More than 1,700 policy makers, economists and students tuned in earlier in the week to watch a webinar debate on the US debt and financial deficits organized by the Columbia Business School.
Jared Bernstein, former chief economist and economic adviser to Vice President Joseph Biden in the Obama Administration and currently a Senior Fellow at the Center on Budget and Policy Priorities, and Paul B. Kazarian, CEO of Japonica Partners and the Kazarian Center for Public Financial Management, debated on the subject: “Government Debt and Deficit: Myth or Reality?”
The increasing importance of this perennial debate rises in part from the United States federal, state, and local governments and most, if not all, advanced and emerging nations increasing their deficits to support their economies amid the global pandemic.
One side argues that we will never dig ourselves out of this recently-created fiscal black hole. The other side argues that we actually need more stimulus, not less.
Bernstein argued that “debt is nether bad nor good. It depends what we do with it.”
He accepted that the US system of huge debt and deficits may be broken, but he argued that it may be broken “because we do not distinguish good and bad debt. Good debt contributes to society’s goals; through investments and pro-growth public goods it improves social welfare.” He added that the United States should therefore concentrate on bad debt.
“Most think that there is something very wrong with the extent of indebtedness in our country. But nobody seems to do anything about it. Most importantly, there does not seem to be any cost in ignoring the issue,” Bernstein stated.
“I am not saying that the system is not broken but that this unfunded liability of almost three percent of GDP is an easier problem to tackle than the truly scary liabilities we are facing such as global warming, economic inequality and systemic racism,” he added.
On the opposite side of the argument, Kazarian posited that “the debt and deficit model has broken. It is so badly broken that it must be tossed into the garbage bin of failed theories.”
Kazarian, whose Japonica Partners, at one point was the largest private lender to the Greek government during the country’s financial crisis, argues that there are five systemic misconceptions that perpetuate the broken debt and deficit model:
The first misconception is that total government balance sheets do not exist. This is false, he declared. Fourteen governments worldwide have indeed produced balance sheets.
The second misconception is that debt and deficit are the most meaningful financial indicators. This again is wrong, he argued, because governments often “cook the books.” At this point, Kazarian highlighted the example of Greece, where authorities had hidden the extent of debt and deficit prior to the financial crisis.
The third misconception, Kazarian argued, is that there are no metrics more insightful than debt and deficit as a percentage of GDP. This is again wrong, he said. There are three more insightful indicators, such as citizens’ wealth, total government net worth and total government net worth as a percentage of GDP.
“We have used these indicators for the last 30 years at Japonica Partners to successfully see the financial performance of governments and businesses that others cannot see,” Kazarian explained.
A fourth misconception is that a better government model does not exist. This is again wrong, he argued, bringing as an example the New Zealand model.
The fifth and final misconception, Kazarian argued, is that the US government is a global benchmark in financial performance. “Unfortunately, and disappointingly, this is far from the truth”, he stated.
The comparison to New Zealand shows a vastly inferior performance of the US government. “Over the last twenty years, citizens’ wealth in the US declined by $25,000 per person, whereas in New Zealand it increased by $44,000 per person,” the CEO of Japonica Partners said.
You can watch the whole debate, moderated by Shivaram Rajgopal, Roy Bernard Kester and T.W. Byrnes, a Professor of Accounting and Auditing at Columbia Business School, here: