There's a Hole in my Bucket

Liza and everyone else is wondering, should we or should we not bail out? The current stimulus of 800+ billion dollars is being offered up as a way out of severe economic trouble brought on by what is often referred to as the housing crisis. Americans borrowed too much against their homes and banks encouraged them and encouraged themselves by inventing new and ingenious ways to finance that debt. And governments encouraged banks by keeping interest rates low and by looking the other way as the banks went on inventing. Other people (Great Britain among them) saw the obvious potential for short-term gain and decided to follow suit with borrowing and slick financing tools. (President Sarkozy of France is saying that the cause of the crisis is those confounded Anglo-Saxons. That strikes me as a rather archaic description of the problem. He shouldn't forget that he's smarting because France wasn't as prepared for a downturn as it well might have been. Having said that, of course, they're on much better footing than Iceland.) Slowly but surely the realization came that houses would not continue appreciating forever and that most American families, after years of slow wage increases, could not afford to service all the debt they carried. They were going to have to start saving sooner or later - and now they've done it. Trouble is, our lifestyle (economy) was almost entirely based on consumer spending.

Anyone who has ever examined personal finance with the least degree of effort knows that the debt one carries must always be a function of how much they make. The standard view is that one's debt to income ratio should hover between 30-50%. That means, if a citizen makes a hundred dollars they should commit only $30-$50 of it toward debt leaving the balance to live on. The reason why there is a range is obvious. It should be on the low end if, for example, you don't own a home. If you're servicing debt on a home, but also living in it than it's possible that the range can tilt somewhat higher. If debt service exceeds 40% than you'll begin to see that your debt service is crimping your lifestyle. If you know you're going to get a big raise you might start spending more, which is rational but not always the best idea. 50% is dangerous, but it's not a hole that can't be escaped. The thing to remember is that there is a limit to how much you can borrow and it's always a function of how much you make.

Now, it was Aristotle who said long ago that only oligarchists will accept an oligarchy; as goes personal finances so goes state finances. Sooner or later, the people will mimic the state and/or the state will mimic the people. We have had a state that has for a long time been spending more than it makes. Its debt commitments have long been running at about 60% of Gross Domestic Product - the nation's potential income. This is a fairly low debt-income ratio as many modern nations go: Germany's is 80%; As long as the economy is expanding, the government can go on borrowing more and that percentage may or may not grow larger. In other words, an increase in GDP is like an individual getting a raise. If I am committing fifty dollars a month to service my debt, but I get a raise to $125, I can increase my debt by 20%, but decrease my debt to income ratio by a few percentage points. For many years the state's debt has grown, but so has its income. The theoretical advantage the state (and corporations) have over individuals is that their life-time is longer. They don't get old and retire. They go on in perpetuity - at least theoretically. (We haven't time now to discuss the theories of body politic in Hobbes, Rousseau, Constant, &c.)

In addition to long life-spans, governments are different in yet another way. They're different because the size of the public fund is so large that public spending recirculates throughout the whole, potentially increasing the GDP. Yes, in layman's terms, government spending is one of the ways the government can give itself a raise. The IMF estimates that when rich countries spend public funds on large bailouts like the one now in Congress they can recoup up to 50% of that money in other ways. For example, the University of Minnesota is in a budget cruch because predictions are there will be less money to spend. One of the ways the University is thinking to make up this shortfall is by laying off professors and/or getting a piece of bailout money. Mine is one of the jobs they might "save" by this process. Now, if they get bailout money to actually save my job or one like mine - that means that someone can go on servicing their debt and spending money - all of which the state taxes. It means one less person on unemployment benefits. It means, in short, that the GDP doesn't not grow - especially when you multiply it across thousands of people - which is a good thing when it is obvious that, speaking economically, the US economy is looking at at least one-two years of little to no expansion.

Now, just like personal finances, nations can experience crises. If you or someone you love gets sick you may have to spend down your savings. Often and often people borrow money to pay for hospital bills, &c. Often and often people get better or die, the crisis diminishes, and the debt gets serviced. Nations have the same options. During World War II, for example, the US debt to GDP ratio rose to a staggering 120%; Britain's to an outrageous 200%! (See this great article on the subject in this week's Economist.)

In other words, the bailout is borrowing in a crisis. It potentially stops the whole system from free-falling. Bush's $700 billion hand-out to his banker cronies roughed out to about 7% of GDP. The $800 billion+ plan in Congress now is about 8% of GDP. So the US has, since Thanksgiving, shot off 15% of GDP. The conventional thinking is that about half of that can be recouped economically to the US treasury by, now, a strong dollar and a stemming of the tide of economic restriction. Trouble is, the conventional wisdom also says that banking crises like this - experienced in the 1990s in Japan and South Korea and later a bailout of banks in Sweden - usually cost about 22-29% of GDP to get out of. Having said that, Sweden recouped about 90% of their public outlay - in part because they nationalized their banks - making the profit from those banks the public's for many years to come. (Why, oh why, is the CEO of Citigroup getting any salary at all?)

Of course it's true that even with Japan's bailout they had 10 years of slow to no economic growth (1990s). We don't know what boat they would be in had they not bailed out. Additionally, the Japanese state response was very slow. Plus, their debt to income ratio was much higher than the USA's at the start of their crisis. The US also has advantages. For example, Japan's slow population growth and their stringent immigration policies mean that there was good reason to doubt their capacity to service their debt. The US is still one of the least populous places on earth and could receive many new laborers. But we're still in for some lean years to come, make no mistake. The seven lean kine are coming to devour the seven fat kine.

Having said all that no politician worth anything should want to do nothing. Inaction is not smart. The state's borrowing will not change the fact that we're in for lean times; it might, just might get us through it quicker. We'll have to wait and see. In the mean time, start bailing and hope against hope there's no hole in the bucket.

TJ

I only just discovered the other day that in Thomas Jefferson's original draft of the Declaration of Independence he wrote,

We hold these truths to be sacred and undeniable; That all men are created equal and endowed by their Creator with certain inalienable rights; that among these are life, liberty, and the pursuit of happiness.

It was Benjamin Franklin who crossed out "sacred and undeniable" with heavy backslashes and inserted "self-evident." It seems to me there is a lot at stake in the change. I am increasingly persuaded that the root of social order is sacred order. I have been transported recently by Philip Rieff's powerful book, My Life Among the Deathworks: Illustrations of the Aesthetics of Authority, volume one of a three part series entitled Social Order/Sacred Order.

Too often in contemporary times we hear sacred and we run for our First Amendment establishment clause. Apparently Jefferson, the author of Virginia's statute for religious freedom, didn't see the contradiction. I don't either. Part of the problem arises from our tendency to argue that the opposite of sacred is secular. That is, of course, incorrect. Secular can and does mean opposed to the church, but denotes a measurement of time, originally time away from a monastery. Secular means the things of the world and the measurement of time. Sacred, as opposed to profane, refers to people and things set apart, of which there are too few these days. Reverence and "thou shalt not" is the rhetoric of sacred. Culture, Rieff says, is renunciation; whereas, our culture looks too much like the renunciation of renunciation. Holy and accursed are the two sides of the same coin. Often and often the scourge and the sanction restore us to human limits.

And, anyway, even if you're not buying that . . . are the rights really self-evident? I'm having trouble buying that. After all, if they are, why the need for Jefferson's eloquent, rhetorical work?