The Dangers of Debt

The central theory of Keynesian economics is that markets can be stabilized by borrowing and spending heavily during recessions and paying it off during boom periods. However, one of the major problems with this idea is that it completely ignores the risk associated with credit.

According to a new analysis of the Great Recession, the countries that were hit the hardest were those with the most aggregate debt (private + public debt).

Maybe this should be obvious, considering how this economic crash was termed a “credit crisis,” but now we have a definitive picture linking the collapse of the mortgage market (which I’ve already explained in great detail, countless times) to the collapse of the rest of the economy.

Basically, the CRA created a housing and mortgage bubble, which was popped by the Federal Reserve spiking lending interest rates. Normally, such a pop would be dissipated by the strength of the rest of the economy, and this is what Alan Greenspan has admitted he was counting on when he deliberately popped that bubble. However, it turns out there was another, more pervasive weakness in the economy: excessive debt due to at least 7 years of Keynesian stimulus. During the 2001 recession, Bush started a comprehensive Keynesian stimulus plan, including tax credits, stimulus spending, and lowered Fed rates. Even though actual economic recovery didn’t begin until the 2003 tax cuts were implemented, the debt-feeding Keynesian machine continued until 2006.

This is important, because it’s an example of Keynesian policy being implemented exactly as Keynes intended: inflationary stimulus during recessions, with deflationary debt-paying during bubbles. But rather than leveling out the booms and the busts, this policy merely resulted in a new bust being primed by excessive debt, hitting us even harder and faster than the last one.

Suppose you’re trying to walk while holding a glass of water. Keynesian stimulus is like trying to run exactly as fast as the oscillation of the water, so that you can move faster while your rhythm cancels out the waves in your cup. It doesn’t work. You just end up with water all over you.

With this in mind, we should be very worried about the economy in the near future. We’ve now racked up more debt than ever before with the latest round of unprecedentedly large Keynesian stimulus. We even bailed out a lot of the companies that failed last time, so that they’ll be around to fail next time too. It is absolute insanity that we’ve set ourselves up for yet another major recession like this.

Tinkering around with the economy through debt the way Keynes suggested is never safe, and therefore not a responsible approach for a national economy. We need to undo the damage that has been done and reduce our spending and debt levels, or suffer further economic collapse in the very near future.

Funding Science

Obama’s lead science adviser, Dr. John P. Holdren, gave a speech here last night. He spoke at length about how the Obama is the president most committed to helping science in all of US history. He threw around all kinds of dollar figures and percentage increases in various budgets, and talked about how hard he’s working to “defend science from the current Congress.” I was not impressed, and I would like to explain why.

I asked a question which was skillfully reworded by Dr. Ahmed Zewail to something like this (paraphrasing):

As you know, science is driven forward by the innovation of inspired individuals. When government funds science, it tends to focus on a few “big picture” goals which don’t predict a lot of new ideas (from these individuals) which haven’t yet become politically attractive. In some ways, the innovative power in this country is a zero-sum game. The government wants to fund missions to the Moon, missions to Mars, electric cars, but what about the truly unexpected ideas that the government can’t predict? You get a lot of people working on these bigger projects at the expense of diversity in scientific research. So, in the future, do you see a new model for scientific funding- a new way for scientists to get money for their research so the diversity of innovation isn’t drowned out by the goals of government?

Dr. Holdren’s response went something like this (again, paraphrasing):

Well, no, I don’t think so. I disagree that science is a zero-sum game. You see, it takes government funding to do basic research. The private sector funds a lot of research, but they look for marketable attributes when deciding what to provide funding for. What the government does, what I see its role as, is to nurture more options in science for the market to pick up and choose from. And as you know, the President is very committed to nurturing a diverse array of science, and by making that money available, we help provide the resources necessary to make use of this country’s innovation. You know, China has been increasing their scientific research budget 15-20% annually, and I used to go there at least once a year, and it’s changed dramatically. If you were airdropped into one of their universities with no sense of where you are, you might think you were right here at Caltech, or up at Stanford, just looking at the equipment and facilities they have available now. But it is the innovativeness of this country which has allowed our own country to succeed for so long, and we need to nurture that in order to maintain our prominence.

This answer disappointed me, because I think it reveals a fundamental misunderstanding of how markets work and what young researchers need. The question was meant to get at the heart of von Hayek’s local knowledge problem and how it relates to science, as a market. How can the government “nurture more options” when nobody in government actually knows what these millions of scientists know? Politicians and the people they appoint like “popular science,” because that’s the kind of science that gets more attention from the media. They don’t like science which is so theoretically focused that the potential applications are unknown.

Dr. Holdren made the point that the private sector seeks marketable science, so it isn’t very good at providing adequate funding for basic research. However, I can make the same argument about government-funded research. Government funding agencies lean towards applied research just as much as the private sector, but with different topics in mind. I experienced this first-hand when applying for the NSF Graduate Research Fellowship and NDSEG Fellowship. Government has very specific interests in mind (energy research, flexible body armor, helping poor communities), and they will almost always take research geared towards those goals above research which is just very theoretically interesting. It’s no secret among scientists that when applying for these fellowships, we compete to see who can spin their research activities to make it sound like we’re trying to help poor ghetto children. Because, you know, scientific merit is great, but that alone isn’t going to get you funding from the government.

Scientists go where the funding goes, so if the government is funding science, government interests are where scientific progress will focus, often redundantly. Dr. Holdren might object, saying that creating new funding opportunities doesn’t detract from the ones that exist independently. But it does. If the general public is given the impression that scientific funding comes from tax dollars, then they’re not as likely to contribute voluntarily. If individuals see the government as filling the role of supplying scientific funding, then they are not as likely to donate to independent funding agencies for basic research, or found their own. This is the “crowding out” effect, as applied to the market for science. “Crowding out” is a very real and significant effect of government funding, and I can cite countless examples of this effect demonstrably playing a huge part in real markets.

This assumption that “more money => better development” is such a 20th-century perspective, and I’m really saddened that the leading science adviser to the President is stuck in this mindset. More money isn’t always better when the type of funding system is flawed to begin with. I really wish Dr. Holdren and others were more willing to consider a future in which science is funded in a better way.