Debt Without Considering Risk Leads to Panic

Where is the discussion of risk in the current debt ceiling debates? Why isn’t anyone talking about the risks of the deficit reduction proposals being put on the table?

Only today, two days before the deadline, did I clearly hear one side talking about risk. That was progressive economist Paul Krugman on the This Week show. Krugman, clearly in despair, finally predicted “a lost decade” worse than Japan’s  for the United States if any cuts were made without revenue increases. Clive Crook too, considers that “America flirts with a fate like Japan’s” (Financial Times, June 20, 2011) and expounds on Krugman and Eggertsson’s theory of the “paradox of toil” where if everyone tries to save, aggregate (total) savings actually decline.

Is the choice either cuts or revenue (tax) increases? Personally I detest either/or thinking. It always gets me into trouble, and I think it is getting our economy into trouble right now too.

The privileges of inheritance

It’s so easy for some people I’ve met to say they’ve risked all for what they got from life. These are usually people who started out with an inheritance of some kind. In my book they (and myself)  have not risked as much as other Americans to get where they are.

By inheritance, I mean not just money, but skills. Look at Donald Trump, for example. Mr. Trump’s father was a developer in the New York City area. Donald can certainly be proud of how much further he has taken his real estate development business in New York. But how many of us had a father (or mother) who gave us precisely the skills we needed to get ahead of them?

By inheritance I also mean the social structures that support us – the “entitlements” that our parents, our governments (state, local and federal), or our employers paid for, some of which we will be expected to pay for when we are older. That includes the promise of social security for old age, student loans and grants, unemployment compensation, worker’s comp, subsidized downpayment and mortage tax breaks for homeowners, medicare, medicaid, and many other entitlements.

In fact, even being an American is a kind of inheritance in a world where the vast majority of people are far poorer than any of us are.

Weighing risk vs. reward

When we make a decision to go into debt, we all weigh the risk vs. the reward. The risk level of a decision is actually the most important element of the decision, not the debt level of a decision. When we make a decision to go into more debt than ever before, it leads to huge anxiety, usually the middle-of-the-night kind! We may wish we hadn’t ever made the decision that got us to this level of debt.

That is exactly why there has to be an understanding (and discussion!) about the risks involved before making a decision to go into debt, or indeed even to get near to the point of going into debt.

So here’s how that process works. If you have an inheritance of some kind: money, skills, and/or social support, you are more willing to assume risk. You will assume risk even though you may not fully understand the consequences, e.g., you later realize that the student debt you incurred for college won’t be able to be paid back before you’re a grandparent!

On the other hand, if you don’t have an inheritance, the risk required goes way, way up, but you may feel you have to take it. At the poorest levels of our society, the choices are few. The drug trade and the military are two of those choices. Both can be extremely dangerous.

Those with no inheritance who want to get ahead literally put their lives on the line in order to get the skills the military promises, skills that those with an inheritance do not have to risk their lives for. As a certain singer from the working class put it, “You want it, you take it, you pay the price.”

Either/or choices

It is a privilege of the wealthy and the middle class that we don’t often have to make either/or choices. We have alternatives. That is what is so troubling about the debt ceiling debates. There is an either/or atmosphere around the issue of money that is not common to those who are, or have been at one time at least, better off. That in itself leads to a huge feeling of crisis.

We’re in crisis. How did we get here? We got here because Congress, the House of Representatives in particular, and the previous two administrations in the White House, went deeply into debt. The very same entity that got us into this debt, the House, is now the one freaking out. Congress realizes the consequences of its actions and is obviously feeling a huge anxiety.  As a result, we have a government that is being driven into reflexive withdrawal due to fear of consequences for its own actions.

Anxiety about debt isn’t wrong, but making decisions based on anxiety is. Decisions involving risk should be made ahead of time with a clear understanding about what the probable consequences are. It isn’t how we spend money or how much money we spend that matters, it is where we are going.

For example, during an expanding economy a person with an inheritance (savings and/or good credit) might decide to quit a dead-end job, buy a house with the intention of turning it into a rental after fixing it up, and go into debt for their own living expenses.

There is risk involved, and the person must be willing to accept that. If they don’t get renters, they will have to get a job and spend years paying back the debt. A person without an inheritance knows they might lose their life if they fail. Soldiers and sailors do know that, and they do take the responsibility for that risk when they enlist.

This is why investors, entrepreneurs, workers, and business owners alike all know what politicians don’t seem to be aware of. There is always risk involved when you go for rewards. There is no such thing as rewards without risk; at least some risk has to be borne to get what you want.

The Congress of 2000 to 2008 and President Bush do not seem to have ever taken into account the risk of the massive spending they did. The Congress of 2008 to 2010 and President Obama acknowledged that the spending they did involved risks, but they have never come out and said, as Mr. Krugman has consistently done, that it would not solve the problem they were facing. And now we have panic.

Questions about risk that aren’t being asked

We, the American people, are being asked to sit by while scared and defiant politicians refuse to discuss with each other or us the exact nature of the risk that is being taken in our names. And there are risks, huge risks. We have a right to know those risks and get some answers about how to minimize them.

How exactly will our children be “protected” if our and their entitlements are taken away? How will they take care of themselves without any inheritance? How will poor Americans be protected if we keep on spending massive amounts for wars that are their children’s only real alternative for getting out of debt in the long run? How will children of wealthy Americans keep prospering if other Americans are out of work and not buying anything?

And my biggest question listening to all this is –  how will making cuts that are equal to every revenue increase get us anywhere? Isn’t that just like driving with the gas and the brake on at the same time? Cut, cut cut is the voice of fear. Cut cut cut is the voice of those who didn’t think before they took the leap and spent too much without considering the risk.

I don’t live my life that way, and I resent being expected to clean up the mess of those who do! There’s a time to save, and there’s a time to spend. Wise people figure out the difference and when they fail, take responsibility for taking on debt.

The false distinction between private and public debt

I personally vote that the richest country in the world takes a further risk of spending more right now in order to put Americans back to work for the short-run. I’ll pay the higher taxes if we fail, because that will most certainly be the consequence.

But in return for taking that risk, I want the assurance that my government officials will start talking calmly about how to shift resources in this country to making more money for all of us.

Taxes are not the only form of revenues! GDP goes up because a country as a whole begins earning more than it’s spending. GDP (gross domestic product)  goes up when debt is incurred for things that ultimately bring us rewards. (And what exactly are the “rewards” from any of the wars we’ve begun?)

As liberal British economist Martin Wolf pointed out recently – the line between public and private spending is a thin one. Said Wolf n his article “The eurozone after Strauss-Kahn” (Financial Times May 17, 2011): “Indeed, we now know that the distinction between private deficits and debt and public deficits and debt is far less absolute than the fiscal priesthood understands: private debt becomes public debt and private deficits become public deficits very swiftly.

Thanks to the financial crisis of 2008, private debt has been shifted onto the shoulders of the government. It has become public debt. Now, the public is being asked to pay for what the private sector did.

I don’t want to penalize the private sector or the public sector – as a small business person, I’m a part of both sectors. I know too that we all make mistakes; but I do want the private sector and its advocates in the public sector to begin to take some responsibility for what is happening in the public sector. Maybe if anything good comes out of the debt ceiling crisis it will finally be the recognition by Wall Street and Washington that neither can eat its cake and have it too – at least not for much longer!