A few days ago while reading Cryptonomicon, I got a good chuckle out of Neal Stephenson’s description of a typical business plan for a high-tech startup firm. He says that one section of the plan (“Spreadsheets”) always contains “graphs that all seem to be exponential curves screaming heavenward.” Yes, I remember it well.
Later that same day, as I was browsing the web, I found one of those Screaming Heavenward graphs in an article at the Milwaukee Journal-Sentinel Online (JSO), titled Chew on this: The national debt is $8.2 TRILLION and growing. With tongue-in-cheek, the author said:
If each of us could write a check right now for a bit more than $27,000, or $100,000-plus for a family of four, we could just about eliminate that $8.2 trillion national debt.
Although the author knew how impossible that would be today, the article still left me with the impression that someday, eventually, paying off the debt is thought by some to be a good idea. So I took the article’s advice: I chewed on it a while.
Result: I came up with a few more things that should be chewed on before anyone jumps to a too-hasty conclusion about the desirability of paying off the debt.
So, after chewing on that Screaming Heavenward graph of the debt, I came up with two additional graphs that should be chewed on. First, here’s a repeat of the debt graph we’ve all seen a million times. Click to enlarge.
Second, here’s that same graph with just a little more information added; this might be the first place you’ve ever seen it. Note that there are two curves Screaming Heavenward, not just one. Click to enlarge.
Third, here’s how those two curves relate to each other, along with three possible directions that relationship could take in the future. Click to enlarge
After that, I thought up three questions (or question-groups) worth chewing on before we lock down a decision to pay off the debt:
Question 1:
Instead of paying it off, why couldn't we just continue rolling the debt over, as we've been doing harmlessly for generations? (“Rollover” means selling a new bond and using the proceeds to pay off a maturing bond.)Question 2:
If it's true that our grandchildren will eventually have to pay off the debt, that implies that debt rollover will become impossible one day soon. That would be a true disaster. Therefore, the all-important question is: Why will debt rollover become impossible? And if debt rollover will in fact remain a viable option, why does everybody keep saying our grandchildren will have to “pay off the debt we are piling up today”?Question 3 (a brain-teaser):
Say there's a citizen, Joe, who has (a) $27,000 in his checking account, and (b) $27,000 worth of savings bonds in his safe deposit box. What good would it do for the government to tax away the $27,000 in his checking account, then use that money to buy back its debt from Joe (his $27,000 in savings bonds)? Seems to me it would reduce Joe's wealth from $54,000 to $27,000. Why is that a good idea? Why not just leave the debt alone, and let Joe keep both his cash and his bonds? (Hey, he just might bequeath his bonds to his grandchildren; wouldn’t that be a good thing?)
Last, I thought up a few responses to several assertions in the JSO article. Here they are:
JSO assertion:
Even given the administration's rosiest projections, there will be no end to deficit spending as far out as the eye can see.My response:
Permanent deficits would cause the debt to grow each year. But what about GDP? Will it grow each year, too—as far out as the eye can see, and at least as fast as the debt grows?JSO assertion:
But sooner or later, policy makers will need to engage. Sooner or later, they will need to raise Social Security taxes or cut Social Security benefits or perhaps a bit of both.My response:
Cutting SS benefits would be breaking a promise. That means keeping the debt-to-GDP ratio inside the guardrails (i.e., below 80%) will require raising the effective rate on the payroll or the income tax—commensurate with the rising annual incomes of workers in a growing economy—just enough to keep the debt in the safe zone. The faster those incomes rise, the lower the rate hike will need to be.JSO assertion:
Sooner or later, a president and a Congress will have to raise taxes.My response:
Not only will it be “sooner,” but sooner is now; it's already happening. They are raising taxes as we speak. In fact, according to the numbers published by the US Treasury Department, federal tax receipts have been increasing faster than federal spending outlays for some time now. How are the president and Congress doing it? They are holding tax rates constant as the economy grows. They are “raising taxes” by taking the same percentage of a larger, growing pie.And that begs the question: Would the economy grow just as fast even if tax rates were raised—OR would higher tax rates divert money away from productive investment and into nonproductive, tax sheltering activities as happened in the past? More importantly: Is hiking tax rates worth risking slower growth? Is a larger slice of a smaller pie better than a smaller slice of a larger pie?
Bottom line: Let’s chew on those before we jump to any short-run policy decisions that might be politically profitable, but financially detrimental. Never underestimate the power of growth. It mitigates or eliminates a lot of problems, and that’s true for the national economy as well as for private sector firms.
