Where are we going and why are we in this hand basket?
Samuel L. Skogstad, Ph.D.
Professor Emeritus of Economics
(In an exchange in which he corrected--for the worse--one of the debt charts on the economy going around, Sam sent me the piece below, in response to my asking the old joke question, which I have used as the title. He kindly agreed I could share it with readers. He is both an economist and a brother Marine. His explanations are clear and always worth reading. ~Bob)
Good question (i.e. where are we going and how did we get here?). It seems to me that one of the very important causes of our having gotten here is the political reality that presidents and legislators in both houses keep their eyes pretty clearly on the next election, and not very far beyond. Keynesian economic thought, taught us that the mere fact of an increase in government spending, paid for with borrowed money, isn't necessarily harmful. And I think virtually all economists believe that this can be true if it is done for short periods and doesn't raise our debt servicing burden very much. But to the extent anyone outside the academy learned about Keynes' ideas, they got the totally false impression that government debt isn't harmful---period. So the voting public tolerated borrowing for any kind of government goodies at all, believing their school teachers, pundits, preachers, etc. when they said "oh all that stuff about public debt being bad for the economy is just far-right slogan-mongering."
I think most of our elected representatives behaved as if they believed this, too. But by carrying this belief way too far, and funding the most routine consumption type stuff with borrowed money, the national debt got to be palpable. People who can think in balance sheet terms began to believe, and to act on the belief, that Uncle Sam would run out of credit and then turn and come after them and their assets to feed the government's great appetite. Then as that was talked about more and more in the news, and our national credit rating took a lump or two from the rating agencies, more and more household heads began to have the same fear---i.e. that Uncle S. would be coming after them to feed the beast.
Gradually the inescapable conclusion that Uncle's debt isn't his at all---there ain't no uncle except you and me---was so broadly felt that it made entrepreneurs retreat to the sidelines along with households who had managed to form up a little wealth.
Given enough time, every sector and income segment will realize that we have to slam on the brakes. But my worry is that we are so close to the precipice that Greece, Spain, Portugal, Italy etc. are tottering on, that the disaster might strike before the population of voters who understand this have become half or more of the voting population. And Obama will be returned to the White House by our large and vocal body of econilliterati.
My prognostication? If Obama is re-elected, we will be in a downward economic spiral like that in
Greece that cannot be stopped, before his second term is over. ALL assets will deteriorate in value as will real incomes. Politicians won't have the fortitude or the political force to take either of the possible remedies---(1) cut way back on spending; (2) confiscate private income and wealth or some combination of the two. So instead they will turn on the printing presses, thereby enacting a harshly punitive and very regressive, concealed income tax that takes the form of hyper-inflation of prices and wages. Think Germany in the 1920s. On the other hand, there is some possibility that Romney would use the levers and bludgeons of power to direct a modest retrenchment and move us back bit by bit from the unmanageable debt precipice. But it isn't guaranteed by any means.
Please excuse my pessimism. I hope I will wake tomorrow having dreamed up a more hopeful, yet plausible, path that can be taken.