In the temporary agreement recently reached by Democrats and Republicans something like $38 billions were cut from the current budget. That’s only about $120 per American, spread over six months. It’s nothing to write home about but it’s good training for what’s to come. That’s the debt ceiling, an issue that will arise in a couple of months. The “debt,” the national debt, all federal, is simply the accumulation of federal budget deficits that is not paid back at a given time.
The federal government cannot by law spend money Congress has not appropriated. Much of the money it spends is borrowed. There is no shame as such for governments to borrow money. It might borrow to build highways, harbors and bridges and such. That contributes often to the productivity of the general economy. Also, traditionally, government bonds (titles to government debt) have provided safe investment for seniors. They are a source of harmless inter-generational loan: The old lend money to the government that uses it to create conditions that will benefit the young. The young pay back at a modest interest rate. Federal government interest rates are traditionally low because people and organizations trust, used to trust, that government would pay back the money it borrowed.
The Federal debt now stands at about $140,000 per American, man, woman, and newborn baby. That’s right, a baby born today already owes $140,000. That’s plus the share of my debt I won’t be able to pay back before the lottery-in-the-sky calls my number.
Unfortunately, government borrowing is mostly not as virtuous or innocuous as the description above implies. Much of it, most of it, I think, is simply debt incurred to pay for current expenses. The federal budget mixes rational debt similar to the debt I incur when I purchase a better tool to make me more productive, or a house I expect to increase in value, on the one hand, and money I spend on my credit cards to drink more expensive wine than I otherwise would, on the other hand.
Note that an individual such as I is severely limited in how much crazy spending he can engage in. All my life, bankers have restricted my borrowing to what I could afford or to debts backed by real collateral such as a house or a car. Credit cards could have been the exception to this rule of enforced wisdom except that I read the fine print and when I see annual interest rates of 12%, 15%, and now, I hear, up to 24%, my own rational self-control comes on-line. I slap myself a couple of times across the head and I go have a couple of beers with a friend (for which I pay cash), and the urge vanishes.
The federal government knows no such restraints. First, the law does not even allow the President to distinguish between the two kinds of expenses, to improve productivity and to live like a whore. That’s called he “line veto.” Many state governors have it, the President does not, an open door to federal fiscal irresponsibility. Second, the federal government is not normally put off by high interest rates it has to pay – until now. The reason is that most people, most organizations and, as we shall see, some foreign governments, believe that the US federal government can always pay its debts by raising taxes. With little perceived risk of default goes low interest rates.
Everyone knows the game has to stop somewhere. No one knows where. It takes political will to say, “The party is over.” There is such political will now, exceptionally, because of the Tea Party movement that is kicking the Republican Party into shape. It’s useful to understand the dimensions of what we as American citizens are facing. $140,000 is about four times the value of what we currently produce per American. If we taxed ourselves one third of what we produce annually just to pay off the debt, it would take more than 12 years. Of course, we would still have to tax ourselves further to support the most necessary federal services (of which, there should be few according to me and according the the Constitution of the United States). This calculation assumes that the rate of growth of our economy and the value of production by Americans remained stationary. If our economy grew at 3%, a modest goal but not a sure one, it would take only about five years. If our economy grew at paltry European rates of 1% to 2 % it would take much longer. So, economic growth rates matters a great deal. Anything that keeps our economy from growing perpetuates our collective indebtedness. That would include high taxation of the “rich,” and high taxation of corporations. And of course, I give these figures only to make our debt more concrete. There is zero chance Americans will want to dedicate one third of their earnings to paying off the national debt.
There are several predictable consequences to government indebtedness I review below. But first, a reminder: I am only talking about the “national” or “federal” debt. The debts incurred by states and local governments are not included. You are responsible for those also. Some states, including California, are proportionately as indebted as the federal government. Finally, keep in mind that the debs accumulated by Americans, individuals and organizations, are yet another, completely separate topic. You will be saddled with your debts, on credit cards, mortgages, etc, irrespective of the policies the federal government ultimately adopts vis-a-vis its debt. Here are the four main consequences;
First, the principal on the debt has to be repaid to some extent. That’s money out of your paycheck and not available for federal government services, including military services. Alternatively, it’s money obtained by raising taxes which undermines in turn our collective ability to pay the debt.
Second, with a high level of debt comes creditors’ unease and potential creditors’ reluctance to lend. The remedy is higher interest rates. The higher the interest the federal government offers creditors to borrow money, the more will have to be taken from you in taxes, just to service the debt. Or, the lower the level of services the federal government can offer. In spite of high interest rates, the greater the federal government’s obligation to all kinds of creditors, the more difficult it is to borrow more. At some point, not precisely defined, it becomes nearly impossible for the government to borrow at any interest rate. This might be a good thing, vigorous medical treatment, if inability to borrow signaled the end of borrowing. This is rarely the case, however because the federal government is in the habit of borrowing to pay off previous debt. Hence, at some point the fear that the government will default on its debt arises. It’s true that the federal government has never defaulted but other national governments have. If the Treasury announced: “ We will give you 10 cents on each dollar the government owes you; take it or leave it,” what would anyone do about it?
Third, instead of being scattered largely among its own citizens, the US federal debt is increasingly owned by other governments. I think that about ¼ of the debt is currently owned by the Chinese (Communist) government. Generally, I don’t worry much about governments holding a share of our debt. It’s a proof of confidence, after all. The Chinese government is different though. It has geo-political goals as well as economic goals. I am not afraid of China sending a fleet to collect but I can imagine circumstances when it would liquidate its American debt holdings suddenly, causing US federal titles value to plunge. In this scenario, I am guessing that many Chinese organizations and individuals would follow suite and also liquidate simply because they are generally ill-informed about the rest of the world.
The fourth consequence of high national indebtedness is both the gravest and the most insidious. The high interest bonds the federal government is forced to offer to the market to continue borrowing compete directly with productive investment. If the government offers me miserably low interest rates for my savings, investing in publicly held companies will look more attractive than if it does no. More or less every dollar taken by the federal government as debt does not go to developing American productive capacity, does not go to higher employment, does not go toward economic growth. Perversely, every dollar borrowed by the federal government today thus undermines the federal government’s capability to tax tomorrow. That’s because production and people who are employed can be taxed, whereas non-production and unemployment cannot be, obviously.
The effect of this third consequence is hard to measure and harder to explain but economists do it all the time and there is no doubt at all about the simplification above.
Two last comments: First, if the US economy grew at 4% for five years, we would see the debt problem recede in the background. We have doe it before; we could do it again absent anti-business government intervention. Second, contrary to a downright lie spread daily by the liberal media, in a slow economy, it’s the poor that suffer the most. The rich just go on vacation to the Bahamas instead of Monte-Carlo.
NPR is spreading alarmist rumors about Chernobyl cancers without attribution. The Japanese government has just raised the official seriousness of its nuclear problems to level 7. I am sure it has its own reasons. I don’t know what the move means and none of the usual media heads have bothered to find out either. At this point, and after more than 200 visits to my blog, I see no reason to revise my assessment that no Americans are in danger. (See: “Radiation and Health….” on this blog and also, “Radiation Danger….”)