This is the first of two (or three) posts about the recent roundtable discussion of the Debt and the Deficit on the Charlie Rose Show, aired on February 18, 2010. The discussion was free ranging, but not free ranging enough as far as Decline of the Empire (DOTE) is concerned.
The participants were:
- economist Paul Krugman
- South Carolina congressman John Spratt
- Pimco CEO Mohamed El-Erian
- former comptroller of the United States David Walker
- economist Alan Auerbach
Krugman introduces the key concepts. "Well, the deficit is the extent to which the government is spending more than it’s taking in in the way of revenues. The debt is what accumulates after you have done a number of years of that. So the debt is the amount of money that the government owes. The deficit is the extra money the government has to borrow this year, which adds, of course, to the debt." Introducing the subject, Rose notes that "The Congressional Budget Office recently projected that total debt this year would climb to nearly $9 trillion, or 60 percent of GDP, the highest level in nearly 60 years" (the years just after World War II). David Walker notes that "we have $38 trillion in unfunded (off-balance sheet) promises in Medicare alone." If you throw in Medicaid and Social Security, our future unfunded debt obligations are around $60 trillion, which is more than 4 times our nominal GDP.
So let's jump into it at page 13 of the transcript, where things get interesting. I have cleaned up the text a bit for clarity. Selected entries are presented in discussion order. I use blue text for highlighting.
DAVID WALKER: I think one of the problems -- I have been to 46 states doing town hall meetings. And the fact is there are a couple of reasons why the American people are really concerned right now. Number one, we have gone from billions to trillions, just like in the 1930’s, we went from millions to billions. It’s 1,000 times the other, and people are having difficulty with it. Secondly, it’s the off balance sheet obligation. It’s not our current deficits or debt. It’s the fact that when you add in the unfunded promises that have been, made this country is in a $60 trillion-dollar hole. Just Medicare and Social Security, pensions and health for civilians and military. That’s three times what it was when George Bush became president. The debt has doubled, more than doubled, since George Bush ... became president. That’s what they’re concerned about.
Frankly, we have a dysfunctional democracy. And the problem isn’t so much the partisanship, although that’s an issue, it’s the ideological divide. It’s the fact the country is more in the center but a disproportionate share of representatives are on the poles and you can’t get a deal done on the poles.
Now we're talking! Actually, with the new Supreme Court mandated changes in Campaign Finance, we don't have a Democracy at all. Or we could say we have a weighted Democracy, where J.P. Morgan Chase's vote is several orders of magnitude more important than your vote according to their ability to buy Congressmen. I guess that would qualify our political system as "dysfunctional."
Mohamed El-Erian's not buying this "dysfunctional" Democracy stuff. He prefers to call the Hell we're going through a "paradigm shift." We are still far, far away from the notion of a declining Empire here.
MOHAMED EL-ERIAN: It’s not that our democracy has become dysfunctional. It’s really that we’re going through a paradigm shift. We have a seen a 20 percent increase in the debt to GDP ratio in a very short period of time. We have seen unemployment go up to levels that were unthinkable and are likely to stay there. And this is in a system built on the assumption that unemployment cannot stay high for a long time... That’s why our safety nets are so weak.
We have seen major questions being raised about institutions, about the Fed, about the banks. This is a paradigm shift. But when the paradigm shifts people fall into ... being hostage to their prior internal commitments. You do something but it’s really doing more of what you have done before... And the way we see it, not only in the United States, is this paradigm shift has taken the system by surprise and the system is still trying to adapt and react. And I think it will take time. And I don’t think as much a question of the democracy no longer functioning as it is that democracies or any systems don’t deal well with paradigm short.
CHARLIE ROSE: Before anybody answers that, what are you referring to, making sure I understand you, the paradigm shift that you’re talking about.
MOHAMED EL-ERIAN: What I’m talking is there are things that are happening that were unthinkable. It was absolutely unthinkable that we would have a 20 percent increase in the debt to GDP. It was unthinkable one in six would be under or unemployed. It was unthinkable that the growth potential of the U.S. economy would come down from three percent to two percent...
Major questions being raised about institutions. Unthinkable unemployment. A rapid, large increase in the debt to GDP ratio. And by the way, our safety net is not weak because the system assumes full employment. The safety net is weak because our heartless, corrupt Federal Government whittled it away in various Social Darwinist "reforms" over the last few decades. All the while, Wall Street was getting bailed out over & over again—no survival of the fittest for them!
But it is the last part of El-Erian's remarks here that are the most insightful, even if he himself does not address the full implications of what he's saying. We are hostage to prior internal commitments. What does this really mean?
In energy, but particularly for oil, the United States did nothing in the previous 25 years to alleviate our growing dependency on imports, despite the fact that it was clear that domestic production had peaked in 1970 and has been steadily dwindling ever since. The prior internal commitment now stands at 19 million barrels each and every day, though it used to be about 20.5 before the Great Recession. (During the later bubble years, it actually exceeded 21.) We are held hostage to past policy mistakes and consequently, future oil price shocks.
What did we do instead during all those years? We expanded our military commitments to keep foreign supply chains open, especially in the Middle East—for example, we invaded Iraq—instead of finding ways to reduce our oil consumption. And now, regarding oil, we are toast.
Another way in which the past determines the present is in the economy. Here, our prior internal commitment was to destroy our industrial base, outsource good paying jobs in software or manufacturing, handicap our export capability, gear our economy toward consumption (instead of production) and most importantly, base our future growth on ever-higher private debt levels to support that consumption. I described some of this in my blog post Keynesian Delusions.
And here again, in the economy, we are toast.
Oh, Yeah, I almost forgot—we're also broke.
Finally, there is El-Erian's remark that you do something but it’s really doing more of what you have done before. Exactly! As I said in Decline of the Empire—Now What? quoting Einstein, insanity is doing the same thing over and over again and expecting different results. On this important theme, see my post The Wheel of Suffering.
All of this is not a paradigm shift, it's an ongoing catastrophe. America's deterioration has been going on for a long, long time. That's enough to chew on today. Stay tuned for additional posts on this Charlie Rose discussion.