Debt Denial

February 18, 2019

https://www.cnbc.com/2019/02/13/that-22-trillion-national-debt-number-is-huge-but-heres-what-it-really-means.html?recirc=taboolainternal

A few days ago, the national debt hit $22 trillion for the first time, and the above-linked article appeared on CNBC, essentially downplaying the seriousness of the situation.

  • What matters is the debt-to-GDP level, which is not in the danger zone now but threatens to get there before long.

Baloney.  When the people holding that debt – China, Japan, Germany and all the others who use our trade deficit money to buy U.S. debt decide to cash out and demand their money back, are they going to say “Hey, U.S. GDP, we want our money?”  Of course not.  U.S. GDP is an economic measure, not a holder of money.  They’re going to come to you.

Take another look at the picture in the article of the man looking up at the national debt clock.  Not mentioned in the article are the words just below the national debt figure:  “YOUR family share 086858.”  That’s right, the average American family now owes $86, 858.  Measured in terms of debt-to-average household net worth, the national debt has skyrocketed far beyond the average household’s net worth and ability to pay.  The reason that expressing the national debt as a percentage of GDP is so bogus is that, although the GDP has been growing steadily, the average net worth of American households has been stuck at about the same level for decades.

The source of all this debt?  The article provides a half-truth:

The main culprit of public debt is budget deficits, …

Well, yeah, but that’s like saying you owe money on your mortgage because you borrowed it.  The real question is “why do we have to keep running such huge budget deficits?  Why don’t we just stop doing that?”  Think about it.  What would happen to the economy if the federal government suddenly stopped putting a trillion dollars per year into it?  Instant recession – probably one that would quickly spiral into a depression.  Without the federal government putting that money into the economy – and it’s no coincidence that it’s almost exactly the same as the amount that the trade deficit takes out – the economy would collapse.  There are those who would tell you that balancing the budget, without addressing the trade deficit, would somehow prove to be an economic stimulus.  Don’t listen to them; they’re idiots.  The only way to deal with the budget deficit and the national debt is to eliminate the trade deficit.  Period.  Plain and simple.  There are no other options.  Let the trade deficit continue to grow and we’re soon headed for a real disaster.

It’s astonishing to me and scary how few people in the media, and even economists, understand this basic truth.


The National Debt: How Big and Who Pays?

December 17, 2012

In light of the intense debate over the “fiscal cliff” – triggered by unsustainable federal budget deficits that are growing the national debt at an alarming rate – this might be a good time to revisit the national debt and put that problem in perspective.  Just how bad is it?  Who’s on the hook to pay it?  What’s the best way to fix it? 

Most economists relate the national debt to our gross domestic product, or GDP – in other words, the size of the economy.  So let’s begin there.  The following shows the growth in our national debt vs. growth in GDP:  National Debt vs. GDP, 1929-2012.  (Source:  U.S. Bureau of Economic Analysis.)  Note that the two have grown in tandem but, beginning in the early 1980’s, the national debt began to catch up to GDP and the lines crossed in 2010. 

To make it easier to understand, let’s look at the national debt as a percentage of GDP:  National Debt as Percentage of Chained GDP.  (Source:  U.S. Bureau of Economic Analysis)  The war effort (World War II) skyrocketed the national debt to 120% of GDP but, once the war ended and federal spending returned to normal levels, growth in the economy steadily outpaced growth in the national debt until the national debt fell to only about 33% of the economy in 1981.  Aside from a brief period in the late ’90s, when a bubble in the stock market and in the PC/cell phone/internet businesses generated a ton of federal revenue, resulting in balanced budgets, the national debt has grown steadily as a percentage of GDP, but really began to accelerate in 2008 when the “Great Recession” took hold.  Now the national debt exceeds our GDP, a milestone where some economists begin to fret.  How much debt is too much?  I don’t think anyone really knows.  As a percentage of GDP, some nations’ debts are actually much larger than that of the United States.  Interest payments on the debt are still a relatively small part of the federal budget, though growing. 

But who’s really on the hook for this debt?  If holders of America’s bonds decided to cash them in and demand repayment of their principal, where would the money come from?  The federal government would have to extract revenue from “the economy” in order to come up with the cash.  But that’s misleading.  Almost all federal revenue comes from the pockets of individual taxpayers.  Any revenue generated by taxing business simply gets rolled into the cost of their products and we still end up paying.  So, what’s more significant than the percentage of GDP that the national debt represents is your share of it.  How much do you owe?  Would you be able to pay it?  Here’s a chart of the national debt per capita, and how it’s grown from 1929 to today:  National Debt Per Capita, 1929-2012.  (Sources:  U.S. Bureau of Economic Analysis and U.S. Census Bureau)

Yikes!  Now that’s scary!  On average, every man, woman and child owes about $44,000 on the national debt – a new record in 2012, and climbing really fast.  That’s more than double what it was at the end of World War II.  If you’re the breadwinner for a family of four, your family owes $176,000.  Could you afford to pay that?  Few could.  Virtually no one could by having a percentage deducted from their pay in the form of taxes.  It’d have to come from your net worth – your home and your savings. 

So let’s take a look at household net worth to see just how many people could afford this.  This chart shows both the median (the point at which half of the people have higher net worth, and half have lower net worth) and the mean (average) net worth of households:  Household Net Worth.  (Source:  U.S. Federal Reserve)  First of all, as an aside, notice that the median net worth hasn’t grown at all since 1983, the year the Federal Reserve first began tracking this data on a triennial basis.  But the mean has grown nicely.  This means that the net worth of the top few percent of households has grown at a phenomenal rate.  In 2010, the median household net worth was about $77,000.  But, on average, each household owes $176,000 on the national debt.  In other words, if your net worth is anywhere near the median or less, you’re broke!  You just don’t know it yet. 

In actuality, though, the national debt wouldn’t be spread evenly across all households.  The rich would have to shoulder much more of the burden, since their net worth is much higher.  So how much would each household owe if the percentage of net worth was the same for everyone?  To calculate this, we divide the national debt by the sum total net worth of all households combined.  Here’s the chart:  National Debt as Percentage of Total Household Net Worth.  (Sources:  U.S. Bureau of Economic Analysis and U.S. Federal Reserve)

As you can see, this figure held fairly steady for decades in the 12-20% range.  But, in 2010 (following a brief period during which if fell, thanks to the bubble in housing market), it jumped to 28%, thanks to a big jump in the national debt and a fairly big drop in household net worth in the wake of the “Great Recession” a few years ago.  The point is that, if we’re all to pay an equal amount in terms of percentage, we’ll all be called upon to fork over 28% of our net worth. 

What are the odds that all of America’s creditors will want to cash out at the same time?  Slim to none.  Why would they?  They’d be paid in dollars.  Then what?  What do they do with those dollars which, ultimately, can only be redeemed in the U.S.?  Nevertheless, as the debt goes higher, so too does the risk that more and more creditors will become uncomfortable and will want their money back.  One way or the other, the debt has to begin coming down at some point, whether it’s done by the government through tax increases and spending cuts, or by creditors cashing out.

In essence, you owe 28% of your net worth to the federal deficit spending that has taken place over the decades, propping up the economy and making us all feel wealthier than we really are.  And, bear in mind that the median household net worth hasn’t risen since 1983.  Were it not for that deficit spending, most of us would actually be 28% poorer.  The unraveling of the national debt process is going to be painful.  Even if it occurs over many years, it will be a matter of the federal government withdrawing stimulus from the economy.  It’ll leave all of us poorer than we would be if the deficit spending continued – something that can no longer be sustained.

Of course, there is a way that the national debt could be cut painlessly – a way that no politician or economist has dared to address – a way that addresses what necessitated the deficit spending in the first place – and that’s fixing our trade policy to restore a balance of trade.  As I’ve discussed many times in the past, it’s no mere coincidence that the growth in our national debt closely tracks the growth in our cumulative trade deficit.  You’ll notice that, in all of these charts, things took a turn for the worse in the early 1980s.  That coincides closely with the beginning of our string of 37 consecutive annual trade deficits that began in 1976, sapping nearly $12 trillion from our economy.  Here’s that chart once again:  Cumulative Trade Deficit vs Growth in National Debt.  (Source:  U.S. Bureau of Economic Analysis)

Without tackling the trade deficit, any meaningful progress toward reducing the national debt is impossible without throwing the nation into recession.  Both parties know it.  Neither wants to address it.  Republicans love our trade policy because it’s in the best interest of their rich, corporate benefactors.  Democrats love it too – perhaps not to the same degree – because it makes people more dependent on government largesse.  But now both parties are stuck.  The most likely action is some token, trivial revenue increases and spending cuts in return for mutual agreement to address the problem in a more meaningful way, perhaps after the next election.  And the next time the debt is tackled again?  The result will be the same.


Tough Choices Highlight Need to Amend Constitution

March 29, 2009

http://blogs.reuters.com/great-debate/2009/03/26/to-pay-for-vital-programs-congress-must-make-tough-choices/#comment-11315

The linked editorial by Deborah Weinstein, executive director of the Coalition on Human Needs, speaks to the need to make tough choices to fund the intiatives proposed by President Obama in his budget.  In a particularly cynical mood, I wrote the following response:

This may be the fatal flaw in democracy – the inability to make tough choices. Like a family with four children that is run democratically, the end result is inevitably a bankrupt household loaded with toys, run by truant, morbidly obese children, lying around in front of the TV amid the clutter of empty pop cans, potato chip bags and candy wrappers.

How can any tough choices ever be made when we are governed by people interested above all else in re-election who will tell us what we want to hear – that we can have it all while reducing taxes further with each election cycle?

I see absolutely no hope that these problems will ever be addressed.

What hope can we have that any of our problems will be addressed when one party tells us that we can have it all, to be paid for later, while the other party tells us that we can cut taxes more and more without consequence?  Both parties say they want fiscal responsibility, but the time is never right.  There’s always some crisis that must be dealt with first. 

Then I remembered that similar problems are dealt with successfully all the time at the state level.  The arguments about spending and taxes are virtually the same, yet compromise is ultimately reached and budgets are balanced.  Why?  Because it’s mandated by the state constitutions.

In the 222 years since the Constitutional Convention in Philadelphia in 1787, the constitution has been amended eighteen times to add 27 amendments.  Only one amendment, the 16th, ratified 96 years ago in 1913, dealt with the economy and the financing of our federal government.  The 16th amendment established the income tax, addressing the fears of many that the United States would soon become insolvent without it.  Until that time, all federal revenue was generated from tariffs on imports and from some small “excise taxes” that were nothing more than incomes taxes disguised to skirt questions about their constitutionality. 

Just imagine what our nation’s leaders in 1913, concerned about insolvency then, when our national debt was about $2.6 billion, would think if they could see the state of our nation’s finances today.  Today, our national debt is 5,000 times higher.  Even adjusted for inflation and population growth, the per capita share of the national debt burden is about 77 times higher.  In 1913, we had no trade deficit, while in 2008 our trade deficit was $677 billion.  In 1913 we were self-sufficient in energy resources while today we import 75% of our energy needs.   I think it’s safe to say that the framers of our constitution and even our nation’s leaders in 1913 who were so concerned about the potential for insolvency would be absolutely stunned and aghast at what has become of our country, now bankrupt in every sense of the word. 

Because of the political consequences associated with making tough choices, none are ever made.  There is talk in Washington of a complete overhaul of regulation of our financial industry.  But the problems go much deeper and the need for reform extends much further.  Nothing less than constitutional amendments are needed if we are to have any hope of a return to fiscal responsibility and any hope of dealing with mortal threats to the continued viability of our nation, including the trade deficit, energy policy and overpopulation. 

If our philosophical differences prevent us from reaching agreement on how to balance the budget, let’s begin by agreeing that it needs to be done and mandate it through an amendment to the constitution.  If we can’t agree on how long to wait for our free trade policy to eventually restore a balance, we can agree that an enormous, perpetual trade deficit is unsustainable and amend the constitution to require a balance.  If we can’t muster up the courage to utter even a peep of concern about the potential for population growth to transform us into another India, then let’s amend the constitution to at least force a discussion on where we’re going and just high high we’re willing to let our population rise. 

The framers of our constitution could never even begin to imagine the breadth and depth of the problems that now beset us.  Otherwise, they would surely have included mandates to force us to deal with them.  But we can see the problems clearly.  The question is, do we have the courage to act, as our forefathers surely would have if they had a crystal ball, or is this also too tough a choice for us to face?


Obama’s “Grand Bargain”

January 12, 2009
While being interviewed by George Stephanopolous yesterday on ABC’s “This Week,” Obama admitted that, at some point in his administration, in order to restore some fiscal sanity while pursuing his agenda, he will have to reach a “Grand Bargain” with Congress and the American people – sweeping legislation to put the brakes on spending and raise taxes to eliminate the deficits and begin paying down the debt. “Everyone will have to share the pain,” he said. “Everybody has to have some skin in the game.”
I don’t know if he’s thought this through yet but, contrary to what some “economists” may be telling him, cutting spending and raising taxes by themselves will seriously erode the purchasing power of consumers. As consumption declines, so too will employment. It’s a recipe for making the recession (or depression?) even worse, unless one more step is taken – eliminating the trade deficit. When he speaks of everyone “sharing the pain” and having “skin in the game,” is he including the exporting nations who have gotten a free ride in the American economy? Cutting the purchasing power of Americans doesn’t mean that they’ll simply stop buying imports. Go to WalMart and take a look around. See any luxury items? Of course not. Everything you see is necessities. And, aside from most of the grocery items, do you see anything that’s manufactured in the U.S.? Again, no. Sure, there’ll be fewer imported cars purchased, but sales of domestic models will decline just as fast. It’s services where the pain will really be felt – services provided by American workers.

In recent decades, as free trade policies eroded our manufacturing base, the big lie that we could somehow still have a vibrant economy was swept under a rug of debt. Americans could be made to feel just as prosperous by swapping savings for debt. We sold everything we could think of to foreign investors to raise the cash for easy credit. When we finally resorted to selling them subprime mortgages, the whole scheme came crashing down and the rising tide of unemployment that we had held at bay for so long is now topping the levee and inundating us.

Mr. Obama is a very smart man. In his efforts to restore some sanity to our fiscal mess, how long can a line item written in huge, bold red caps escape his attention? Unless Mr. Obama wants his “Grand Bargain” to accelerate our economy’s downward spiral, he’ll have no choice but to finally turn his attention to our massive trade deficit, now totaling $9.2 trillion since our last trade surplus in 1975. And, being a smart man, will he look at our decades-long strategy of complaining about currency valuations and cajoling our trade partners to abide by the spirit of agreements, and say to himself, “gee, this is working really well?” “Let’s keep doing it!” Or will he finally conclude that, just perhaps, it may be time to take some positive action – like tariffs, for example – to restore some balance? The last “skin in the game” may be the global trade welfare state.

 


Taxpayers: Time to Demand a Recovery Plan from the Government!

December 3, 2008

Regardless of how you feel about the domestic auto industry, its fat cat CEOs or the UAW, you probably feel it was reasonable for Congress to demand to see recovery plans before loaning them taxpayer money. And Congress seemed to feel it was quite appropriate for their CEOs to cut their pay to one dollar a year and for the autoworkers to take cuts in pay and benefits until the Big Three are viable again.

Yet Congress hands out trillions of dollars of taxpayer money like it was candy, especially to Wall Street, with absolutely no questions asked. What do they care? It’s your money, not their own.

Well, isn’t it time that we taxpayers held the federal government to the same standards as the automakers? Where is Congress’ recovery plan? What is their plan for returning the federal government to a budget surplus? And if it’s reasonable for CEOs to take a dollar in pay while their companies return to profitability, isn’t it reasonable to expect all of our elected federal officials, including Obama, Biden and every senator and congressman to do the same? And shouldn’t we expect that every federal worker take cuts in pay and benefits until the budget is repaired?

Some Congressmen suggest to the automakers that they simply go into bankruptcy and let the court straighten out their mess for them. Well, there is no entity on earth more worthy of bankruptcy than the United States. Why don’t we simply declare bankruptcy and escape our national debt? Now I’m being facetious, of course. Bankruptcy isn’t an option for the federal government.

But let’s not have a double standard. If it’s good business practice to demand recovery plans, dollar salaries and wage cuts for workers from the auto industry, then it’s also good practice for taxpayers to demand the same of Congress!

I’m encouraging all of you to write your senators and congressmen and demand that they produce a recovery plan for the federal government – a plan to put the federal budget back in the black – and that they be willing to accept one dollar per year in pay until the plan is accomplished, and that they cut the pay of every federal worker. (You’ll see a link on the right hand side of this blog that will make it easy to find out how to contact your elected officials.) Send a link to this post to all of your friends and encourage them to do the same. Feel free to reproduce this post on your own blogs. I think that if we all got behind this idea we could have a big impact on restoring some fiscal responsibility to the federal government. They clearly won’t do it on their own.



One Less Globalization Cheerleader on the Federal Reserve Board

May 29, 2008
Federal Reserve Gov. Frederic Mishkin said Wednesday that he would resign from the central bank at the end of August to return to his Columbia University teaching post.

With Mishkin’s departure, the seven-member Fed board of governors could be pared down to four. The Democratic-controlled Senate for nearly a year has refused to vote on President Bush’s nominees to fill several open Fed slots. If the Senate delay continues, whoever is elected president in November will have a chance to quickly shape the policymaking arm of the central bank through new appointments.

The Senate is right to hold off on approving any more of Bush’s globalization cheerleaders. We need Fed governors who are willing to take the administration to task (whether it’s the Bush administration or the coming Obama administration) for continuing unsustainable trade deficits and federal budget deficits. It’s time for a return to common sense management of this nation’s finances.