The Business Insider highlighted a tweet from @larry_kudlow:
Trouble w/ Reinhart/Rogoff debate not stats. It’s this: Growth solves debt, not other way around.Reform taxes, spending, regs,money.
I agree with Mr. Kudlow that growth solves debt but disagree with him about his subsequent statement debt and growth. The basic Reinhart and Rogoff premise is unchanged regardless of whether you look at the original or the revised numbers, GDP growth rate goes down as you increase debt load. The revised GDP number goes down less severely than the original GDP number but it still goes down compared to lower debt levels. I think where Mr. Kudlow and I disagree is our assumptions about the potential economic growth and whether debt is relevant to potential GDP growth. He assumes that the US economy has a higher potential than it is presently showing and that a little additional stimulus will result in increased consumer spending and higher GDP growth. This is the traditional Keynesian fix for the economy. In his scenario the increased debt is not relevant because the marginal gains from trying to reach this higher economic potential are so great. My assumption is that that the economic potential is lower. Reinhart and Rogoff have shown that a higher debt level is correlated with lower growth so it is logical to conclude that the economic potential is lower, too. A country’s high debt load is not the cause of lower growth but it is a symptom that shows that lower growth factors have been in place for many years just like high blood pressure can be a symptom of heart disease. As an example let us assume that GDP growth over the last thirty years is a combination of increased consumer spending via debt and good demographics from the baby boom generation in their peak spending years. Let us further assume that the economy peaked in 2000 and we have been struggling to jump start the economy with economic bubbles and more debt. Under this scenario it is easy to see a future with maxed out consumers, young people straddled with college loans, and a baby boomer generation that is retiring. This scenario looks like a high cost, slow growth economy that is unresponsive to government efforts to stimulate spending just like the last ten years. In the last ten years we attempted to stimulate the economy into overdrive with spending on fighting two wars, a big tax cut, and a large stimulus spending package focused on infrastructure and unemployment. It did not work. With these economic results to guide us, additional debt may alleviate the short term pain but is harmful to the economy in the long term. We tried every trick in the Keynesian stimulus book and we failed to increase the prospect for long term growth in the economy and employment. In contrast to the Keynesian stimulus solution where they encourage families to buy more more stuff they don’t need now, our economy needs the government to do no harm so that family spending can expand naturally and let the markets pick the winners and losers with less political interference. Stimulus spending by definition is designed to interfere with natural family spending decisions and get them to spend their money on something they do not want to buy now. In this context it is difficult to see the difference between an economic stimulus and a financial bubble. If a family with limited income growth is responsible for their creating their own wealth, it is natural that they will assume a more traditional viewpoint concerning debt and reject the decision making that comes from financial bubble/economic stimulus spending. Yes, families are smarter than the government when it comes to spending their money. For most of them it is a back to the basics economy in which to increase their wealth they need to do more with less. We tried to accumulate wealth with increasing amounts of debt and found out that it does not work. Now we are going back to the way my middle class parents accumulated their wealth. It worked!
So let us start down the list of cost cutting opportunities and some of the problems. Our electrical bills should be going down since we have record low prices for natural gas and coal. It appears the savings are going everywhere but to the customer. It is interesting that the administration has stated that they would like carbon based electricity to go up in price to make solar and wind generation more affordable. Are we “tilting at windmills” in our battle against carbon dioxide? A similar argument can be made for gasoline and its relationship with ethanol. Why are we letting the price of gasoline get whipped about by ethanol? Another big ticket item for the family budget is the cost of health care. Every healthy family agrees that we are overpaying for our health care and Obamacare is a failure at controlling costs. If Obamacare is not helping healthy people get more affordable health care, it is a failure. You cannot completely ignore the needs of the majority. It was silly to expect a politics ridden organization using a command and control organizational structure to be effective at controlling costs. If this was true then Russia would have an economy greater than the United States. There is nothing like a stack of 20,000 pages and a long list of exceptions to Obamacare regulations to remind us that this was the wrong organizational structure to fix our health care problems. This recipe for disaster did not work for Tennessee and is a questionable success in Massachusetts. On one hand Massachusetts expanded health care and on the other hand they have one of the highest cost health care costs in the country. Any idiot can expand health care coverage without paying for it. The trick is making the system sustainable and that is where Massachusetts is struggling. It all comes back to cutting costs. Trying to promote the Massachusetts experience to the national level is an example of the Peter Principle in action. Since we do not have a tradition of cost effective, sustainable government services, what we probably need is a modern day Rockefeller or Carnegie to work with and against the health care institutions and insurance companies to reform our health care system into a more cost efficient system from the ground up. I was reminded that in a lecture recently that these two men achieved their success by using research and development to aggressively cut costs so that they could sell their products at lower costs. They also were very flexible to market conditions. A real health care reform is not much different than our present system but with a greater emphasis on cost control and a different management style. We tried to ignore costs and failed. Steven Brill’s 22,000 word article in TIME reminded us that health care cost accounting is a nightmare that is not going away. It is amusing to try and think what Rockefeller would say about our health care cost accounting. We tried the big political solutions to health care like Obamacare and failed. Throwing more politics and money at health care does not fix the rising health care cost problem. Maybe if we want a smaller, less political solution like the Cleveland Clinic to work on a national scale we have to encourage each community figure out how they can replicate the best hospital practices and get out of the way. I have a lot more faith in a local hospital trying to compete with the Cleveland Clinic that anything coming from the federal government. If a successful company like Proctor and Gamble can make effective decisions using the one page memo principle, maybe our government needs to embrace a more strategic management style rather than a micro managing style. The “I’m from the government and I am here to help” management style used by Obamacare is creating a bigger health care problem by breaking the health care system faster than doing nothing at all. Since all health care is local health care, all health care solutions are by definition local solutions. If we want a solution to our health care problems, we should look no further than our local health care providers.