Private Debt, per Dollar of Public Debt

Revising and re-posting mine of March 29, 2012

I'll just go with the newest version of the Private-to-Public-Debt graph: 

Graph #1: Dollars of Private Debt per Dollar of Public Debt

When the line goes up, times are good:

 • 1920-1929, The Roaring Twenties
 • 1947-1973, The Golden Age
 • 1994-2000, The Macroeconomic Miracle

When the line is too high, times are tough:
 • 1929, start of the Great Depression.
 • 1974-1993, Small ups and downs here, suggesting only brief "good" periods.
 • 2008, start of the Great Recession.

When the line peaks there are problems:
 • 1929
 • 1974
 • 2007

When the line falls dramatically there can be a Depression.

When the line goes up, times are good. But when the line is high, times are tough. This is the stuff that cycles are made of.

My idea is to use policy to keep the line flat, somewhat like 1974-1993 on the graph, but to keep it flat at a much lower level, a level where the economy constantly wants to grow vigorously. We may not get Golden Age growth that way, but long-term growth will be better that way than any other way. And it will be sustainable growth. It will be the quasi-boom.

I expect you know who said this:

The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

That's the end of the old post. By the way, this topic comes up lately because the Debt Ceiling is in the news. The purpose of the debt ceiling, political bluster aside, is to reduce the growth of the federal debt. But if you spend a moment with the graph you can see that when private debt is high and federal debt is low, the one relative to the other, times are hard. I'm not making this up. It's in the data and it's on the graph.

We also know from experience since the 1970s that increasing the federal debt (and federal spending and all that) does not make the economy better.[1] So we cannot solve the problem Stephanie Kelton's way, by setting public spending "always to the level required to achieve full employment" and accepting "whatever deficit may result." We've seen insane increase in the federal debt for half a century, and for half a century economic growth has been slowing. We cannot solve the problem Kelton's way.

The idea that we need more federal debt is only half a thought! We need more federal debt relative to debt-other-than-federal. This could happen easily, without increasing the federal debt, if we sufficiently reduce debt-other-than-federal -- our own debt. I'd like to see new policies that encourage us to pay down our debt more quickly and help us afford to do it. As an alternative, perhaps, a massive debt forgiveness, but I have trouble picturing that.

As a practical matter, I think we should expect continued increase in federal debt while we transition to a lower-private-debt economy. After the transition, we will be able to whittle down feddebt without creating problems.

It's a good plan. But we need policy to make lower-private-debt happen, because existing policy works the other way. Existing policy does everything possible to increase the availability and use of credit, because policymakers think credit helps the economy grow. They think using credit helps the private sector grow.

But that too is only half a thought. Using credit helps the private sector grow if we are not already overburdened with debt. But we in the private sector ARE already overburdened with debt. We have been overburdened with debt for two generations now. That's why the economy got slow in the mid-1970s. And it's why increasing the federal debt has not improved the economy since the mid-1970s. 

It is the policy of always encouraging more use of credit that created the problem.

What policy has to do now is encourage us to pay down debt faster than normal. We have to offset all the policies that caused the excessive use of credit. And because policymakers let things get so bad, the new policies must do more than encourage us to pay down our debt. Those new policies must help us pay down our debt.

Think of it as a mistake. They thought their policies were good for the economy. And they were right: the policies were good, until debt started to be a problem. We knew debt was becoming a problem, probably before the 1990s we knew. But the rich guys that make the policies, they didn't see a problem. They were probably collected the interest we were paying!

Think of it as a mistake. They didn't realize how bad things were getting at our end. So they kept using their stupid rule -- the "credit is always good" rule -- to try and make things better. And I guess when more interest payments started rolling in, things did seem better, to them.

But not to us. So we need the new kind of policy, the kind that helps us pay down our debt, to reverse the effects of credit-use policy. And it was their mistake, so they should pay for it. Policy has to help us whittle down our debt. If it doesn't, the economic vigor will never return.

Now might be a good time to talk to your congressman about this, because the Debt Ceiling is in the news. If that takes effect, and the the growth of the federal debt is reduced, it'll push us up higher on the graph, and the only solution then will be to reduce private debt even faster to get the ratio down.

Worse comes to worst, another Great Depression could do the trick. But I don't want to go there.

 

NOTES

[1]: A big federal debt and big deficit spending make things better for some people and some businesses. Maybe for many. But the federal debt and deficits do not improve the economy's ability to make things better for people and businesses in a way that makes the big debt and deficits no longer necessary. Thus I say that increasing the federal debt "does not make the economy better". Certainly the goal should be to restore economic vigor -- and the pursuit of Happiness --so more people have a better chance to earn a decent living. The goal must not be only to help us cope with a disappointing job, a disappointing income, and a disappointing life.