No Emergency, But Long-Term Debt is a Threat
Bob Pollin Pt.2: There is no debt crisis, but debt is a long-term danger to the economy
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. In part one of our interview with Bob Pollin from the PERI institute, he made the point that interest due on the American debt is at historic lows, mostly because Treasury bills are being sold at a interest rate of about 1 or 2 percent. So, in fact, the urgency of the current crisis, he argued, is not apocalyptic. But let’s deal with the next step of this, which is, how about the size of the overall debt. And now joining us to continue our discussion is Bob Pollin, codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Bob.
ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you Paul.
JAY: So let’s dig into this issue that the overall–the deficit, first of all, if I have it–understand it correctly, is at, since World War II, at least, historic highs. But your argument that the interest rates are at historic lows–and I think that point’s been clearly made in part one–but the overall debt is growing at a very rapid pace, partly, I guess, because of the recession and other things, like military spending and the level of taxation and such. So isn’t that overall level of debt a real danger, at least in the long term, to the well-being of ordinary people?
POLLIN: Well, generally, I would say yes. And therefore what we should have over the long term is that everybody, including the wealthy, should pay their fair share of taxes on April 15. But even the debt–that is, if you have a mortgage, you know, that’s the total amount, $100,000, as from the example from the last segment. Right now it is still not at a high level, historically high level. It is rising at a fast rate, yes. So when you look at the thing going up, it is going up fast, because the rate at which we’re borrowing is high. At 10 percent of GDP, that’s $1.4 trillion, so it is piling up fast. But, again, it is piling up at a low interest rate, so there is no immediate pressure. Over the longer term, yeah, the first way to stop the government borrowing so much is to get out of the recession. In a full-employment economy, instead of having a 10 percent of GDP level of borrowing, you’d have 5 or 4 percent. These aren’t my numbers; these are from the Congressional Budget Office, the US Congressional Budget Office. They even have a scenario–in fact, their main scenario, the Congressional Budget Office says, out of the recession we’re at, like, 3.5 percent of GDP deficit, which–effectively they’re saying, there is no budget crisis at all after you get out of the recession.
JAY: But the argument would be that you can’t get to a full-employment economy just through government stimulus, ’cause the stimulus money eventually runs out and then the economy starts to sputter again.
POLLIN: Well, yes. I mean, economies do grow. The US economy has grown dynamically many, many times. Unfortunately, the last generation, the way that we have grown–and we’ve grown fast over some periods–has been driven by financial bubbles. This wasn’t the first one. And so we’ve built an economy around the idea that the main thing pushing us forward is Wall Street speculation in financial bubbles, which then spills over, increases people’s wealth, and they want to invest more, they want to consume more. That’s been the logic. So coming out of this crisis, the fundamental problem and the policy focus should be on creating an economy over the long term that can grow on a foundation other than financial bubbles.
JAY: And to do that, doesn’t there have to be more real demand, in other words, higher wages?
POLLIN: Yeah. I mean, part of having a long-term sustainable economy is to have a vast consumer market driven by ordinary people having enough money in their pockets to spend. That can’t happen if people–if wages keep getting pushed down, if unemployment keeps going up, if we keep cutting the social wage, that is, services provided by governments. That is what’s happening through these austerity measures at state and local government. So it makes it harder and harder for people to get by. So the notion that ordinary people’s incomes can drive the economy is getting further and further away from where it could be actually a real major engine of growth.
JAY: Well, let’s go back to the debt issue. President Obama, when he made his speech a few days ago on the debt ceiling debate, he said if the overall debt doesn’t come down, the cost of servicing that debt will be such that maybe Social Security and Medicare will be able to be paid for but not much else. And in segment one, we talked about, you know, even though interest rates are at historic lows now for state debt, that can change. And one of the arguments I know you’ve made and others have made about if you go back to World War II, the size of the debt then and how the US economy was able to essentially grow its way out of that debt–. But aren’t the conditions quite different then than now? In other words, after World War II, United States was this manufacturing juggernaut and all its competitors were mostly lying in ruins–England and Germany, Japan. Is the kind of room for growth that existed back then, wasn’t it significantly different than now?
POLLIN: Well, it’s true. And I myself am not one of the people that puts that much emphasis on the World War II example, because the world has changed a lot. Nevertheless, it’s a useful reference point for people to know that right now the debt, the total amount we owe, putting aside interest rates, is around 50 percent of GDP. In World War II it got up to 110 percent of GDP, and then it gradually came down, as you said, as the economy grew. Now, the conditions for growth in this economy now are obviously different. You’re right. Manufacturing–we were a manufacturing powerhouse. We exported to Europe. That was one of the things in the Marshall Plan was we gave Europeans money to recover, and part of the deal was the way they recovered was buying things from the United States. So that was important. And then there was a couple of other things that were crucial, and I’ll emphasize one. We had a regulated financial system coming out of the Depression, the Wall Street crash of ’29 and the subsequent disaster–was we did put in place a reasonably good system of financial regulations that prevented the kind of hyperspeculation and excess that has led to this crisis–and, by the way, the previous three crises. Remember that we had the state and local–I mean, the savings and loan crisis. That was in the late ’80s. We had the East Asian crisis that spilled into the United States. That was in the mid ’90s. We had the dot-com bubble. That was early 2000s. This is not anything new. This is what happens when capitalism lets the financial markets run amok. It has always happened historically.
JAY: But what do you make of President Obama’s math? I think he’s essentially saying, if you don’t get $3 trillion or $4 trillion out of the budget, the cost of servicing the debt will overcome all kinds of other programs that people want.
POLLIN: Well, number one, again, so far there’s no evidence for that, and it is not an immediate problem. There is no way it’s an immediate problem. So to be straightforward, he and every other politician should just say, okay, we may have a long-term problem. Let’s say we do have a long-term problem. We do not have a short-term problem. So if we have a long-term problem, let’s solve it in a rational way, gradually. Now, could interest rates go up? Yes. We haven’t seen it so far. In the meantime, the first way, again, to get out of the high level of borrowing is to get out of the recession. Let’s say we don’t even grow that fast; let’s say we grow at a slower rate than we have historically. Yeah, you do need to make adjustments. The biggest single thing that–over the long term that’s causing problems is the cost of health care. And the reason the cost of health care is so high is because we spend twice as much per person as every other advanced economy.
JAY: Okay. Well, let’s–in the next segment of the interview, let’s get into what you think should be done. So please join us for the next part of our interview with Bob Pollin on The Real News Network.
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