A different specter haunts the world

Fred Block - Research Professor of Sociology, University of California, Davis

 The deficit hawks rely heavily on scary graphs showing that the ratio of outstanding government debt to annual GDP is rising inexorably towards what they insist are unsustainable levels of 100% or more.  But this graphing exercise is built on out-of-date ideas about what makes an economy productive. Back in the 1930’s and 1940’s when our systems of national income accounting were created, most people worked in factories and farms producing tangible products. Back then, it made some sense that the only expenditures that were counted as “investments” were outlays by business for tangible things such as buildings, machines, and vehicles.   

We have a very different economy now where most people produce intangible things that are labeled as services. The statisticians have made some adjustments; they now recognize that government outlays for buildings, machines, and vehicles are investments. In both Europe and the U.S., revisions have been made to acknowledge that some investments are intangible such as expenditures for software and for research and development. 

Economists have been talking for more than sixty years about the central role that “human capital” plays in making an economy productive.  The idea is that spending to increase the skills and capacities of the workforce is critical for expanding economic output.  However,  none of these statistical agencies include outlays that create and improve the abilities and skills of the labor force in their measures of investment.  Yet it is undeniable that  dollars,  pounds or euros spent on education from childcare through to post-doctoral positions is an investment in making the future economy more productive.   The same can be said for a substantial share of what is spent on health care since overcoming accidents and illnesses is essential for effective employees.  Moreover, paid parental leaves and various income supports for families raising children are also routes to a more productive future.  

These outlays, taken together, are huge relative to the types of investment that are included in the accounts.  A fairly conservative estimate for the U.S.  shows that for the year 2019 (before Covid) when outlays on human capital are counted, public sector investment increases from $740 billion to $2.66 trillion.   The upward shift in public sector investment would be even more dramatic for European countries that spend considerably more than the U.S. to keep children out of poverty.   Moreover, when expenditures that were counted as intermediate outlays are reclassified as investments, Gross Domestic Product goes up as well.  The same is true when unpaid family labor to raise children is recognized as a critical investment.  By my calculation,.  U.S. GDP in 2019 would increase from $21.4 trillion to $24.2 trillion when investments are correctly estimated.   Rather than the official debt to GDP ratio of 108%, it would fall to 95%.

The simple reality is that both businesses and households routinely borrow to make capital investments.  Most families do not try to buy homes or cars from current income; they take out mortgages and loans.  Similarly, businesses often borrow to finance major new investments in the belief that the returns will allow them to pay down the debt.  Governments can and should do exactly the same thing. In 2019, for example, the total U.S. federal deficit was calculated as $984 billion. This means that almost two-thirds of the $2.6 trillion of government investment was paid for out of revenues, while only about a third was financed via debt.  This is a ratio that is sustainable.

The scare stories of the deficit hawks rest entirely on bad economic data that has not yet been updated from the industrial era. However, the deficit hawks have sold their story about the danger of deficits to bond traders whose management of huge portfolios means they can abruptly punish governments by speculating against their debt issues, forcing them to pay higher interest rates on new borrowing. The horrible consequence is that most citizens experience continuing austerity with governments unable to address pressing issues such as housing unaffordability, decaying infrastructure, and the declining quality of services including education and health care.  This is precisely the fuel driving the rise of right-wing authoritarians.

 We need a new system of economic accounting that recognizes that investing in human beings is the single outlay with the highest rate of future returns. But we also need reform of the rules governing global financial flows to deprive the bond traders of their influence. James Tobin’s idea of a financial transaction tax remains as relevant today as it was when first proposed in 1972. High levels of financial speculation are an immediate threat to democratic sovereignty; what citizens want gets vetoed by the bond markets as Bill Clinton painfully learned back in the early 1990’s. By making such trades more costly, speculation would be reduced and governments could get back to the urgent business of responding to the needs of their citizens.