Saturday, July 31, 2010

Is government debt the latest [anti-]bubble?

Here we go again!

It seems like only yesterday (but it was 1999) when it was common knowledge that investing in stocks was safe because, historically, the stock market always goes up. This was an oft-repeated piece of wisdom at the time, and my answer (although I usually kept it to myself) was to point out that it was 24 years between 1929 and when the Dow reached it’s pre-crash level. That’s a long time if you’re planning your retirement. The stock market boom was followed by a housing boom (“housing prices always go up”) and bust. Now, the same people are all convinced that government debt is the thing to focus on.

In each of the previous bubbles, there were clear dissenting voices. Alan Greenspan himself spoke of “irrational exuberance" in 1996. A lot of people were skeptical about the real estate bubble. I myself used the term “foreclosure mortgage” in 2004. For example, I advised friends to “get a 30 year fixed, not one of those foreclosure mortgages.” Their answer typically was “Don’t worry, we can just refinance.” I haven’t had the courage to ask how that’s working out for them lately (these were not close friends). Now, Paul Krugman seems to be the one who is trying to push back the tide (New York Times, June 28, "The Third Depression").

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
I hope that he is wrong about this being a depression. I hope that we have learned to see crowds and panic for what they are. However, I’m not so sure.

To illustrate my point I'm including two figures from recent issues of The Economist. First, a graph from their special report on debt ("Repent at Leisure," specifically "In a Hole" ) shows the growth in debt. There has indeed been real growth in debt. It is a problem, and it's the subject of their report. However, it's personal and financial business debt that have been growing much faster than government debt. Furthermore, if the past is any guide (I have added labels to their figure showing which party was in the white house myself), we would be much better off under Democrats, which is not something that most of the people you hear talking about government debt appreciate.debt graphI also include a graph showing the price of gold (also from the Economist), which is the true bubble that goes along with the anti-debt [anti-]bubble.

gold bubble

The Kalven Committee Report on the University's Role in Political and Social Action

Some documents are timeless and important. The Kalven Committee's "Report on the University's Role in Political and Social Action," which was written in 1967 by a committee at the University of Chicago, may be one of them. I learned of the Kalven committee report from an interview of Jonathan R. Cole by Cat Warren in the May-June issue of "Academe," the magazine of the American Association of University Professors (interview, report). Jonathan Cole has just written a book ("The Great American University: It's Rise to Preeminence, It's Indispensable National Role, and Why it Must Be Protected", available at Amazon). I have my differences with Jonathan Cole (who was provost for most of the time that I spent at Columbia University), but I like what he says in that interview. It is good that he can refer, today, to a report written in 1967, and I encourage all scholars to read it. I, for one, am inspired to defend free inquiry and academic freedom, and to emphasize whenever possible how important they are to having a free society.