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The New ‘Buffett Rule’ Everyone Is Ignoring

Tuesday, July 31, 2012

Taking our eyes off the overwhelmingly important goal of returning the economy to robust growth is a waste of valuable time.

Warren Buffett, recently expressing his disgust with the debt ceiling debate, condensed a profound truth about our federal debt into just a few short words. Although this gem of wisdom (below) deserves to be elevated to the status of a new “Buffett Rule,” that will not happen in the foreseeable future, because both presidential candidates are choosing to ignore it. Why? Apparently, they would rather not complicate the economic debate, especially during election season. Nonetheless, the new “Buffett Rule” deserves some airtime, because both candidates have some explaining to do.

The rule comes from Buffett’s recent answer to a question about the debt ceiling: "As this country grows, our debt capacity grows."

That simple statement packs a lot of meaning into eight words. It means that a growing economy can neutralize the impact of growing debt. It means that “paying down the debt” is not necessary when the economy grows at a sufficient pace. It means that taking our eyes off the overwhelmingly important goal of returning the economy to robust growth is a waste of valuable time.

Below is a screenshot from a campaign ad the Obama team aired in Texas in late July.

If paying down the debt actually is in the Obama plan, that begs some questions. Given that “paying down the debt” requires running budget surpluses instead of deficits, just when does the Obama plan call for those surpluses to begin? Why has not one Obama budget ever called for any surpluses? Besides that, haven’t Obama’s Democratic supporters and Keynesian advisers (as well as many conservative Republicans) been telling us, correctly, that running surpluses in a sluggish economy is a really dumb idea?

And, lastly, if running surpluses is not in fact in the Obama plan, why does it say so in the ad? Could the ad merely be his campaign’s attempt to avoid complicating the economic message during the campaign—instead of admitting that Buffett’s new rule teaches us that paying down debt is not necessary with sufficient growth?

Conover_Obama July 2012

The Romney campaign also wanders off onto the same sidetrack in Romney’s book, Believe in America: Mitt Romney's Plan for Jobs and Economic Growth:

The rise of the Tea Party is a classic instance of the self-correcting forces of American democracy in action. One way or another, Washington will get the message that we must live within our means, spend only what we take in, and pay down our debt.

Of all people, those who have built successful businesses understand that sufficient growth turns growing debt into a non-problem. That begs the question, why talk about “paying down our debt” instead of staying on track and sharpening our focus on growth?

Also, of all political groups, the supposedly private-sector-friendly Tea Party should understand that successful launching of private businesses not only creates new wealth for the equity owners and extra tax revenue for the government, but also turns a successful firm’s growing debt into a non-problem. The same principle holds true for the government. However, that truth has become lost to the Tea Party—apparently because of its zealous mantra about “paying down the debt”—and that misdirected mantra has put a dent in Romney’s growth message.

In any case, Romney’s business experience and success surely mean that he understands Buffett’s new rule. As Buffett implies, growth takes priority over debt—why not just admit it?

Buffett’s new rule is trying to tell us that a focus on growing the economy—jobs, jobs, jobs—is more important than any distraction about running surpluses to “pay down the debt.” The new Buffett Rule is worth repeating: as the economy grows, its debt capacity grows. That means, for example, that a $20 trillion debt in a $30 trillion economy is more sustainable than a $15 trillion debt in a $15 trillion economy—even though the debt is a lot larger in the first case.

The new Buffett Rule means that political rhetoric about “paying down the debt” is political hot air. It is a time-wasting diversion, if not an attempt to pander to the public’s emotional reaction to the out-of-context scare-word “debt.” The solution to our current economic problem comes back to getting our economy growing faster than our debt; it does not require “paying down the debt.” Mitt Romney certainly knows it, and Barack Obama probably does—but neither one of them is telling us. Not yet, anyway.

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.

FURTHER READING: Conover also writes “Why Growth Matters More Than Debt,” “The Debt Ceiling Distortion,” and “Why Growth Is an Economic Grand Slam.” Alex Brill discusses “Understanding Tax Fairness (and Why the Buffett Rule is a Distraction).” Norman J. Ornstein contributes “What Happens if We Go Off the Fiscal Cliff?” Kevin A . Hassett says “Cut to Grow.”

Image by Darren Wamboldt / Bergman Group

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