Sunday, August 7, 2011

Our National Debt - A Guide for the Perplexed

By R.Christian Scott

What is the National Debt?

Our national debt consists of all the federal government’s outstanding bills, both public and private. Some of it is money they owe themselves. For example, they have more money in Social Security than they currently need so they borrow some to cover the cost of the Iraq War. In-house loans like this account for roughly a third of the debt. The rest of the debt consists of bonds sold by the Treasury. The way bonds work is similar to a savings account; investors are promised a safe return over a long period at a low interest rate. Private investors and foreign governments buy these bonds, which start at $10,000. Investors see US Treasury bonds as a safe place to park their money; the government sees them as loans, which allows them to keep spending. 

Check Please!

If we could stop spending right now, how much would we owe? The numbers involved are so large that they defy easy understanding. The most practical way to understand the debt is to relate it to our yearly income, the Gross Domestic product, or GDP for short. The GDP is the value of everything Americans pay for, or are paid to do. Currently, the debt is almost one hundred percent of the GDP, a ratio not seen since the end of World War II. This number is significant because it shows the relative stability of our country. If we owe more than we earn we look less attractive to investors.

Who Racked up this Huge Bill?

We’ve been in debt from the start! Eventually we paid down the tab for the Revolution, but over the years other wars and policies have added to the debt. Most Americans can readily understand that it costs money to fly a jet over Iraq, but the other factors contributing to the national debt are less concrete. According to the Congressional Budget Office, the main reasons are the poor job market and the continuing bailout of the financial system. High unemployment means less income tax is collected and a sharp increase in the number of people applying for aid programs. Instability in the financial system means credit dries up; in other words, the loans needed to get the economy going are much harder to get. 

The other factor to consider is how much money the government takes in, the total revenue. Ideally, any decrease in revenue would be matched by a decrease in spending. Tax levels are as much a matter of political posturing as they are of economic theory. The unavoidable truth is we must find a balance between our income and our spending; something our politicians seem incapable of doing. 

A Sense of Entitlement 

Entitlement programs are benefits the government is obligated to provide to anyone who meets their qualifications. These programs include Social Security, Medicare and VA benefits, as well as many others. More than half of all federal spending goes toward entitlements, and this number seems likely to grow as the population ages. Each program is funded and managed differently. Social Security and Medicare are funded through a payroll tax, the FICA deduction. In theory, these two massive programs are separate from the regular budget. Unemployment benefits are also funded by a payroll tax. The Supplemental Nutritional Assistance Program, more commonly known as Food Stamps, is funded through the Department of Agriculture. The Veterans Administration is the second largest government agency, accounting for nearly 18% percent of the budget for the year 2010, according to the Congressional Budget office. 

The Chinese Credit Card and other Debt Myths

The notion that we have unwittingly mortgaged our country to the People’s Republic has a certain political cache. The Chinese have replaced the Oil Sheiks and Japanese billionaires as the group most likely to put America in a financial stranglehold. While it’s true that the Central Bank of China does own nine hundred billion dollars of U.S. Treasury bonds, that hardly makes them a majority shareholder. According to the Treasury Department, China’s share of the debt is roughly 11%, Japan holds about 8% and the U.K. holds 5%. Americans own most of the publicly held US debt, for better or worse.

Still, the Chinese share is large enough to matter and this raises the question of what would happen if China called in its debt. The simple answer is China wouldn’t do that because it would ruin their economy as well. China depends on the US to buy its goods. A weakened US means a weakened China. China buys US debt because it is seen as a safe investment.

Another persistent debt myth is that certain pet projects and tax breaks are destroying our fiscal health. The problem with this myth is that it has more to do with politics than fiscal policy. Two recent battles, which received a lot of coverage in the media, illustrate this empty symbolism. The President and his allies railed against a tax break for corporate jets, which would have only yielded three billion dollars over ten years. The Republicans, for their part, objected to the Corporation for Public Broadcasting. Their 2010 budget was $422 million, a mere .00014 percent of the federal budget according to the Washington Post. 

Finally, there is the myth of intergenerational debt. This idea suggests that by refusing to address the debt now we’re forcing it onto our children and grandchildren. People in the future will engage in economic activity just as we do today. Wages will be earned and products will be purchased. The debt hangover from the forties did not stop the fifties from booming, nor will our debt prevent future economic activity. Because our debt consists of outstanding Treasury bonds -- that are essentially savings accounts-- there is no particular risk associated with it. When the bonds mature, the government will simply move money from one account to another much like a private bank would. 

The Buck Stops Here

It would seem that our debt level is matched only by the partisanship in our politics. Every decision to tax, spend or cut is framed in strictly oppositional terms. Instead of taking sides in a gridlocked political battle the American people should seek out the facts underlying the debt debate. An informed and engaged public is the best safeguard against financial ruin a democracy can have. We, as a nation, face many challenges in these tough economic times. Finding the facts should not be one of them. 

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