Media coverage of the season’s political contests, many Very Serious People and indeed the candidates themselves are telling voters that the out of control federal debt will crush the economy, put our future in hock, turn us into Greece, and ignite hyperinflation.
Now chill out. It ain’t happening.
Start with what “taming” the federal debt actually means. Politicians and policy wonks throw this term around, but it’s not accurate. Regardless of who wins in November, the national debt will continue to rise because every annual deficit is added to the pre-existing national debt. The real disagreement is not who will reduce the debt, but who will reduce the rate at which the debt increases. This is accounting, not politics.
Even more clarity is called for. Take, for example the well-known but not terribly important deficit number, $16 trillion. That’s gross national debt, and that number includes about $7 trillion owed from one government entity to another (for example, the trillions the Treasury owes Social Security). However, Social Security has assets (Treasury bonds) in an exactly equal and offsetting amount, so that nets to zero. The important debt number is $9 trillion. That’s the number that matters because it’s what’s owed by the government to the non-government.
Slowing the rate of growth of the national debt means massive cuts in federal spending. Any cuts large enough to make a difference (10 percent is $900 billion, 1 percent is $90 billion) mean huge reductions in employment.
One billion dollars in federal spending supports anywhere from 11,200 defense and military jobs, to 16,800 jobs in clean energy, or 17,200 jobs in health care, or 26,700 jobs in education. (Political Economy Research Institute, November 2011). Scaling up to hit a 1 percent target means job losses ranging from a low of 1 million (if all the cuts are defense-related) to a high of 2.4 million (if all the cuts are in education).
True or false: Candidates in the current political races are serious about destroying between 1 million and 2.4 million jobs. With upwards of 20 million American currently unemployed, this would be insane and politically impossible. There’s something about the impossible. It rarely happens.
And another thing. Wednesday night one of the presidential candidates reminded us that it’s a horrible idea to raise taxes on anyone when 20-plus million Americans are unemployed. Why? Because tax increases slow growth. But if raising taxes in a recession is bad, then why would cutting government spending be good? Both reduce the level of spending in the economy, and that’s exactly what we need to avoid.
To get around this, debt hysterics tell us we need to cut “entitlement” programs, Social Security and Medicare, in the future. Actually, program beneficiaries receive payments based on the payroll taxes they paid. Hardly an entitlement. Hairsplitting lexicographic issues aside, the Pete Petersons, Erskine Bowles, and Alan Simpsons of America want to gut these programs even though (or is it because?) they are the backbone of middle class economic security. We can’t avoid the possibility that the sturm und drang about the national debt is political cover for a full frontal attack on the last vestiges of the New Deal.
So folks, if you wanna give up your retirement — whoops, forgot, you can’t retire, wages are too low, your mortgage is under water and you can’t risk waiting for your partner to qualify for Medicare — be sure to get really worked up over the run-away national debt.
Back to what matters. People have important questions about the national debt that deserve answers not included in the deficit hawk hellfire-and-brimstone, pulpit-pounding morality play.
Some wonder, “I can’t borrow forever. I don’t know anyone or any companies who can borrow forever, so the government can’t borrow forever. Right?” Nope. Wrong.
To understand the problems with this analogy you need to understand that the government constantly rolls over the nation’s debt. Except for the very brief two-year interlude between 1835 and 1836, we’ve had a national debt since the founding, 223 years ago. The national government is not like us — it has a potentially infinite lifespan, it has the power to levy taxes on the largest economy in the world, and it can print money. As a result, it can carry very large amounts of debt. And even though the size of the debt — $9 trillion — is mind-bogglingly gargantuan, it’s far more accurate to think about the national debt in relation to the size of the economy (16 trillion). The debt-to-GDP ratio for the U.S. is actually modest; it was way higher at the end of World War II, and it’s way higher in other nations.
Yes, there are scenarios in which large deficits and a growing national debt could lead to economic problems. Inflation is a potential result of too much government spending when the economy is near full employment. We’re not there now. So let’s put this worry aside until the jobs crisis is over.
Some worry that running up large debts today means that our kids and grandkids will have to pay higher taxes to cover future interest payments. This isn’t correct either. Thanks to Walter Wriston, former chairman of Citicorp Bank for the most succinct explanation ever: “If we had a truth-in-government act comparable to the truth-in-advertising law, every note issued by the Treasury would be obliged to include a sentence stating: This note will be redeemed with the proceeds from an identical note which will be sold to the public when this one comes due.”
In other words, the United States need never pay back what it borrows, because it just borrows anew to refinance debts as they come due. Here’s the cool part: The dollars the government gives you when it pays off your note are as spendable as the dollars you lent to the government in the first place. (Note to reader: If you don’t believe me, send an SASE containing any dollars you have lying around and I will prove it to you).
Sounds like bad business, huh? But it’s not “business.” It’s financing the government of the largest economy on Earth. If it were going to be difficult to finance our debt, we’d know it because interest rates would rise. Right now, though, interest rates are near zero, and the Fed is straight up telling us it plans to keep them there.
We are not mortgaging the future. The grandkids are not going to get a bill from Uncle Sam demanding their share of the national debt.
There is a way though, that the national debt negatively affects your grandkids. That’s if it isn’t large enough. Say what, Susan? You don’t really mean this, do you?
Yeah, I do. If the government doesn’t run large enough deficits and add enough to our debt to cover essential investments in education, infrastructure, and a clean environment, then our grandkids will suffer.
If we don’t borrow and spend to put teachers in classrooms today, then we are ensuring a future population that’s less educated. How is that good?
If we don’t borrow and spend to maintain our highways, ports, electric grid, and communications networks today, then the next generation will inherit an infrastructure that’s falling apart, prone to breakdown, and barely functioning. Is that the legacy you want to leave?
And if we don’t borrow and spend today to ensure clean air and drinkable water tomorrow, will your grandchildren appreciate your penny-pinching?
Folks, the hysteria over the debt and the deficit is not based in reality. It’s a cynical attempt to play you for a sucker. Don’t fall for it. Recognize the national debt for what it is: a fiscal tool necessary for financing the future we want and our kids deserve.
Susan Feiner is a professor of economics and women and gender studies at the University of Southern Maine.