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Why deficit spending is so dangerous
CALIFORNIA'S state employee furloughs that began last month are prefigured by Peter G. Peterson in "Running on Empty: How the Democratic and Republican Parties are Bankrupting Our Future and What Americans Can Do About It," published in 2004.
A former chairman of the Federal Reserve Bank of New York, Peterson used California as an example of falling household savings and rising non-federal spending deficits in his visionary book.
Beginning February 6, more than 200,000 state employees in California must take two days off each month, unpaid, in accordance with an order of governor Arnold Schwarzenegger.
The forced furloughs were supposed to cut each employee's salary by 9.2 percent, which would help the state save US$1.3 billion through June 2010. The state now has a whopping deficit of US$42 billion.
Peterson was not the only visionary five years ago. Nobel Prize laureate economist Joseph Stiglitz noted in his 2003 book, "The Roaring Nineties: A New History of the World's Most Prosperous Decade," that Ronald Reagan's willingness to let the deficit mount had put the US economy's long-term growth at risk.
Stiglitz did not argue against any government deficit, he was saying long-term deficit should be avoided.
In hindsight, both Peterson and Stiglitz were correct five or six years ago when they warned against unsustainable government deficits.
Now that California has partially fulfilled Peterson's prophecy, what about the United States on the whole?
For a quick understanding of how far American government has run on empty, Peterson's book is illuminating.
Some figures from the book -- they are even higher and more troubling today:
1. America depends on an unprecedented US$2 billion in foreign capital every working day to support its weak savings rate and US$500 billion trade deficit.
2. From 2001 to 2004, the US deficit grew by US$10 trillion, of which one-third can be attributed directly to former President George W. Bush's tax cuts.
3. Before new deficits, Social Security and Medicare had US$27 trillion in unfunded liability.
4. By 2014, every US household will be facing its US$90,000 share of the deficit.
These figures don't mean much if you don't understand why large government deficits hurt.
Large deficits matter, says Peterson, because economists and historians have found that nations can only sustain their standards of living if citizens save and invest, and if national leaders pursue fiscal responsibility, including avoiding public debts.
In any country, however hard citizens may save, long-term government deficit spending detracts from savings rates in the non-government sector, Peterson explains.
Indeed, when the source of savings declines, interest rates will be forced higher, leading to inflation or stagflation.
Will American households save more to increase domestic demand? Hard to say, given the "culture of spending" which, in Peterson's view, became more pronounced in the early 1950s as the emerging "affluent society" promised to insure middle-class members against disability, retirement and illness.
This "culture of spending," or "conspicuous consumption," has shown no sign of abating, until recently. On the contrary, this part of American capitalism has crossed the American border and found its way into many emerging markets in Asia and elsewhere, creating a global culture of spending.
Given the current global financial crisis, which stemmed from unbridled desire to consume in America, Peterson's book is very pertinent: Its warnings about US deficits may also apply to certain other economies scrambling to spend more than they save in the long term.
A former chairman of the Federal Reserve Bank of New York, Peterson used California as an example of falling household savings and rising non-federal spending deficits in his visionary book.
Beginning February 6, more than 200,000 state employees in California must take two days off each month, unpaid, in accordance with an order of governor Arnold Schwarzenegger.
The forced furloughs were supposed to cut each employee's salary by 9.2 percent, which would help the state save US$1.3 billion through June 2010. The state now has a whopping deficit of US$42 billion.
Peterson was not the only visionary five years ago. Nobel Prize laureate economist Joseph Stiglitz noted in his 2003 book, "The Roaring Nineties: A New History of the World's Most Prosperous Decade," that Ronald Reagan's willingness to let the deficit mount had put the US economy's long-term growth at risk.
Stiglitz did not argue against any government deficit, he was saying long-term deficit should be avoided.
In hindsight, both Peterson and Stiglitz were correct five or six years ago when they warned against unsustainable government deficits.
Now that California has partially fulfilled Peterson's prophecy, what about the United States on the whole?
For a quick understanding of how far American government has run on empty, Peterson's book is illuminating.
Some figures from the book -- they are even higher and more troubling today:
1. America depends on an unprecedented US$2 billion in foreign capital every working day to support its weak savings rate and US$500 billion trade deficit.
2. From 2001 to 2004, the US deficit grew by US$10 trillion, of which one-third can be attributed directly to former President George W. Bush's tax cuts.
3. Before new deficits, Social Security and Medicare had US$27 trillion in unfunded liability.
4. By 2014, every US household will be facing its US$90,000 share of the deficit.
These figures don't mean much if you don't understand why large government deficits hurt.
Large deficits matter, says Peterson, because economists and historians have found that nations can only sustain their standards of living if citizens save and invest, and if national leaders pursue fiscal responsibility, including avoiding public debts.
In any country, however hard citizens may save, long-term government deficit spending detracts from savings rates in the non-government sector, Peterson explains.
Indeed, when the source of savings declines, interest rates will be forced higher, leading to inflation or stagflation.
Will American households save more to increase domestic demand? Hard to say, given the "culture of spending" which, in Peterson's view, became more pronounced in the early 1950s as the emerging "affluent society" promised to insure middle-class members against disability, retirement and illness.
This "culture of spending," or "conspicuous consumption," has shown no sign of abating, until recently. On the contrary, this part of American capitalism has crossed the American border and found its way into many emerging markets in Asia and elsewhere, creating a global culture of spending.
Given the current global financial crisis, which stemmed from unbridled desire to consume in America, Peterson's book is very pertinent: Its warnings about US deficits may also apply to certain other economies scrambling to spend more than they save in the long term.
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