Both Oars In Debit or Credit?

Jun 19, 2009

Like Pavlov’s dog, we have become conditioned to respond almost mindlessly to the question: “Debit or Credit?” Yet, this question—or at least the answer to it—impacts the health of our economy everyday—especially when it is the President answering the question on our collective behalf.  For households and the nation alike, credit is definitely the weaker answer.  

 

To his credit [puns abound], President Obama, having responded “credit” for the past several months, is indicating that he would like to switch to “debit.”  He is at least giving lip service to “pay as you go” budgeting. He has proposed that Congress once again adopt PayGo and keep the new spending budget neutral. His detractors point out that this is only after putting trillions more on Uncle Sam’s charge card.  Still, it is a start on the path to a stronger economy.

 

PayGo is also not exactly “pay as you go” in the strict sense.  Unfortunately, something tricky happens when “as you” is taken out of this much needed fiscal discipline.   PayGo only requires that Congressional spenders reduce existing spending in one area if they want to add it in another—it does not require operating a balanced budget on the whole. Subsequently, PayGo may help us avoid increasing the rate we are going into debt as a nation, but it does nothing to slow the bleeding from our existing wounds.  In the end, PayGo is really just “pay as we add,” not as we go.

 

PayGo can also be set aside by Congress when deemed necessary. This is how the deficit went up even when PayGo was in place from 1991-2002 and also in 2007 by hundreds of billions of dollars. Brian Riedl, lead budget analyst for the rightwing Heritage Foundation, gives a great rundown on the shortcomings of PayGo at http://www.heritage.org/Research/Budget/wm2312.cfm.  It is a worthwhile read, but don’t expect it be cheery or unbiased.  However, he is correct in his general point—Paygo could turn out to be more of a distraction than a real fiscal diet.

 

How should we decide what we put on credit and what we pay for immediately as a nation? Here is a rule of thumb: Only borrow for infrastructure improvements that will increase the productivity of the nation, like highways, universities upgrades and ports. It makes sense to mortgage these types of projects against future tax revenue because they will contribute to future tax revenues.  It is the same for the individual.  It is never a good idea to buy a depreciating asset on long-term credit.

 

On the other hand, social welfare programs, wars, principle and interest for the national debt and the cost of government should be covered by tax revenue each year.  Today’s issues should be covered by today’s receipts. In bad years, this means higher taxes or fewer services.  For the sake of humanity and civil order, it is best to always lean toward increasing taxes before cutting social services. I can assure you from personal experience that class strife comes with its own high tax.      

 

The best way to avoid cuts in lean years is to build up reserves in fat years. However, as a nation and as individuals, we have tended to be grasshoppers more than ants. We need to take a lesson from Chile’s latest success. Thanks to Mr. Velasco, Chile’s dower Finance Minister who held back copper windfalls from running up before the economic crash, our southern brothers and sisters had sufficient reserves to fund their stimulus package out of pocket.  Even with all its social programs and a recent drop in copper prices, Chile is a net creditor to the world, not a borrower.  Asked to describe how Chile navigated the storm that sent other ships—even far bigger ships—on to the rocks, Mr. Velasco is quoted by the Wall Street Journal as saying, “We did exactly what any household would do.”  

 

Saving in the good times is good for nations and individuals. Unfortunately, it would seem that our current government culture, regardless of whether it is under Republican or Democrat leadership, is more bent on spending than saving.  But, how much longer can we respond “credit” when asked “Credit or debit?” if we are already $11.5 trillion dollars in debt?  Every card has its limit.