They Make a Crime Wave
Dolors & Sense
by Sanford Rose
KISSIMMEE Florida—(Weekly Hubris)—8/1/11—Most readers will recall muckraker Lincoln Steffens’s famous line—“I Make a Crime Wave”—about the role of journalistic hype in the erroneous public perception that city crime had mushroomed.
The US Congress, in league with many others, is “making” another type of crime wave right now in Washington DC.
It is a crime, first and foremost, against common sense.
But it is also a crime against the welfare of the American people.
It is a crime founded on the notion that our biggest problem is the growing Federal debt.
To be sure, historically, when national debt approximates 90 percent of a country’s GDP, that country’s rate of future economic expansion may be constrained.
Government debt can prove a problem.
But it can also be a solution to a problem. If the debt is used to create or widen a positive gap between the rate of real economic growth and the rate of real interest required for debt service, then the debt is good and will become progressively less burdensome to the economy.
Debt can also be needed to forestall deeper recessions.
A country’s economy consists of: 1. consumption; 2. investment; 3. government spending; and 4. exports minus imports.
These four sectors have to be in aggregate balance. If some sectors are earning more than they spend, other sectors must spend more than they earn.
At present, three of these four sectors—consumers, businesses, and the foreign sector—are earning more than they spend. They are in effect saving. (Foreign savings are analytically equivalent to the excess of US imports over exports.)
If all the sectors are earning more than they spend, the government sector must spend more than it earns.
If the government doesn’t spend the difference or, as it were, “dis-save,” the level of economic activity will fall until aggregate earnings and spending are brought back into balance.
Government must run a deficit, adding to the debt, until the imbalances in the other sectors are corrected.
In the current economic economic environment, government should make the kind of direct expenditures (infrastructure) that will raise confidence sufficiently to encourage households and businesses to stop their temporary over-saving.
But the Congress, hungry for headlines that resonate with confused electorates, has persistently refused to consider this.
The real crime here is not debt, but economic illiteracy. It is indeed a wave—one that can easily drown us all.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)