Debt and Deficits In Perspective

Updated May 23, 2013

The Debt

When an up and coming family like yours finds it can earn more by moving far away from its present home, the pleasant prospect of buying a better place to live presents itself.  The question of how much can you afford depends mostly on how much each monthly house payment will be when compared to your newly enhanced monthly income.  Congratulations!

It is taken for granted that you will sell the present home, pay off its mortgage, and put any remaining equity into the new place, which because it costs more will put you deeper in debt.  Despite that, if you always pay on time your credit only gets better.  In fact, if you bank the equity from the old place and rent until you could buy that dream house outright your credit score could drop for lack of current credit data in your records.

Something like that happened to my father.  After living over 30 years in the same oil patch town in a little cottage paid for in the first ten years, always paying cash in Detroit for a new car every five years and never using credit cards or charge accounts, he asked his bank for a loan to buy some oil leases and was turned down.  He had absolutely no credit history.  The bank issued him some credit cards, to my mother's incredulous delight, and he soon had a history. (The less said about the oil leases the better.)

Our federal government has never had Dad's problem.  Since the day when Alexander Hamilton, President Washington's Treasury secretary, assumed the revolutionary war debts of the thirteen states, there has been a national debt.  Because, like your up and coming family, the nation has always paid its debts in full on time, our credit standing is without parallel in the world.

This is true even though we owe creditors at home and abroad over $16 trillion and a private credit rating agency,recently dropped us one notch from AAA to AAa (don't ask).  Why?  Because wealthy creditors prefer to trust us with their money over anybody else -- and at historically low interest rates.  They just ignore the credit agency's tut tutting over recent financial food fights in Washington.

Don't Japan and China, the big creditors, know how horribly much we owe?  Of course.  What is it that they know that most Americans don't know? They know to ask the question, the debt is too big compared to what?  Nations like people become insolvent when they stop paying their debts, even with borrowed money.  We meet our payments, even if with borrowed money, and have done so for about 230 years. 

The next question is how long can we keep on living on the world's borrowed dime?  One way nations evaluate their financial standing with other nations is by comparing ratios of public debt (PD to Gross National Product (GNP).  The ratio of the US PD to annual GDP (PD divided by GDP) is 73% at the end of 2012.  Japan's in contrast is 250%, one of the highest in the world.  We are in the middle of the pack of wealthy nations.

But isn't that ratio the highest in our history?  No.  In 1946 in the wake of our costly victory in World War II it was 113%.  We cut debt in the booming aftermath of the war when a rapidly expanding GDP generated the tax money to do so.  Of course tax rates were as high as 91% in the highest brackets back then, and virtually everybody paid something. 

Annual Deficits

So how are we doing today?  A look at the numbers from October 2009, when the first Obama administration budget was formed, to October 2013  reveals that our annual deficit is coming down rather steadily:

        2009  --  $1,509 billion
        2010  --    1,360
        2011  --    1,324
        2012  --    1,100
        2013  --       885 (early estimate)
        2013  --       636 (later estimate) 

The numbers quoted above are from an official US government web site.  They show that we are on track to reduce annual deficits to less than half of the 2009 figure in the current fiscal year ending next October 1.

So, how is the GDP doing?  It's expanding, not as rapidly as after the war, or as rapidly as we could if government were allowed -- and business could be enticed -- to invest more.

         2009  --  $14,297 billion
         2010  --    14,044
         2011  --    14,582
         2012  --    15,094

It's on a slow but fairly steady rise.  Indications for 2013 are for more of the same. These numbers are taken from the web site of the University of North Carolina's Kenan-Flagler Business School.

Perspectives

If the annual deficit is dropping and GDP is rising then we are on a track to bring growth in the national debt to zero.  If at that point we can still borrow at a low rate of interest and unemployment is still high by historic standards it will be time to increase investments in infrastructure (roads, bridges, ports, tunnels, rail, airports, the electric grid, the Internet, air and land traffic control systems), education (especially remote learning) and basic research (environmental and demographic threats, energy alternatives, the human brain, the genetic code, robotics, life in space).

Will this send the debt up again?  Yes, of course.  But these are areas where we are lagging, not leading, the world.  They are investments that in some cases should be made now if we are not to lag further behind.  They are investments that will pay off in jobs, income and wealth.  They are investments that entrepreneurs can turn into life enhancing products supporting jobs and more GDP growth.

The sum of these efforts will solve the curent deficit/debt problems, but only if we also reform entitlements.  The easy one is social security pensions.  The program will not be insolvent for years and with a modest bit of tweaking even that threat can be made to receed further. This is explored in my blog entry of 4/4/2012, "On Social Security Finances and Myth Making."

The hard and important one is medical care.  ObamaCare is a brave, flawed start.  But it only partly tackles the issue of insurance, and peeks ahead to the prolonged effort we will have to take to rein in the rampant ineffeciencies, and attendant costs, of a bloated, corrupt health care "system."  For more on this subject see my blog entry of 9/21/2009, "Reforming Medical Care: A Task for a Generation."

Finally, we must also cure one other plague if our other efforts are to endure.  The earth is finite.  Therefore our boot prints cannot grow infinitely.  Eventually there will be fewer of us or less of our "stuff."  Growth in tangibles, even services, cannot go on forever.  This year we have seen how our coastal cities can be washed away if trapped heat from the sun sends polar ice caps sliding into the sea, warming them and thus feeding greater energy into their storms.  We have met the plague and it is us.  We either come to terms with a sustainable state of nature or nature will reach a state in which our species cannot live.