The cost of policy

It often seems to me that when I mention the cost of interest, people think I mean the rate of interest. That's not what I mean.

Suppose the rate of interest is always five percent. And suppose you have a debt of $100. Your cost of interest will be $5 for the year.

But now suppose you have a debt of $100 million. Your cost of interest will be $5 million. The rate of interest is the same, but the cost of interest is certainly not.

The cost of interest depends on the rate of interest and the amount of debt we owe.

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How much has debt grown?

In the US, for every $1 of debt in 1946, by the end of 2021 we had about $250 of debt:

The graph uses annual TCMDO ("All Sectors") data. The 1946 value was 357.032 billion.

If we have 250 times as much debt now as we had in 1946, and if the interest rate now happens to be the same as it was in 1946, then we will be paying 250 times as much interest this year as in '46. If interest rates are higher now, we'll be paying even more.

The cost of interest depends on the rate of interest and the amount of debt we owe.

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How much has GDP grown?

For every $1 of GDP in 1946, by the end of 2021 we had about $100 of GDP:

The graph uses nominal GDPA data. The 1946 value was 227.535 billion.

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In the 75 years from 1946 and 2021, GDP increased about 100x. Debt increased about 250x. Is there some reason debt had to increase so much faster than GDP?

Well yeah: Policy. Debt increased so fast because of policy. 

Other than that? No reason I can think of.

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Policy. The growth of debt is a (presumably) unintended consequence of policy.

At the Federal Reserve, they change interest rates all the time. And they are always ready, and able, and very often willing, to lend more money.

In Congress, they tweak things to make more credit available. And they tweak things to encourage us to borrow. These policies work: For every dollar of debt we had in 1946, we had almost $250 of debt in 2021. Debt grows rapidly. If you ever wonder why we have so much debt these days, the answer is that our policies make it happen.

They certainly do not prevent it.

You know what policymakers forgot? They forgot to invent some policies to get us to pay down our debt at a faster rate. Debt grows rapidly because of policy, and debt is paid back slowly because of policy neglect. The result is that our accumulated debt has grown to an insanely high level.

It is all the fault of policy. A simple mistake. They encourage borrowing and the use of credit, so that debt grows rapidly. But they do not also encourage the accelerated repayment of debt, and so debt accumulates to unnaturally high levels.

That is the cost of policy -- or the cost, I should say, of ill-considered policy. 

And that is the source of our economic troubles.

We must do better

I oppose the decline of civilization. This means, for example, that I support environmental protection, because we need civilization more than we need oil. 

But civilization depends on oil, you say. It does. But civilization can change, and it might have to change to survive. I don't have the whole analysis worked out. But this is how it seems to me. Civilization cannot survive if the environment goes to shit.

Opposing the decline of civilization, I also oppose things like the "universal state" and the "volkerwanderung", which Arnold J. Toynbee identified as late-stage phenomena in the life of a civilization, and part of the decline.

Opposing the universal state means that I naturally oppose the development of the European Union, NAFTA, and free trade pacts generally, and I oppose imposing such developments upon society. These developments are anyway driven by the economic needs of the powerful (those of great wealth, who want even more) and are supported among the rest of us by those who have accepted the sales pitch that says the universal state will improve the economy. That sales pitch is nonsense: Economic problems require economic solutions, not political solutions.

Opposing the volkerwanderung means I am naturally uncomfortable with the ever-increasing border crossings along the southern US border. 

The Dark Age, which over-civilized people insist on calling "the early middle ages", is identified by Toynbee as "an interregnum or heroic age". He writes:

Again, the Roman Empire's fall was followed by a kind of interregnum between the disappearance of the Hellenic and the emergence of the Western Society.

This interregnum is filled with the activities of two institutions: the Christian Church, established within and surviving the Roman Empire, and a number of ephemeral successor states arising on the former territory of the Empire out of the so-called Volkerwanderung of the Barbarians from the no-man's-land beyond the Imperial frontiers.

"Ephemeral successor states" arose (after the fall of Rome) out of the "Volkerwanderung of the Barbarians" (before, during and after the fall). Such successor states will arise again, unless we stop our own decline and fall.

I have to oppose "immigration" (which is the word we use, though Volkerwanderung would be more apt) because it is a sign of the approaching fall of civilization. But of course, stopping the immigration won't stop the decline. We have to fix the problem that causes problems like this immigration.

And I want to emphasize that this view has nothing to do with race or racism. I think economic conditions are worse on the other side of our southern border than they are on our side. And I think the difference in economic conditions drives the migration.

But conditions on our side of the border are not good, either. And this is the more pressing problem, one which underlies the immigration problem: for we cannot afford to fix the immigration problem. 

And yet we cannot afford not to fix it.

The immigration problem cannot be solved by welcoming immigrants; we know that didn't work in ancient Rome. It cannot be solved by building a wall, because the problem, which continues to grow, originates on the other side. And it cannot be solved by making conditions better on the other side of the border, because we cannot afford to do that.

That is the only solution, though: to make conditions better on the other side of the border. I don't think very many people want to be foreigners. I think they'd prefer to live in their own home land, as I do. But I think conditions must be so bad for them at home that they have no choice but to come to America, where conditions are better.

The most successful thing we do to discourage immigration is that we continue to let our own economic conditions deteriorate.

We must do better.

Grotesque

CNN Business: "Your take-home pay is the difference between your gross pay and what you get paid after taxes are taken out."

 

Your take-home pay is the difference between your gross pay and what you get paid after taxes are taken out.

Trapped by policy

We are trapped by policy that encourages the accumulation of debt. Until policy is changed, we will be unable to reduce debt except for brief periods, as with federal debt in the latter 1990s, and household debt for just four years after the financial crisis.

Too much fertilizer is bad for the crop

With my previous post in mind... 

 

You don't need a reason like "exhaustion of the soil" to get financialization going. In our case, we began with too little finance, decades ago: debt was below its optimum level. So expanding finance turned out to be a good thing. 

And so policymakers adopted the principle that expansion of finance is a good thing. That put us on the road to ruin. Policymakers forgot that the effects of debt are non-linear. The effects are good when debt is low, and harmful when debt is high.

Policymakers went with the linear view that the expansion of finance is always good. They were wrong, and we are paying for it now. 

Debt is like fertilizer: A little is better than none. And just the right amount is better yet. But too much makes things worse. It's not that hard to figure out, unless maybe you are a policymaker.

"Slower" is not good enough

First, three brief excerpts on exhaustion of the soil from "Rome's Fall Reconsidered":

• "The soil of Italy did not get exhausted over night. It was a long process and many were its stages."
  
  
• "If the farmer is borrowing to meet the exigencies of a so-called bad year, his distress is temporary, and he is likely to square himself during the next good year; but if his distress is due to the progressive deterioration of his farm, he will be unable to extricate himself. Such indebtedness is hopeless. The increasing weight of accumulated interest on the loan and the decreasing productivity of the land seal the fate of the landowner."
  
  
• "The fundamental trouble could not be cured. In Italy, labor could not support life…"
  

 

I recently ran across a paper on financialization at ResearchGate: Christopher Witko's "The Politics of Financialization in the United States, 1949–2005". Interesting that it goes back to 1949; studies like this usually start around 1980, well after the policy change that got the whole thing started.

Just going by the Abstract, here. It reads in part:

Financial activity has become increasingly important in affluent economies in recent decades. Because this ‘financialization’ distributes costs and benefits unevenly across groups, politics and policy likely affect the process... An analysis of the United States from 1949–2005, shows that when unions are stronger, and when the Democratic Party is in power and is more reliant on the support of working-class voters, financialization is slower. In contrast, when the financial industry is more highly mobilized into politics, financialization is faster.

I'll have to get the paper so I can see where Witko takes the idea. But from the Abstract it sounds like Professor Witko is saying we can use policy to make financialization proceed less rapidly, if we so desire. Slower? I think that would be like choosing slow, painful death over quick painful death. The only way "slower" would be beneficial is if we use the extra time as no civilization has done before, to stop financialization dead in its tracks, reverse its progress, and assure that financialization would get smaller and less powerful with each passing day. 

That would have to happen soon, before financialization once again reaches its logical conclusion. For if we let financialization continue, fast or slow, it will lead inexorably to the fall of civilization and the next dark age. 

The pain of that decline has already begun.

In the paper on Rome, quoted above, economist Vladimir Simkhovitch reviewed surviving works of ancient Roman writers, calling those works "the testimony of the eyewitnesses". Fourteen pages later, he summarized his findings:

It seems to me that the progressive exhaustion of Roman soil is, judging by all the sources at our disposal, completely established...

As I recall, I was introduced to the "exhaustion of the soil" idea once, in passing, years ago in Econ 101. The idea was dismissed as ridiculous, without explanation. I approached the Simkhovitch paper with a preconceived notion rather than an open mind.

But looking again now at the summary of his findings, I no longer think Simkhovitch was arguing that exhaustion of the soil caused the fall of Rome. He judges by all the sources at his disposal, yes; but those sources are the ancient writings that happened to survive. The value of his evidence is roughly equivalent to that of relics like the sacred shopping list of Saint Leibowitz.

I'm not criticizing Simkhovitch's essay. I loved it. But I have come to think he was making a point unrelated to exhaustion of the soil: Any problem that caused the unrelenting increase of debt in Rome would have caused the fall of Rome. Look again at this sentence that I quoted above:

The increasing weight of accumulated interest on the loan and the decreasing productivity of the land seal the fate of the landowner.

Decreasing productivity of the land created the accumulated interest problem, but it wasn't only the soil that sealed the fate of Rome. As Simkhovitch tells the story, exhaustion of the soil led to increasing indebtedness until "labor could not support life", then growing poverty led to extreme concentration of land ownership, and ultimately to the fall of Rome. The story of increasing indebtedness is easy to believe, in this day and age.

Today we don't suffer from exhaustion of the soil. However, we do increasingly have the labor cannot support life problem. And we do have the increasing weight of accumulated interest on our debt. So we appear to be moving toward the Fall-of-Rome scenario again. And this, I think, may have been the concern Simkhovitch wanted to convey, a hundred-odd years ago.

Our troubles today could be explained by exhaustion of the soil leading to growing financial cost, as in the Simkhovitch paper, except that exhaustion of the soil is clearly not the problem today.

Our troubles could be explained by saying that people like me are worthless spendthrifts who never save a dime; people who do nothing with their lives but accumulate debt. Well, yeah, but that is a superficial view that sees the result and calls it the cause. And that view doesn't explain why the number of spendthrifts and the size of our debt have been persistently increasing for half a century now. I need a better explanation.

It could be explained by the fact that the increase in borrowing always outpaces the repayment of debt, without pointing a finger at people like me. Hey, we do what we have to do to survive, but our world is shaped by economic policy. If the weight of accumulated interest on our debt is so heavy that labor is failing to support life, then maybe the problem lies with economic policy.

The problem lies with policy that promotes the use of credit and the accumulation of private sector debt. It would be an easy problem to fix, if enough people were focused on it. Oh, and policy-as-cause also explains the persistent increase in debt and in the number of "spendthrifts" like me. 

BTW  I'd rather be poor than superficial.

In ancient Rome, they thought the farmland was exhausted. Maybe it was. But it was financialization that killed them. We can see, today, that financialization -- the relentless growth of debt -- was the reason labor could not support life in ancient Rome. 

Maybe we can also see that financialization will kill us too, unless we stop it in its tracks. The problem is not in our soil, nor in our character, but in the growing cost of finance. 

In Rome financialization became a problem, perhaps because of soil exhaustion. In our time we have exactly the same problem -- excessive financial cost -- simply because policy promotes it: Policy promotes credit use. Policy promotes the growth of debt. Policy promotes financialization in all its forms. Policy is the problem.

Slowing financialization is not enough. We have to stop it dead, reverse the process, and make sure that financialization and financial cost decline for decades. Then we can put our feet up and smoke a

"militarism, ruralism, and irrationality"

Carroll Quigley, The Evolution of Civilizations, p.276+:

The Ionian culture that was adopted as their own by the Greek-speaking world, and put on like a garment by the Latin-speaking world, was never the culture of the whole Mediterranean basin because it was the culture of the literate upper classes only. These were the slaveowning minority who knew how to read and write, who had leisure, and who used that leisure to read Homer, Plato, Cicero, and Virgil.

The great mass of the inhabitants of the Mediterranean world did not share this culture; they were born, worked, had children, and died. This great mass included the rural inhabitants at all times and even the majority of city dwellers at most times. In other words, the Classical culture we so esteem was the culture of a small minority of city dwellers except for a brief period of a century and a half (480-330 B.C.) in Athens. 

In this brief period it may be that the majority of the inhabitants of that city had some idea of what we call Classical culture. Otherwise, in other cities generally, and in rural areas always, the masses of the people lived in a morass of ignorance and superstition that is difficult for us to imagine. To them life was an irrational chaos of conflicting powers and forces of which the chief were a myriad of local gods and spirits.

This substratum of irrationality and localism beneath the veneer of Classical culture must always be kept in mind if we are to appreciate properly the great achievement of the small minority that possessed this culture and if we are to understand how this culture was destroyed when this minority was crushed and finally submerged by the rising tide of militarism, ruralism, and irrationality.

Image Source NBC News -- Evelyn Hockstein / The Washington Post via Getty Images file