‘If Something Cannot Go On Forever, It Will Stop’

That’s Stein’s law, named for Herbert Stein. He was chairman of the Council of Economic Advisers from 1972 to 1974 and was an economist for the American Enterprise Institute. He’s probably most famous for his namesake law, and it is invoked often in economic discussions.

Stein meant it as a tongue-in-cheek reassurance that we don’t need to be worried about things that we know can’t go on forever. He first said the phrase publicly in a symposium for the Joint Economic Committee in 1986. The discussion was about foreign debt.

New York Times economics reporter Leonard Silk, who was moderating the discussion, noted that Stanford professor Michael Boskin had said during his presentation earlier in the day that “no nation has ever been able to continue piling up debt indefinitely.” Silk posited Canada as a possible counterexample, saying it had “been incurring debts continuously every year since it was born and at a fairly sizable rate.” In view of that, Silk asked whether the United States could “be a debtor country, stay a debtor country, and at what acceptable level?”

Boskin explained that there has to be a limit on how much debt foreigners will buy. He said that for foreigners, “Eventually, your portfolio goes from 5 percent in dollar denominated assets to 10 percent, to 20, to 30, to 40, and Professor [James] Tobin, who won the Nobel Prize for, among other things, telling us not to put all our eggs in one basket, would I’m sure agree that eventually foreigners to continue this level of movement of resources into the United States would demand higher and higher interest rates.” He also said Canada wouldn’t be a fair comparison since it is so small relative to the U.S.

Then, MIT professor Lester Thurow said, “Obviously, in some technical sense, as long as the international debt doesn’t grow any faster than the GNP it can do it forever.” That’s true mathematically, but not in practice. “The problem is that the international debt is doubling every year at the moment and that is a lot faster than the rate of growth of the GNP as far as I know,” he said.

Thurow raised the problem that so much of the federal government’s debt is to finance consumption, not investment, and therefore the spending isn’t creating the assets necessary to pay back the debt. He then gave this reductio ad absurdum argument as an alternative strategy for paying off the debt:

Now, the other thing you could do, of course, is you can in an equity sense sell America off to the rest of the world. In the earlier panel it was suggested selling off federal assets to Americans to solve the problem. My suggestion there is that the federal government allow private corporations to charge ten cents a mile for every car on the interstate highway system, we sell off the interstate highways and pay off the federal deficit — the national debt, and have no debt at all. Well, you could do the same thing in the international debt. You could sell all America to the foreigners, but presumably you don’t really want to do that in either case. So, I think you can’t just buy this idea that we can double the international debt every year.

It was to that remark that Stein replied:

Well, I recently came to the remarkable conclusion which I commend to you and that is that if something cannot go on forever it will stop. So, what we have learned about all these things is that the federal debt cannot rise forever relative to the GNP. Our foreign debt cannot rise forever relative to the GNP. But, of course, if they can’t, they will stop.

What Stein was saying is that the fact that the federal debt can’t increase forever is not, in itself, a problem. It’s a fact. We don’t have to be worried about it increasing forever, because it will stop at some point. It has to.

That doesn’t mean the debt isn’t a concern, though. It’s just a concern for different reasons. Stein would explain those reasons in a June 1989 AEI paper, “Problems and Not-Problems of the American Economy.” Laying out the issue, he wrote:

If you asked any group of politicians, journalists, or business leaders what the great problems of the American economy are, they would overwhelmingly refer to the “twin deficits” — the budget deficit and the trade deficit. Usually they do not think it necessary to explain why they are problems. The fact that they are called “deficits” seems sufficient. One comment that is commonly thought to be adequate ground for worry is that these conditions cannot go on forever — or, at least, it is believed that they cannot go on forever. I have tried to comfort people who worry about this by propounding Stein’s law, which is that if something cannot go on forever, it will stop. That satisfies only a few.

The tongue-in-cheek nature of his comment is clear again here. Don’t worry about things that can’t go on forever going on forever. After all, you just said they can’t go on forever. If there’s a problem with the thing in question, it must be for another reason.

Stein went on to clearly explain the economic theory of why the trade deficit is not a problem (that section is worth a read and re-read). But he wrote that the budget deficit is a problem because it is part of a larger problem: “that the United States does not wisely allocate its large national income among competing uses.”

Stein noted that U.S. GNP had just passed $5 trillion (today it’s $27 trillion), yet the U.S. still suffered from many problems that suggest it was spending its national income poorly. “The public is not saying that the problem is that the country is not rich enough,” he wrote. “It is saying that even though we are very rich, we have too much crime, too much homelessness, too much illiteracy and ignorance, and so on.”

He chalked up that problem, in part, to the federal debt. “The United States is a rich country mainly because of what was done in the past,” he wrote. Stein continued:

Our performance today looks quite different. Our savings are low in relation to our national income, partly because the rate of private saving is low and partly because the government deficit is large. As a consequence, the rate of private investment owned by Americans is very low. We have been fortunate that the rest of the world has been willing to supply capital to us. Capital owned by foreigners is better than no capital, but from the standpoint of the future incomes of Americans capital owned by Americans is best. The true significance of the budget deficit is that it has substantially reduced the rate of private investment owned by Americans.

When Stein wrote those words, the personal saving rate in the U.S. was 8.1 percent. Today it’s 3.4 percent. The budget deficit was $153 billion. Today it’s $2 trillion. So the trend he was describing has continued.

Stein wrote that he would “prefer to see more of the national output go for investment, education, care of the very poor, and defense and less of that output go for consumption of people who are not poor, including their large expenditures for medical care.” The two largest federal expenditures today, Social Security and Medicare, are largely for the consumption and medical care of people who are not poor. And those programs are driving more borrowing, which makes the private-investment problem worse.

Stein concluded:

If the present allocation of the national output were the result of knowing and well-informed private and public choices, I would disagree with the outcome, but I would respect it. That is not the case, however. The present allocation of the national output is heavily influenced by governmental decisions that ignore the facts and the real issues. Decisions about the size of the deficit profoundly affect the share of the national output going to investment. The deficit decisions, however, do not consider that effect. They are only exercises in window-dressing the figures to seem to comply with rules arbitrarily laid down several years ago. The share of the national output devoted to consumption is greatly affected by the level of taxation. In considering whether to raise taxes, however, we have no serious discussion of that or other real effects of taxation. The discussion is preempted by the question whether it is good or bad to embarrass a president who made a firm commitment during the election campaign not to raise taxes. I could give many other examples of the failure to appreciate and act upon the real consequences of important decisions.

By means of a budget in excess of $1 trillion and in other ways, the American people, through their government, are influencing the allocation of a $5 trillion national income among its possible uses. This allocation will profoundly affect the quality of life in America, as well as our national security, for generations to come. It is not too strong to say, however, that we do not know what we are doing — or, if we know, don’t care.

Replace “$1 trillion” with “$6 trillion” and “$5 trillion” with “$27 trillion,” and those words are still as true today as when Stein wrote them in 1989.