bostonpatriot

by Pat O’Reilly

When you get to print your own money, then what does debt really matter? That seems to have been the unspoken question of perennial deficit spending by the US Federal government over the last quarter century. It is a question that came up again with the plan to borrow another $150 Billion in order to give short term stimulus to our economy. And it is a question that has come up every year since the United States military has occupied Iraq.

The rule of thumb has been that as long as debts and deficits are kept below a certain percentage of GDP, then all is good. But you won’t find any consensus about what would actually constitute too high a percentage of GDP. Is 5% too much, or 50%? And when you look at GDP itself it becomes clear that much of that number is based on borrowed money. It is as if you could count the money you borrowed as income in order to justify borrowing more money. If this was someone’s personal economic strategy, then they wouldn’t make it very far out of their twenties without having to move back in with their parents. As far as the US is concerned… I think we are a bit too grown up now to ask the Queen to have us back.

Even one of our founding fathers, Alexander Hamilton saw national debt less as a burden than as a unifying institutional force. After all, if someone owes you money you aren’t going to do anything that would make them not want to pay you back. So too do modern policy makers go about creating an interdependent world, one they hope will be less likely to see war and strife as long as our financial system is so dependent on civilized relations between nations. But every system has its limits.

As with any debt, how much of a burden it really is depends how things go. So as long as you can expect your salary to always go up and to remain employed, then you can grow your debt along with your income and expect to maintain your standard of living. It works similarly for our Federal budget.

In 1996 spending on interest on the Federal Debt was 16.6% ($241 billion) of $1,453 billion in tax revenue. But ten years later in 2006 servicing the national debt was down to 10.4% ($227 billion) of $2,178 billion in tax revenue. So things look like they are getting better not worse over that time frame.

So why all the fuss if our nation’s actual debt payments are going down? And not only going down against GDP, which I would say is not a reliable metric, but going down relative to real tax revenue as actually collected by the Federal government. A metric that much more closely resembles our personal income versus debt payments comparison.

As we know from our personal real life experiences, debt doesn’t really start to weigh you down until sometime after you borrow it. On a personal scale that can mean months or years or maybe only after the loss of a job or illness. And with nations the burden is measured in years and decades, but so too can the burden be exacerbated by economic circumstance.

Much of the last 8 years of deficit spending comes due in the next decade. Again, the percentage of tax revenue devoted to servicing the national debt will rise. A thorough analysis of that debt with some reasonable projection of future tax revenues would give a clearer picture of the future burden of today’s debt. An analysis which I will leave to a future article. But from preliminary numbers, available from the Office of Management and Budget, the picture is clear enough to say that some hard choices are going to have to be made about what our government can do and cannot do in the next 5 years. Obligatory debt payments are going to be rising substantially and there is no reason to think that the economy can keep up. Especially considering how much of our current economy is relying on unsustainable deficit spending to begin with. The years of borrowing to please everyone are over.