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America’s (Unproductive) Debt Crisis

In 2015, total debt in the United States increased by $1,912 billion, but the US economy expanded by only $599 billion. In this blog, I will discuss why debt grew by 3.2 times more than the economy and what that means for our future.

One reason that debt grew more than the economy is because the United States ran a trade deficit of $529 billion last year. So some of the increase in debt was used to buy things from other countries. That debt generated economic growth in the trade surplus countries, but not in the United States. The US has been running very large trade deficits practically every year since 1980. Once the US government ceased to be concerned about the US trade deficit, US corporations moved their factories overseas to profit from much cheaper labor. The US manufacturing base collapsed and wages stagnated. The consequences have been ruinous.

Another reason debt grew more than the economy last year is because corporations and non-corporate businesses increased their debt by $793 billion, but they increased their investment by only $161 billion. Put differently, they borrowed $632 billion more (five times more) than they invested. The $632 billion of excess borrowing was used to fund dividends and share buybacks. Investment creates jobs and adds directly to economic growth. Dividends and share buybacks keep the stock market inflated and boost the economy indirectly when stockholders spend more, but the positive impact on the economy is much less than that generated by direct investment.

The second reason is related to the first. The benefits derived from investing in other countries, where wages are up to 90% less than in the United States, make investing at home unattractive. Buying back share (which pushes up share prices) is the logical course for corporate executives whose bonuses are linked to their company’s share price. But only Investment can generate productive, long-term economic growth for the country. When companies move their factories offshore and buy back shares (instead of investing domestically), they are undermining the country’s economic future, while increasing income inequality. However, in a world of global competition, if they don’t, their profits and share prices would suffer and the executives would quickly lose their jobs.

Total US debt (not just government debt, but every kind of debt) increased by $1,912 billion last year. That was a 3.1% increase, much below the annual average of 8.9% during the six and a half decades leading up to the crisis. Many well-meaning commentators tell us that even this relatively modest increase in debt is dangerous, that debt is bad and must be reduced.

What they fail to understand is that, in our post-Bretton Woods world, there is no longer any difference between credit and money. If we reduce the “credit supply”, we reduce the “money supply”. If we allow that to happen, then the already very weak global economy will spiral into a new great depression.

Therefore, rather than slashing debt, we must find a way to channel new debt into productive investment rather than into more wasteful consumption and share buybacks. The right kind of investment would generate profits and jobs and economic growth. Then the ratio of debt to GDP would fall. Unfortunately, the private sector, acting on its own and in its own best interest, is not going to invest. That means the government will have to. The alternative is economic collapse.

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