in his first question, George Gallup asked
“Do you think expenditures by the government for relief or recovery are too little, too great or just about right?” 60% said “too great.”
Last month, in a CNN poll, 66% of those polled said deficit reduction should be “the main” or “an important” goal of the federal government.
There were similarities in the economic trends of the two periods – tentative recovery from a deep economic downturn. And similarities in political debates.
Just as each proverb has its dual in an anti-universe (“out of sight, out of mind” vs. “absence makes the heart grow fonder”), political debates are framed around competing stories.
Advocates of additional US government stimulus spending point to the “recession redux” of 1937, which many believe was caused by Roosevelt’s curtailment of US government spending. Opponents cite today’s Greece, where economic collapse was triggered by profligate government spending. The statistician, of course, insists on bringing measurement into the picture.
There are many measures of the capacity of a government to keep borrowing, and all must ultimately relate to the willingness of creditors to keep lending. A straightforward starting point is the same metric you used to face (and now face again) when obtaining a home mortgage — the ratio of your income to the amount you are borrowing.
With countries, we usually calculate the reverse – the ratio of debt to GDP.
US in 1937: 45%.
US Today: 95%.
The lesson? Unclear. In numerical terms, we seem to be a lot closer to Greece 2010 than to US 1937. How much higher can the ratio go before lenders stop lending? Japan has pushed the ratio close to 200% – but Japan does not rely on international capital markets to purchase its government bonds – the thrifty, inward-looking Japanese public buys them all. The fact that China purchases such a large amount of US government debt, though, has its advantages – China recognizes that a “run on the bank” would not be in its interest, so it is forced to hold on to its US securities to forestall it (small actors do not have the capacity for similar forbearance).
Perhaps we will find out the answer to this question empirically – the allure of government spending that is cost-free in the near term is great, while the political benefits of spending cuts are ephemeral in the near term (and are borne by your successor in office in the long term).