In a piece actually criticizing President Obama for promising to cut the deficit, Reich gives us his full take on borrowing your way to prosperity:
We're in a deepening recession, in case you hadn't noticed. The biggest challenge is to ramp up aggregate demand. Yes, we have to borrow lots from the Chinese and Japanese to do this, and, yes, it's costly in terms of additional interest payments to them. But there's no choice. In fact, if the slump gets worse -- and I have every reason to fear it will because that's the direction we're heading in as fast as you can imagine -- we'll probably have to have a second stimulus. And if the second isn't enough, a third. And so on. FDR's biggest mistake was doing too little until World War II. (No one should interpret this as a recommendation for more military spending -- I'm just saying Obama will probably have to think and do much bigger than the $787 billion stimulus so far.)
Can we continue to borrow and borrow and borrow? Yes, but eventually we'll have to pay higher interest rates to continue to attract global savings, mostly from the Chinese and Japanese. But that's not anytime soon. 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 got it for, and their exports would be in even worse shape than now....
As to the economics, remember that when it comes to deficits and debt, the real issues over the long term are (1) the ratio of debt to GDP (we're still under 50 percent, which ain't bad, considering all the spending that's been going on; at the end of World War II it was substantially above 120 percent). And (2) whether and when we're back to growing the GDP, which is the most reliable way of improving the ratio.
Let's just take two rather ridiculous pieces of this post:
1) The idea that continuous borrowing from the Chinese has no consequences other than high interest rates because the Chinese have no better place to put their money than Treasuries and they need our export market. This works only if you see China exclusively as an abstract country with money to lend and products to sell. The reality: China is our major world competitor over this century for oil, for market share in the automobile and technology markets, and for political dominance in Asia, the Middle East, and Africa. As I noted yesterday, Secretary Clinton's visit to China already demonstrates the cost of our borrowing from the wizened old men in Bejing: she was not allowed to raise human rights issues in any vigorous manner. Why? You don't get to criticize your creditors.
2) The post World War Two recovery fantasy--which also seems to have deluded Paul Krugman. Let's point out those things about post 1945 recovery that we already mentioned last month:
(1) The relatively complete devastation of all other major industrial bases on the planet, to include Japan, Russia, Germany, France, Italy, and even Great Britain, which left the US with a virtual monopoly on heavy industrial production for at least a decade, and a hegemonic position for most of another decade.
(2) The complete absence of developing world economic competition with American (and then European) markets. World War Two ends with most colonial empires in disarray, but it takes decades after formal independence for nations like India, Indonesia, Korea, or Malaysia to become competitors for low-income factory/sweat-shop work.
(3) Low oil prices caused the American/British domination of most oil supply areas and the relative lack of competition for oil products.
(4) The fact that the Federal government engaged in almost no real social spending compared to today--or even the 1960s. The absence of government social spending and the incredibly low national spending on education (especially pre-Brown v Board of Education) meant that the government could make that 8-10% investment in Cold War spending without causing taxes to go up unduly.
(5) The fact that the GI Bill not only allowed millions of white American men to go to college, but also set back most of the gains in the workplace made by women during the World War Two era by excluding them from this benefit.
(6) The fact that high union membership (and therefore the success of collective bargaining) was a byproduct of the heavy industrial model of the economy, which placed its premium on a (relatively) small number of employers who are looking for a workforce with an 8th Grade education, and possess no motivation to become better educated....
(7) The complete absence of a number of modern externalities, like environmental regulations....
What continues to amaze me is that people fawn over economists like Krugman and Reich despite their almost complete historical and political ignorance....
But they do. They even consider them thoughtful.