Fiscal Inferno Part II (or How I Learned to Stop Worrying and Love the Debt)

Alright today I'll finish off my thoughts on the debt with a (hopefully) not as long-winded approach. I've got lots of fun and exciting graphs to share, too! Let's start out with a completely indecipherable one showing the federal debt as a donut graph:

What does this tell us? Absolutely nothing; it just reminds us that donuts are very tasty. Why don't you get yourself one right now? Go ahead, I'll wait.

Back? Good. Let's continue.

My objective here is that first I will lay out all the scary numbers, then make it seem like it's not a big deal, then spin it in a new, scary way. First, the scary part. Today the national debt currently stands at $8.644 trillion dollars, though by the time you read this it will undoubtedly have gone up a few million. And you know what they say, "A million here, a million there, and pretty soon we're talking about some real money." Anyway, the national debt has steadily risen over the past 50+ years. As some useless trivia, the last time the debt decreased from one year to the next was from 1959 to 1960, when it decreased by .20%. To be sure, there have been budget surpluses in years since then, but the government has opted to either spend the additional surplus on new programs or return it to the taxpayers rather than apply it towards the debt. Here is a graph of the balance of the federal debt at year end for every year since 1950.

Chances are you’ve seen a graph just like this before, and it is almost always accompanied by talk of how the debt is a classic representation of exponential growth, whereby things rise very slowly at first but then hit a point and rise very, very quickly.

Now I will continue with the scary news and show some projections of what the debt picture may look like in the next 10 years. Over the last 20 years, the debt has averaged an increase of 7.7% per year. For the sake of being conservative, let’s use that as the high end of growth predictions. Here are three different scenarios for the debt, using 2, 5, and 7.7% growth per year:

This means that if we continue on the growth rate that we have averaged over the last 20 years, by 2016 we will be looking at a national debt of $16.844 trillion, effectively double what we have today. The lower growth rates certainly make it more manageable, but are definitely on the side of extreme optimism rather than realism.

Now, are you ready for some good news? Looking at the national debt by itself is completely worthless. If I told you that one person is currently $5000 in debt and another is $20,000 in debt and then asked you who was in a better financial situation, most people would say the person with $5000 in debt. But the reality is that you need more information. If both people make the same amount of money, then that is correct. But if one makes $20,000 per year while the other makes $100,000 that changes things. So, we cannot look at the national debt in a bubble, we have to consider the nation’s income as well. While the nation doesn’t get a yearly salary, we do have a way of measuring it in the form of its Gross Domestic Product (GDP). For those not familiar, GDP is defined “as the market value of all final goods and services produced within a country in a given period of time.” So it seems that, much like a credit card company will look at a person’s debt-to-income ratio to determine their financial health, we should look at the country’s debt-to-GDP ratio to determine the country’s ability to pay off the debt. Here, there is better news. As of end of year 2005, our GDP to debt ratio is .637. Over the last 50 years it’s been higher and it’s been lower but on the whole it is just slightly above the average of .587.

So, simply put, all that’s really important, at least from a financial health perspective, is that annually our rate of GDP growth is equal to or exceeds our rate of debt growth. Has this been the case? Let’s check it out:


I will admit that at first glance this is a hard graph to decipher. Rather than try to evaluate any one point or year, the important thing to look for is a trend where one line is consistently above the other. And I think there are two trends that become clear. Generally speaking, from 1950 to the mid-70s GDP growth was consistently higher than debt growth and from the mid-70s through today the opposite has been true. There are certainly exceptions, most notable the period from the mid-90s through 2001 where we made balanced budgets a central issue (for both parties) and also enjoyed one of the greatest economic booms this country has ever seen.

In fact, had I written this in 2000, the outlook would be very rosy indeed and I would probably have described how the reversal of fortunes is shining evidence that when we as a country put our mind to something we can overcome even the largest of problems.

But, alas, times have changed. I hope in all the ramblings above I have at least successfully portrayed the message that this is an issue which, although certainly manageable, requires perpetual vigilance. It is therefore deeply disppointing to me to see that it seems to have lost resonance with the general public. Certainly I am not advocating that fiscal issues take precedence over national security and the fight on terrorism, but must we only focus on one issue at a time? In our jobs and in our personal lives, we are expected to multi-task all the time. Why is it that only in the political arena do we consistently see concentration of all efforts on 2 or 3 partisan issues at the expense of virtually blacking out all others?

Let us think about this in relation to the war. The debate that has raged for the past almost 4 years now has centered almost exclusively on whether we should have engaged in this conflict on principle. There has been astonishingly little talk about what the war is literally costing us in terms of cold hard dollars. I have heard it mentioned almost as a throwaway comment by pundits, almost as an afterthought once they finish making all of their points. “Oh, and by the way, it’s costing us a lot of money.”

Why has the question of how we are going to pay for this not been brought to the front and center? I think it largely stems from the fact that although we have spent billions on this conflict, we have opted to not raise taxes so the cost has not been passed on to the average American. To my knowledge, this has never been attempted before. We are witnessing a grand new experiment in government fiscal policy. The strategy is that as long as we keep the taxes low, we can keep growth high and thus the additional debt will not burden us. To me, I see this as a dangerous precedent. This is a “grow at all costs” mentality. To see the ultimate disaster scenario played out you only need to look as far as the Enron scandal, where once the company began hitting rough times it did anything and everything to keep income coming in so they could hit the next quarter’s earnings and hide the debt problems. I am not saying this is a likely scenario for the government, only that it is a situation that is likely to bring more harm than good and also has the potential to be a real powder keg.

Whether you are for or against the war has no bearning on this issue. These questions need to be asked and answered. If someone came to you and said, “Buy this house.” You would naturally ask, “How much does it cost.” It is doubtful that you would accept the response of, “Oh, don’t worry about that now. We’ll figure it out later.” I am just saying that we as American taxpayers should not accept that as a response now.

Now I’d like to wrap this up by bringing up some parallels to the consumer debt I discussed in Part I. Much like too much debt limits your options as an individual, so too does too much debt as a country. Sometimes maximizing profit today is not the answer. Private companies spend millions on R&D divisions that are not expected to generate any immediate short-term revenue, but they recognize that without innovation their long-term prospects are bleak. Being saddled with too much debt can severely limit our ability to do this, in much the same way that an 18-year old with $5000 in credit card debt is compelled to go out and get a job today rather than enroll in a university that will end up resulting in a far more profitable future. In addition, when you are dependent on fiscal growth you are far more likely to run into very difficult ethical dilemmas. For one large example, look at the oil industry. Setting aside the issue of greenhouse gases, it is still widely acknowledged that there is only a finite amount of oil left in the world and that if current usage remains constant (side note: it is actually increasing) it is likely to run out within the next century. Clearly then, it makes economic sense to invest today in the exploration of alternative energy sources so that we are in a position to be both a worldwide industry leader in whatever the next dominant energy source turns out to be as well as to ensure that we continue to be able to supply ourselves with the energy necessary to maintain our standard of living. Yet how do we accomplish this when a number of our most profitable companies are dependent on the high profits of the oil industry? How do we go further into debt exploring technology that, if successful, will ultimately displace one of our largest cash-cows? Further, right now OPEC prices all barrels of oil in US dollars. That means that no matter what country purchases a barrel of oil, they first obtain US currency to do it. This has the effect of keeping demand for our currency very high and creates a natural floor that keeps the value of the dollar from sinking too far (simple supply and demand; since the whole world needs oil there is constant demand for the dollar). How do we transition to a new energy source without losing that huge safety net? Further, do we want OPEC to have that threat of pegging oil against another currency (or, more likely, a basket of currencies) over our head? How does that affect our national security?

I could go on and on, but I won’t (I know; I already did). The point is that a problem that has such a deceptively narrow focus has an unfathomable amount of effects that ripple throughout the country in both anticipated and unanticipated ways. Remember that for years the ultimate fear was that the Cold War would explode into a War of the Super Powers and that only one side would be left standing. But ultimately it was not brute force that brought down the Soviet Union; it was a critical failure to manage their economy. More Americans need to pay closer attention to the fiscal policy of their government and let our leaders know that it’s an issue that’s important to them. Debt is not an inherently bad thing. It is a weapon. It serves an absolutely essential purpose but also needs to be constantly evaluated to ensure that is not being put towards an ultimately self-destructive end.

But really, I guess the previous four thousand or so words can best be summed up with the following 29:

“And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.” – Thomas Jefferson

Sources:
Today's national debt figure comes from: http://www.brillig.com/debt_clock/
Historical national debt statistics come from the Bureau of the Public Debt at : http://www.sbu.gov/opd/opd.htm
Historical GDP info was obtained from the Bureau of Economic Analysis at: http://bea.gov/bea/dn1.htm