Economist Sees Threat of Economic Collapse Overblown
Economist Paul Shea of Miller Tabak has spoken out about Senator Elizabeth Warren’s recent prognostications of doom for the economy, believing that her view is overstated.
Democratic presidential candidate and U.S. Senator Elizabeth Warren claims to have predicted the economic collapse of 2008 well in advance, and she is now telling us that something similar is about to happen again if we don’t step in and take measures against it.
In an essay penned on Monday called “The Coming Economic Crisis and How to Stop It,” she shared her concerns about what she sees as excessive levels of debt, especially household debt, and also proposes a remedy to reduce all this debt and put us on a better course toward economic prosperity.
Being a U.S. Senator presumably allows you to speak as an expert on matters that you may not have any real expertise on, from the armchair so to speak, and Warren certainly does not hesitate to do this at every turn. This time around, she’s sitting on her armchair and pretending to be an economist, so we might want to hear from an actual economist to see if her views and conclusions are actually valid or not.
It should be quite clear that Sen. Warren’s primary ambitions are not really focused upon the economy per se, but instead on her political ideals of promoting what we call social justice. In reading her essay and especially in seeing her proposed solutions to what she sees as a big problem, she leaves no room for doubt about this.
If we’re actually going to look at this from the perspective of the economy, which is what real economists do, we first need to realize that debt in itself is not a bad thing, and is actually not just a good thing but an essential one. Debt is the engine that drives our economy actually, and this is a whole lot different than the way individuals view this, where less debt is good and more is bad.
We want the most amount of debt we can get actually, provided that this is manageable. Manageable here means both staying within our capacity to have a reasonable amount of it paid back and also not let it help us too much so to speak and cause too much inflation.
This is why central banks encourage more debt when the economy is sluggish and look to reduce it when it causes the economy to prosper too much and cause growth to rise too fast. We want to grow our economies but also want to do so in a manageable and sustainable way, as inflation subtracts from nominal growth and must be kept in check.
The actual problem with a lot of defaults on debt, as we saw during the crisis of 2008 for instance, isn’t so much that banks lose money, it is because our debt levels go down so much because defaulted debt is subtracted from the overall debt levels.
Less Debt is Actually What Hurts Us
This might seem odd to those not familiar with how money supply affects economies, but whenever credit is granted, money supply increases and this is multiplied many times over. People borrow, they buy things with the money, they put it in the bank, and this money is loaned out again and more things are bought. When loans are defaulted on, this subtracts from money supply in a cascading manner and if default rates are high, this can greatly reduce the amount of debt out there and we have seen what happens when this occurs.
It wasn’t that we had so much debt back in 2008, it was that we had too much bad debt, and while we want to keep debt levels up, we don’t want to do so in a way that will dramatically reduce the amount of debt out there later through defaults.
If we simply speak about a lot of debt out there and see this as a threat, this does involve a fundamental misunderstanding of the role that debt serves in our economy and can actually end up being a very dangerous idea, where the debt itself may not be harmful but our response to it may certainly be.
We can be critical of governments borrowing themselves into oblivion ultimately, but this is the path we have chosen, the path of prosperity actually, and while this may not be sustainable long-term, we can choose to postpone these dire consequences or we can face economic collapse now instead. All this borrowing is absolutely required to postpone this though so this is not a choice we could ever make.
The same principle applies to the economy in general, where we need high borrowing levels not only to stimulate economic growth but to prevent a collapse. If we wonder what sort of collapse that we’re risking, we need to realize that the one in 2008 only reduced our credit levels by a fairly modest amount, and the real beast that we may encounter if we’re not careful is many times larger and more gruesome.
Money supply is very carefully managed by central banks and even fairly modest variations can have some real consequences. Money supply does not mean money per se, it really means the amount of debt out there. Our economies are highly leveraged, at a rate of about 10:1 these days, meaning that for every real dollar out there, there is $10 of debt. This might sound scary but it’s actually how we stay prosperous and avoid financial catastrophe.
We may glibly speak of debt in general as a problem, but if we lack a fundamental understanding of economics and we have the means to enact change based upon our false perceptions, as legislators do, we need to be very careful. Fortunately, there are people around who do have a much better idea of things, but if we don’t listen enough to them, this can lead to some very dangerous situations.
When financial institutions were failing in 2008, the advice given to Congress was that if this were left to stand, this in itself would cause an economic depression far greater than anything we’ve ever seen. Fortunately, we acted enough to prevent this even though what did go down was painful enough. The rabble was certainly roused as many lost their jobs but they had no idea how worse this could have been if we did not bail out these institutions.
A Real Economist Speaks Out
We still need to ask how bad things may be now, and if our level of debt is one that we really should even be concerned about. Paul Shea, a real economist, has stepped up publicly and addressed the concerns of Warren and other armchair economists that think debt is bad and that the government should be doing what it can do reduce it.
Shea assures us that while consumer debt levels may appear to be high, they are quite reasonable as a percentage of GDP. The only concern here is that we not get to the point where we really do exceed our capacity, and otherwise, this is quite healthy actually, and consumer debt remains at healthy levels.
We’ve actually seen default rates decline year after year since the big bust of 2008-09, which means things are getting better and better, not worse and worse. Warren no doubt looks at the bottom end of the spectrum and sees families struggling, which we will always see given how income and wealth is distributed in free societies, but this is not a way to manage an economy as it loses all sight of the big picture.
Shea even goes as far as to say that the restrained amount of debt that we currently have will actually help, not hurt, if we do end up seeing an economic downturn. This contrasts with Warren’s view that this will not only cause one but also cause its effects to be far worse.
Warren is also concerned about corporate debt, but Shea points out that in spite of the low rate environment that we’re in, corporate debt has only risen by a relatively small amount is well within healthy levels. We can’t just point fingers here, we need to actually present evidence to back it up, and the evidence tells us that this is a healthy situation all-around.
Shea also points out that if we actually had the borrowing frenzy that Warren perceives, we would see borrowing expand much more than it has with the “paltry” rates net of inflation that we have now, and the fact that this is not happening shows that we are quite restrained, the opposite of a frenzy.
He terms the growth in debt as “sluggish” actually, and points out that the economy still growing nicely in spite of this sluggishness is particularly evident of a healthy economy, and healthy and about to collapse are pretty distinct.
Warren proposes several “solutions” to this imagined problem, such as reducing people’s debt load by increasing the minimum wage. However, people only earning this much generally don’t borrow much because they lack the capacity, and such a thing would ironically allow them to borrow more and increase their debt.
The impact of this upon the economy in general is not discussed because it’s not the economy that is the focus of this, it is improving the standing of the less fortunate. Whether or not that is a worthy goal, it is essential that we carefully consider all the ramifications of our solutions, and not just be satisfied with everyone making a certain amount per hour.
There is more, a lot more, such as empowering unions, forcing boards to be comprised of 40% workers, paying off people’s student loans to the tune of $600 billion, offering free college tuition to everyone, using rent controls, free child care, and other ideas that serve to promote her overall socialist political goals.
She also is targeting corporations, and wants to place strict controls on leveraged lending, which she sees as “risky” in general without the need to justify or even considering the effects of such a thing overall. Those in her camp who vent a lot of anger against corporations will not require any explanation though.
The rest of us sure do though, and the combination of her lack of understanding of economics, her misunderstanding of the facts, and especially her putting forth these socialist ideals as some sort of overall economic solution without even explaining how this is to help our economy results in yet another lamentation from her without substance.
She is entitled to promote her social goals as she wishes, as she was elected to speak and has a right to do so, but when this is done under the guise of helping the economy, vacuous arguments cannot count.
Editor, MarketReview.com
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