Fallout: The Financial Crisis

Reducing ratio of debt is the real issue

Marketplace Staff Feb 25, 2009
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Fallout: The Financial Crisis

Reducing ratio of debt is the real issue

Marketplace Staff Feb 25, 2009
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TEXT OF COMMENTARY

KAI RYSSDAL: The president had a lot of things he wanted to say last night. The speech ran almost an hour. About two-thirds of the way into it he started talking about fiscal responsibility, and how he’s going to cut the current deficit in half by the end of his first term.

Commentator Robert Reich says that might be smart politics, but it doesn’t make much economic sense.


ROBERT REICH: We’re in a deepening recession, in case you hadn’t noticed. The biggest immediate challenge is to ramp up aggregate demand. If the slump gets worse, we’ll have to have a second stimulus. And if that’s not enough, a third. FDR’s biggest mistake was spending too little, at least until World War II.

Can we continue to borrow indefinitely? Not without paying higher interest rates to attract global savings. But no reason to worry now. The Chinese and Japanese are not going to yank their money out of Treasury bills, because the slump is worldwide and T-bills are about the best and safest place to park savings. Besides, the Chinese don’t want the dollar to plunge. They’d be stuck with a lot of paper worth far less than they paid for, and their exports would be in even worse shape than now.

Blue Dog Democrats and many Republicans will continue to fuss about the skyrocketing debt. The very word “trillions” when juxtaposed with the word “dollars” is enough to send most people into shock and awe. So it makes political sense for Obama to promise fiscal responsibility, especially with his first budget emerging this week. But if the economy needs further boosting, that promise could become a political liability.

The real issue here is the ratio of debt to the national economy. Today, debt is under 50 percent of GDP but it could be much higher six months from now. Getting that ratio down to a reasonable level depends not just on reducing long-term deficits but, more importantly, on getting the economy growing again.

And to get the economy growing, two things have to happen. First, the stimulus has to be big enough to create a lot of jobs and move the economy toward capacity. Second, the nation has to make the public investments necessary to enlarge that capacity — including investments in the health and education of our workforce.

Cutting the budget deficit in half by 2012 would be nice but it’s a sideshow compared to these two main events.

RYSSDAL: Robert Reich is a professor of public policy at the University of California, Berkeley. His most recent book is called “Supercapitalism.”

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