Monday, April 21, 2008

The National Debt and the Poor

At first glance, America’s poorest citizens ought to be indifferent about the national debt. To pay if off, or at least down, the federal government will have to begin to spend less than it earns and that means some combination of tax increases and spending cutbacks that may injure society’s least well off. Another look, though, suggests the poor should hate the national debt, which now stands at about $9.3 trillion or over $30,000 per person.

The economy appears to be going to Limbo if not Hades itself. To stop its descent, the Federal Reserve is cutting interest rates like mad and inventing (or reinventing) new ways of adding liquidity to the financial system and shoring up confidence. It may succeed, as it did in the wake of the S&L crisis, when it stopped a stock market panic in 1987 and kept the 1990-91 recession short and mild. Its predecessor, the Bank of the United States, made similarly short work out of the Panic of 1792. Even if we get out of the current mess relatively unscathed, however, we will remain poised for another bout of financial indigestion at some point in the future, perhaps the very near future, because the Fed’s actions, while necessary, reward risky behavior. (That is what economists and pundits mean when they refer to “moral hazard.”)

The government is just as likely to fail to stop the slide. In 1929, the government did too little. Prices dropped, companies went out of business, millions lost work, defaults climbed, and banks began dropping like flies. It took years to recover and guess who suffered most? That’s right, the poor. Today’s government certainly doesn’t want another depression but one of its hands is tied. In addition to easing monetary policy (cutting interest rates), governments can thwart economic downturns with fiscal stimulus, cutting taxes or borrowing and spending in order to stimulate demand, keep companies in business, and people employed. Our monstrous national debt, coupled with the weak dollar, means the fiscal path is almost closed. The government could do more than the paltry tax rebate checks it has promised, but not much more.

So the Federal Reserve has had to reduce interest rates rapidly and will likely make more cuts. But here looms another bogeyman, runaway prices, as during the “Great Inflation” of the 1970s and early 1980s. Guess who gets hurt most by inflation? People rich enough to buy TIPs, gold, and other inflation hedges? Professionals who can easily negotiate higher fees? No, it is the poor, who will have a difficult time increasing their wages enough to match the higher cost of “little luxuries” like gasoline, electricity, clothes, and food.

The Founding Fathers knew better than to paint themselves into this corner. The new nation ran up a large debt winning its independence, fighting pirates and the French, and buying Louisiana. But it paid it all off by the mid-1830s because its leaders knew that a large, perpetual debt would injure the poor by redistributing resources from the masses to bondholders. The Founders also knew that too much debt would weaken the nation militarily. War threatened the safety of the entire country but weighed especially heavily on those who would have to join the line, then as now overwhelmingly the poor.

Not much can be done about the national debt right now, except to watch it grow. When the financial system and the economy regain their footing, however, we need to have a long, hard conversation about how to repay what we owe, if not for our own sake then for those most threatened by it, the poor.

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