficits.
But Friedman is not the sort of person to let the evidence stand in the way of a good story. That is why he tries to tell us budget deficits are like global warming.
If we believe that the debt to GDP ratio can impose some magical curse on the economy, and ignore the fact that Japan's debt to GDP ratio is well more than twice the size of ours and does not appear to suffer from the curse, it is worth noting that there is an easy route to reducing the ratio. If interest rates rise, the price of long-term bonds will fall. This will allow us to quickly eliminate huge amounts of debt by buying back these long-term bonds at steep discounts. (See the discussion here.) This would be a pointless exercise since it doesn't change the interest burden at all, but it should make influential people who worship the debt to GDP ratios, like Friedman, very happy.