Why so much fuss over the national debt? (A generic letter to the editor)

[Note: Please don't miss the end note to this article.]

False alarms about the national debt still flood the editorial pages, blogs, and candidates' press releases.  For hundreds of examples just in the past week, follow this link to Google news. 

Yesterday, while wishing I had more time to submit responses, I thought, Why not recruit some help from this blog's readers?  So, if you agree with the underlying message at this blog (i.e., that a managed level of debt can be harmless, even desirable, in a growing economy), and you'd like to help inject some sanity into the debate this year, here's the deal: Copy the two generic letters to the editor (below) to a convenient place on your computer; then, whenever you spot someone whining about the debt while ignoring our growing ability to service the debt, submit a response by using either the short or the long version below, whichever you think is more appropriate. 

Letter to the editor, short version:

I read [name of whiner goes here]'s sob story about the size of our national debt, and wondered why there was, as usual, no mention of our nation's growing ability to service the debt.  Yes, our debt is $9 trillion and growing . . . but our economy is $14 trillion, and has been growing faster than the debt.  Result: Just as the burden of my car payment decreases whenever I get a raise, the burden of our national debt decreases whenever the economy grows faster than the debt.  Why don't we ever hear that side of the story from the fear mongers? 

How about less whining about the debt, and more ideas about how to enhance economic growth, which improves our ability to service the debt? 

Letter to the editor, longer version:

[Name of whiner goes here]'s sob story about our $9 trillion national debt leaves out some very important information: Our national economy is $14 trillion, and it has been growing faster than the debt.  Guess what: That means our ability to service the debt has been improving. 

Think the interest on the debt is a problem?  Well, in the mid-1990s, it took around 15% of federal tax receipts to pay the net interest on the debt; but now, it only takes 9%.  That's a 40% reduction in the debt "burden" in a dozen years.  Again, our ability to service the debt has been improving. 

Think it would be a problem for future generations if, instead of paying down the debt, we allowed it to keep growing at a rate of, say, 2% every year, year in and year out?  Well, if our economy and our federal tax receipts grew at a rate of, say, 3% every year, our debt "burden" would decrease, year in and year out.  Future generations would be better off than we are, in spite of the debt growth. 

So instead of stirring up fear about the negative side (the debt), why don't we start giving at least equal time to the positive side: a growing economy?  That's the best antidote to a growing debt level. 

I, for one, have heard enough whining about the debt and the interest payments.  Does anyone have any ideas about how to enhance economic growth?  If so, let's hear them.  Steve Forbes said it succinctly:

You can't cut your way to prosperity; you've got to grow the economy.

=============
Important end note: 

A happy, healthy, and prosperous new year to all of you.  Thanks for spending a little time here. 

Comments

[Gil]

Articles such these help give me confidence in the future of modern society as well as a breath of fresh air from those, left and right, who preach doom and gloom. :)

[Jason]

While I agree that as a percentage of revenue the tax burden is decreasing, I think we must view the debt burden in larger context.

Context #1 -
While the US's economy dwarfs other economies, our representatives do not have the spending constraints that much of the world enforces by law. For example, the EU has debt limits. The counter argument to this especially in the EU is that each government sets what it will report to its other members and of course statistics can be manipulated. However, at least there is something to marginally constrain debt growth.

Context #2 -
As a libertarian, I am a bit shocked at the lack of effectiveness of the Republicans. If we were to take the ideological stance, the Republicans should have slashed government and significantly reduced the debt yet we have seen the opposite. Government, whether direct hire or outsourced contract makes no difference, continues to grow. While we can argue that the 9/11 changed their mandate, this does not keep in line with what is expected of people who are suppose to be in support of small government and small government means less burdens in the way of tax and debt. I will refrain from a diatribe of disdain for decisions of intervention.

Your insights are great and I enjoy the food for thought you so often give. I agree that we need to take a large view of the debt yet I am still troubled by the rate of growth of the debt since Regan's early 80's tax cuts. Obviously, I am not a trickle down believer.

I would like to know more of your thoughts regarding debt and political ideology. Also, how long do you believe the US government an debt finance yet maintain the living standards while not harming the FDI required to support the debt.

Thanks Steve!

[Boghie]

Steve, Jason,

This is a weird thought...

The mighty 'Debt Burden' hasn't even kept up with inflation. This year it was about 1.3%. Inflation was what - 2.3% or something. This pattern has been visible - but not seen (by me at least) - since 2003. So the ratio is shrinking in real terms and what remains is being devalued – even in a time of very low inflation.

So GDP grows by 3.5%
Wage Growth 4.6%
Inflation is 2.3%
Debt/GDP 1.3%
Debt/Rev 16.8%
Debt/Exp 16.0%

By the way, Steve did mention that debt service as a percentage of both spending and tax revenue is shrinking. I figured that out a while back (in a comment to Steve's post 'Why Wait for the Tax Hike' - and was very pleasantly surprised.

My one issue with Steve's premise is that he is counting on continuous growth. A 'Jimmy Carter' presidency or a 'Charles Rangel' congress could send us into a multi-year recession. In that case our debt to revenue ratio would grow rapidly - kinda like a super tricky interest only -to high fixed rate - to balloon payment sub-prime mortgage. The Gubmint doesn’t control when their bonds are redeemed, eh…

[embutler]

the debt is large ,but the capacity for the world to absorb dollars for goods is limited...not to mention the price of oil...
how bout an article about the value of the euro vs dollar and how that portends inflation as the euros(and others) buy up america..

[Aaron]

"how bout an article about the value of the euro vs dollar and how that portends inflation as the euros(and others) buy up america.."

I couldn't find any articles about how America was buying up Europe when the Euro was weak (remember that was less than a decade ago when the Euro opened up suprisingly weak against the dollar.)

So why should I worry about the Europeans or Canadians buying up America now?

Disclosure: I bought assets priced in Euros when they were cheap and am now very, very happy to see them worth so many USD.

[Chris]

I don't find the car payment analogy particularly convincing. I try to avoid car payments because of the risk that I will lose my job and be unable to make those car payments. From that point of view, low car payments are better than high car payments.

Steve's argument is based on a constantly rising GDP. What happens when the GDP goes down? Pro-growth policies are important, but I'd prefer to ditch the spendthrift Congress in case these pro-growth policies don't pan out.

[Guðlaugur]

Happy new year to you to from Iceland! I read your blog all the time ;)

-Guðlaugur

[Grodge]

Just having debt is neither good nor bad, the question always has been what that borrowed revenue is being spent on. Return on Investment.

War and other specious spending programs are not necessarily good "investments." Why not discuss that?

If I took out a second mortgage to finance a missile launcher for our front yard or to vacation in Tahiti, I think my wife would correctly have a problem with it.

[mark]

What I cannot figure out is my debt "burden". I know how much I pay in income tax, so whatever percent of govt spending goes to pay interest on the debt would be the same percent of my tax bill. But on the other side of the coin, I do receive some of the interest the government pays. I have a few U.S. Savings bonds. I have a pension and 401k at work - mostly in mutual funds. The mutual funds have some treasury securities, but mostly stocks. I checked a few of the stocks balance sheets and all those companies had cash reserves in U.S. Treasury Securites. Owning stock makes me part owner of the company so technically those Treasury Securities are part mine so the interest received is partly mine. The town I live in collects taxes twice per year and they put the money into short term treasury securites until they need it to make payments. The interest the town receives helps reduce my taxes.
It's easy to calculate the "debt payment", but hard to calculate the "interest received". So what is the "burden"? My guess is it is probably close to a wash for most people. The poor pay little in taxes but receive little. The wealthy pay a lot in taxes but receive a lot. Everyone else is somewhere in the middle.

[Dave]

Chris, what if you needed a car to get to work but didn't have enough money to buy a car? Would you:

a) not borrow anything, be debt free but also have no job (and therefore no income or growth of wealth) - very slowly save pennies you find on the sidewalk until you could pay for a car w/o borrowing, in many many years (or never, depending on inflation)

b) borrow money, buy an extravagant car (with a pork barrel decal on the side and racing stripes), get that job, drive to work but still make less money than your car payments and fall behind financially

c) borrow less money, buy a reasonable car that is fit for purpose, drive to work and make more money than your car payments, generating income

d) borrow the same amount of money as point b), but instead buy 2 reasonable cars, keep one to drive to work, rent the other to your neighbor, and make even more money than point c)

The problem is in this country, media/politicians treat b) and d) the same way. They only focus on the amount borrowed, not what we are getting for our investment. Isnt that a rediculous way to run an economy (or a business)? Shouldnt the debate be on the car, not just the payments?

[Grodge]

I couldn't agree with Dave more.

Running a deficit just for the heck of it is pointless. What is the return on investment?

The Grover Norquist idea of starving the gov't is counterproductive as well. There are certain things that the federal gov't should be managing and prioritizing. What are they and how much should be allocated?

The devil is always in the details, and I would argue that the latest priorities that we are funding with deficit spending are not only a waste of money, but downright counter-productive.

[CoRev]

Grodge, said "I would argue that the latest priorities that we are funding with deficit spending are not only a waste of money, but downright counter-productive."

So, how do we determine which set of priorities are funded from borrowing? I have two degrees in Pub. Admin., and spent most of a successful career in local and the Fed Govt, and can assure you that making that determination is impossible.

[Steve]

Grodge:
You are absolutely correct. War prevention is a far, far better investment than war. Unfortunately, politicians get more mileage out of being able to say "Look what I did for you" as opposed to "Look what I avoided for you."

What investments and actions would it have taken to prevent 911, and therefore the subsequent wars, in your opinion?

[Grodge]

CoRev,
You ask, So, how do we determine which set of priorities are funded from borrowing?

Short answer: elections. As someone who has spent time in public admin and government, you may know that it is difficult, but is it really impossible? If so, then why did you devote your life to such an Sisyphian task?

-----------
Steve,
You ask, What investments and actions would it have taken to prevent 911, and therefore the subsequent wars, in your opinion?

My personal bias, after reading the 9/11 Commission Report and other items, is that the 9/11 attacks could have been prevented had our chief executive been more attentive (Read Chapter 8 entitled "The System was Blinking Red"), but that's not my point.

Even assuming 9/11 had occurred under another administration...say, Al Gore or John McCain... do you really think we'd be sunk up to our gonads in Iraq at $10 billion per month without allies or an exit strategy? Is this war spending advancing any of our national priorities?

To just throw up your hands and concede that we need to spend borrow capital without any positive return is a complete abrogation of any fiscal responsibility. I'd rather balance our budget than ship 200 tons of borrowed US dollars to corrupt plutocrats in Iraq. And the sad part is that we could have done it!

Deficits are not inherently evil, but context is everything.

[Grodge]

CoRev,
You ask, So, how do we determine which set of priorities are funded from borrowing?

Short answer: elections. As someone who has spent time in public admin and government, you may know that it is difficult, but is it really impossible? If so, then why did you devote your life to such an Sisyphian task?

-----------
Steve,
You ask, What investments and actions would it have taken to prevent 911, and therefore the subsequent wars, in your opinion?

My personal bias, after reading the 9/11 Commission Report and other items, is that the 9/11 attacks could have been prevented had our chief executive been more attentive (Read Chapter 8 entitled "The System was Blinking Red"), but that's not my point.

Even assuming 9/11 had occurred under another administration...say, Al Gore or John McCain... do you really think we'd be sunk up to our gonads in Iraq at $10 billion per month without allies or an exit strategy? Is this war spending advancing any of our national priorities?

To just throw up your hands and concede that we need to spend borrow capital without any positive return is a complete abrogation of any fiscal responsibility. I'd rather balance our budget than ship 200 tons of borrowed US dollars to corrupt plutocrats in Iraq. And the sad part is that we could have done it!

Deficits are not inherently evil, but context is everything.

[Counter Revolutionary]

Grodge, you got me! No not impossible, my own exaggeration, but also not cost effective and meaningful in today's technological world. Want to know where everyone of your tax dollars went? Why?

BTW, I have yet to hear a Pol tell us which priorities they intend to pay for by borrowing. Elections? Pshaw!

As to Sisyphean, since this task (tracking which/which parts of priorities) are paid from borrowing, was not ever partaken, then it clearly was not endless.

[Grodge]

CoRev,
I think you may be funnin' with me. You ask, "Want to know where everyone of your tax dollars went? Why?"

I hope this is meant as a joke. If/when my tax dollars are spent on any thing, it is not only part of my economic interest, but my ETHICAL obligation to know what is being done with it.

Wars, torture, etc are not only costly from a fiscal point-of-view and a diplomatic POV, and a national interest POV... but also from a moral POV as well. It eats away at our collective soul, and the rot can be smelled all over the world, my friend.

The fact is nobody really cares about deficit spending when those expenditures are valid, but one could argue that there are no current items valid enough to warrant such spending as we have today.

[Chris]

Dave --

Funny you should ask. Right now, I'm driving an 8-year-old Taurus w/ a broken cabin heater, which I am not fixing because I prefer to save the money so I can buy a replacement car. If those were my only options, I'd chose option (c).

You missed option (e), which is what many people, and the government do: Lease a car, drive it for 3 years, but put many more miles on it than the lease allows. Just before that lease is up, take the car back and roll the over-mileage charge into the new lease. Keep doing this and never pay it off.

Actually, I think what the government does is worse -- it leases the car and then takes an equal amount of money, runs it through the shredder and flushes it down the toilet.

[Jason]

@Aaron & EMButler

FYI - No articles exist because the FDI from the US to most European countries is massive and happens a due course of business. There is not much difference now than when the Japanese bought up US based assets in the '80s. When the market forces change in 7 years, the Europeans will sell and someone else will buy and the Europeans will have a tiddy profit as did the Japanese in the '90s.

If you are looking for that info, compare the amount of FDI from the US to Europe and vice versa. Even with the valuation differences, it is quite interesting.

[gunthestops]

I have to question the credibility of some posts here!

Inflation is 2.3%<--- lol--this my be the BLS headline #, but if you really believe it, you will believe anything.

Now where did these numbers come from? (from a prior post)

If you have 9.19 trillion of public debt and a 14 trillion economy and about 3.5 trillion of tax rev. these numbers look a little off---or is this new math?

Debt/GDP 1.3%
Debt/Rev 16.8%
Debt/Exp 16.0%

Since 2001 we have been adding about 500 billion a year to the national debt, in the first Qt of 2008 we have added 190 billion to the national debt. We are on track this year to set a record of by adding 750 billion dollars to the debt. No country in the history of the world has ever prospered long term by continuing to increase their debt levels and debase their currency. In fact, the looting of the treasury is usually a sign of an empire in decline,