Richard W. Rahm wrote an article under the title: “How
much US debt is too much?” and the subtitle: “United States must restrain
entitlement spending.” It was published on January 20, 2020 in The Washington
Times. Rahm begins the discussion with this complaint: “Worldwide debt levels
have reached record levels in absolute terms and as a percentage of the GDP
(well over 300 percent), which is worrisome.” Why so?
The reality is that issues having to do with finance
seem at times to be so convoluted, people give up thinking why things are the
way they are. For this reason, we must develop the habit of creating a simple
vision of what's happening in the “real economy” and go from there to analyzing
the expression of it in the world of high finance. Here is a simple vision that
should clarify some things:
Imagine a Feudal Lord (call him A) who owns a large
piece of property that is self-sufficient in everything. The place is also
inhabited by a thousand other families that work to produce all kinds of foods,
clothing, housing material, modes of transportation, much of the services and
so on.
Year after year, there is enough of everything for
every family to live adequately, therefore everyone receives an adequate amount
of what they consume. The exception is the feudal lord, his family and his
entourage who live in an exclusive quarter of the property. They get one
twentieth or 5 percent of everything that's produced on the property before the
rest is distributed among the working families.
One day, word reaches Feudal Lord A (FLA) that his
neighbor Feudal Lord B (FLB) is doing things differently. So, he decides to pay
him a visit. He tells him what he's doing on his own property, and asks how
different is that from what he is doing. FLB says that his system is almost
identical except that in addition to getting 5 percent of everything, he
charges each working family up to 3 percent more, which he turns around and
gives as bonus to his children and those of his entourage.
But that's not the whole story, says FLB. He goes on
to explain that while the 5 percent are mandatory, the working families have
the choice of paying up to 3 percent more and be debt free. Otherwise, what
they do not pay now is counted as debt that they and their children will have
to pay him, pay his entourage and pay their children with interest.
FLA remarks: This is some kind of trade-off, is it
not? Yes, says FLB and gladly explains that every family has to choose between
lowering their standard of living by up to 3 percent and be debt free. Or
living at a higher standard and carry a debt that they and their children will
have to pay eventually.
FLA stops him at this point to say that he heard
rumors to the effect that the 3 percent started as a one percent then went up,
over the years, to the two percent level and now 3 percent. FLB says this is
correct. He explains that every time new products and efficiency in production
increased the GDP of the property, most of the increases went to the entourage
since the working families live well as it is, and have no reason to complain
or be greedy.
FLA interjects: But the reality as I understand it, is
that as the efficiency increases, the working families get deeper in debt. Yes,
says FLB but that's their choice. They can either maintain their standard of
living and be debt free or improve their standard and be in debt. FLA pushes
back: But is it not true that as efficiency increases, and new products come on
the market, life becomes more complicated, requiring a higher level of
expenditure just to maintain the same standard of living? FLB nods and says:
Yes, there is some truth to that … which means our working families are losing
ground instead of advancing; I admit to that.
FLA sighs and says this is exactly the point he was
trying to make. So, FLB asks: Well then, how do you get around that difficulty
on your property? FLA explains: Whenever the GDP of the property increases by a
given percentage, every family gets an increase in income by that same
percentage. This way everyone, including the entourage, get remunerated both
equally and equitably, and no one gets in debt unless they so decide for
whatever reason.
FLB goes into a deep pensive mode then says: The idea
of reaping the increase in wealth, resulting from efficiency and innovation,
was never mine. It started with the entourage who got wealthier as the working
families got relatively poorer. There must be something I can do to rectify the
situation but I don't know exactly what to do or where to begin.
FLA takes it from there and says that the name of the
game is income distribution. The more unequal the distribution, the higher goes
the debt level, and the riskier it is for the economy as a whole. If and when the
economy collapses, everyone will get hurt, including those of the entourage who
would have caused the downward spiral in the first place.