How I learned To Stop Worrying and Love the Debt
Many American conservatives and libertarians have worried for years about the national debt. Currently, it is sitting around $21 trillion, and it continues to grow. Is this a problem? Is there a financial apocalypse on the horizon? Are conservatives and libertarians right to be worried? The short answer is: No. Before we get into that, though, it may be helpful to describe what it means for the U.S. government to take on debt.
It does this by selling Treasury bonds. Individuals, firms, and even other countries may purchase these. Currently, much of our debt is owed to China and Japan because they have bought many of these bonds. The funds from these loans go into our public spending (so not everything the government does is with your hard-earned tax dollars!). Bonds have helped to fund several things, from our efforts in World War II to the 2009 Stimulus Package. With a focus on the latter, the basic argument for public debt is that it can finance economic growth. If the resulting growth exceeds the payments on the debt, then borrowing money is a rational method to adopt. Generally speaking, this has been easy for America to accomplish, with its low interest rates. It is for good reason, then, that America has generally enjoyed a high credit rating, usually of AAA level.
Let us consider another aspect about what it means for the U.S. government to take on debt: it can continue to do so in a way that individuals cannot. Individuals grow old and unable to work. Their ability to make revenue has an endpoint. They are in a race to secure a good enough retirement that money is not an issue in old age. The government, meanwhile, is a permanent entity and never loses this ability. As such, it can enter a cycle of paying off debt and borrowing more, theoretically forever. Please note: this is not an endorsement of that specific action, merely an acknowledgement of what is possible.
Conservatives and libertarians nevertheless worry about the impending retirement of the Baby Boomer generation and the enormous costs in Social Security spending that this will incur, which might turn the tides of this beneficial trend. They often suggest austerity and cuts to government spending, as a solution. In a brief statement on this matter, the Cato Institute states:
Social Security is not sustainable without reform. Simply put, it cannot pay promised future benefits with current levels of taxation. Yet raising taxes or cutting benefits will only make a bad deal worse. At the same time, workers have no ownership of their benefits, and Social Security benefits are not inheritable. This is particularly problematic for low-wage workers and minorities. Perhaps most important, the current Social Security system gives workers no choice or control over their financial future.
Are higher taxes to address this issue really that much of a problem, however? Former Secretary of Labor Robert Reich seems to think otherwise. In a 2011 blogpost, he offers a story of SS and its financing:
Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.
Today, though, the Social Security payroll tax hits only about 84 percent of total income.
It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.
If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.
Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.
So SS has the potential to be solvent, without requiring us to cut public spending (and thus lessen our debt load). In fact, we have good reason to believe that cutting spending (to SS and other programs) would actively be bad for the economy. According to William R. Emmons, the primary component of growth in America’s economy has been household spending, at about 83%. With a greater share of those households becoming aging Baby Boomers, cuts to public programs upon which the elderly depend would directly undermine our growth (and consequently our ability to pay off debt).
Imposing austerity through a system of cuts also has a poor track record of success. The austerity imposed on Greece in the aftermath of its fiscal crisis in the late Naughts had the effect of growing the problem. In a paper that analyzes the effects of the Greek austerity bailout, Nasos Koratzanis and Christos Pierros write:
Critical to note is that the harmful impact of austerity on investment becomes even more daunting in view of the role of investment as a driver of private profits and the growing shareholder value orientation of modern management that squeezes firms’ internal means of financing investment. Besides this, austerity not only neglects the role of public spending in fostering private investment. It also undermines economic development and technological progress and thus the economy’s growth potential. The latter effect is of utmost importance for the Greek economy, given its lacking productive capacity and the long-standing inability of Greek entrepreneurship to undertake innovative investment projects.
The depth and duration of the Greek crisis vividly highlight that austerity as both theoretical concept and policy option has failed to deliver its promised outcomes.
A similar history is found in the austerity measures imposed by the IMF on Latin American and Asian countries in the late Twentieth Century. When spending is key in the U.S., as it is for a nation like Greece, to cut it is to undermine our own economic foundations and reduce our well-being.
And that is the key issue. A debt crisis is only a problem in the context of reducing the well-being of the American people. If cutting spending in order to preempt this ends up hurting our well-being anyway, then what is the point of preempting the alleged crisis? Moreover, we do not have clear evidence that the trends for debt and growth as they currently stand are going to change rapidly, so to cut spending comes off as needlessly reckless and self-destructive.
This is not to say that we should be dismissive of the possibility of a crisis. There are changes to the ways of the economy that come with the rise of automation and aging of our populations. They can express themselves in some unforeseen ways. The real question is whether or not cutting spending actually solves them at the root. At this moment, we have reason to believe that spending is what is preventing hardship, not causing it.
“Debt” might sound like a scary word to most of us. Generally speaking, we do not want to be in debt. Nevertheless, there are clear advantages in life that come from having a good credit score. It gives us access to more than we would have otherwise. Taking out a loan for a car or a house can stabilize a person’s life and provide them the means to hold a job and accrue wealth. The same logic holds for what public debt is able to finance nationwide.
There are always areas of waste that we can discuss cutting; no budget is so perfect and pristine. In the final analysis, however, most of the spending is beneficial, and it has been self-sustaining up to this point. Debt as traditionally discussed by conservatives and libertarians (and even some liberals) is more akin to a monster under the bed than a real threat. Once I figured that out, I stopped worrying and learned to love the debt already. You should too.