Yesterday (Sat., Aug. 27) the following red-alert Associated Press article appeared in Yahoo News, Business Week, USA Today, CBS, Forbes, and many other outlets:
Experts Warn Debt May Threaten Economy
My immediate reaction was: Sheesh, here we go again.
The theme of the article, of course, is that disaster “may be” just around the corner. To me, however, this is nothing new. I’d been reading books about an approaching catastrophe for decades: The Crash of ’79; The Great Depression of 1990; How to Prosper During the Coming Bad Years; Red Ink; Facing Up; The Population Bomb; Day of Reckoning; The Zero Sum Society; The Limits to Growth; Protecting Yourself in the Coming Depression; Bankruptcy 1995.
But a strange thing kept happening: disaster never arrived. The only visible success the pessimistic doomsayers were having was in selling books to me.
Fortunately, I discovered the opposing viewpoint in books of optimism and faith in humankind, by authors with a wide variety of backgrounds. Books like Unlimited Wealth, The Ultimate Resource 2, The Deficit Lie, Wealth and Poverty, Recapturing the Spirit of Enterprise, How the West Grew Rich, A History of Knowledge, The Wealth and Poverty of Nations, The Misunderstood Economy, The Great Deficit Scares, The Way The World Works, The Ideas that Conquered the World. Those books explained the past and present better than the pessimists did, and predicted the future better than the doomsayers did. The common theme: Growth defeats poverty; growth improves both the human condition and the environment; growth eases or eliminates the interest burden of debt; growth results not from greed, but from benevolence; growth emerges best in free societies with free markets.
The optimistic viewpoint is not only more fun, it has been a much better predictor of the future than the pessimistic viewpoint. That’s why I’m an optimist, that’s why I gave up on the doomsayers, and that’s why I talk about economic growth a lot in this weblog.
What the AP article didn’t say
The author of the AP article leads with this scary zinger: “You owe $145,000. And the bill is rising every day.” Presumably, the author is referring to the present value, per capita, of the federal government’s future liabilities. But why is there no mention of the present value of future per-capita incomes? I suspect it’s because it would undermine the article’s scariness quotient. Why no mention of opposing viewpoints, such as Alan Reynolds’s recent article, “Doomsday is Doomed”? Same reason, I suspect.
Then, way down at the end of the AP article, we find the buried disclaimer:
No one's asking you to write a check to cover that $145,000, not yet.
That’s correct, and guess what: no one ever will ask you to write that check, as long as our economy sustains a sufficient long run growth rate. Reason: Debt rollover. To pay back bondholder X when her bond matures, the government sells a new bond to investor Y and remits the proceeds to person X. Rollover is a perfectly sound way for a growing entity like Wal-Mart, General Electric, or the United States government to manage its outstanding debt.
[For doubters: If the prospect of writing that check a generation from now still scares you, do this thought experiment to illustrate the absurdity of the doomsday scenario. Use the time between now and reckoning day to accumulate your share of the debt in US Treasury bonds, bills, or notes; then, when reckoning day arrives, write yourself a check and tear up your T-bonds—thereby reducing the government's debt by an amount equal to your share of it. Doesn't make much sense, does it? You'd rather keep those bonds—maybe even roll them over—wouldn't you?]
In any case, the key ingredient is economic growth. "Economic growth" means growing incomes. Growing incomes mean growing creditworthiness. Growing creditworthiness, by definition, means that creditors view favorably the prospective borrower’s ability to service additional debt, on top of current debt. And if new borrowing is chosen (instead of new equity or new taxation) as the way to finance activities or projects that result in additional income growth, creditors are more than happy to lend additional funds to that creditworthy borrower. That’s the way the world of borrowing and lending works. (Doomsayers either don’t understand that, or don’t want you to know it; otherwise, to bolster their reckoning-day scenario, they’d be explaining when and why the government would cease the practice of rolling its debt over. But they never do, because it won't happen, and that little tidbit would undermine the fear factor.)
Bottom line: The USA’s future solvency depends on the rate of real growth we are able to achieve and sustain. Growth generates higher incomes and higher federal tax receipts. Sufficiently-growing tax receipts offset the growing interest payments on the growing debt.
The most widely-accepted measure of how successfully a nation is managing its debt is the ratio of debt to GDP. And, to keep track of the debt-to-GDP statistic, keep an eye on the National Debt Thermometer right here at this weblog. I update it during the last week of every month, after the Dept. of Commerce releases the latest GDP estimates.
As a final exercise, take a look at the following graphic. It’s a chart of federal tax receipts and federal outlays: where they’ve been, and where they could go in the future. The Associated Press article explicitly states that scenario 3 or 4 is our unavoidable future: "There's no way we're going to grow our way out of our long-range fiscal imbalance"—no way, end of discussion. [My reaction: "Oh, really? I'm not so sure about that."]
Postscript: My questions to the doomsayers
Why do you limit your discussions to scenarios 3 and 4, the most pessimistic ones? Why do you dismiss scenario 1 out-of-hand? Why do you ignore the robust-growth scenario and the changes we could make to foster bringing it about? Growth is overwhelmingly important to the economic discussion; are you avoiding the growth issue because it is politically expedient to do so?