Time To Fix The Debt

December 19, 2012 13:00 pm

by Charlie · 39 comments

Today’s Courier Herald Column:

Yesterday in my inbox I received an update from Fix The Debt, a national interest group formed to push for bi-partisan progress toward not only averting the fiscal cliff issue looming with an immediate deadline, but to emphasize the nation’s $16 trillion national debt which continues to grow.  They are pushing a blend of increased revenues and lower spending to chart a path to debt reduction.

The issue of the day is how a breakdown in talks would affect Georgia.  Co-Chairman Martha Zoller emphasized the reality of the problem, saying in the statement “A lot of times, though, it seems to feel like an abstract idea.  The reality is that failing to address our fiscal problems could have a huge impact here in Georgia – lost jobs, slower growth, and greater taxes for families.”

The numbers aren’t abstract.  The group cites a George Mason studies indicating that Georgia would lose 55,000 jobs if the cliff issues remain unresolved and tax rates are increased across the board while spending is cut as mandated by sequester.

Georgia would face other problems with its state budget as well.  According to the group, “If lawmakers fail to avert the fiscal cliff, 18 percent of the federal money that is sent to the states will be eliminated. Those cuts will reduce funding for important local programs including education, housing, and low-income initiatives. Curtailments of federal grants will cut out 8.5 percent of all revenue Georgia receives on an annual basis, according to the Pew Center on the States, much of which has already been allocated into the state’s future spending plans. The combination of tax hikes and nearly across-the-board federal spending cuts would have profoundly negative effects on working families, funding for K-12 and higher education, and small businesses and major employers alike.”

I spent most of last week in Washington, and was able to speak to several members from the Georgia delegation regarding the ongoing negotiations.  One discussion in particular sticks out.  Austin Scott is finishing his first term, and is President of the Tea Party infused class of 2010.

The conversation was familiar.  I first met Congressman Scott when he was a State Representative, and he frequently brought data to our meetings.  Last week, he was holding a simple spreadsheet for me.  It had several columns of data regarding the federal budget and debt over the past few years, but there was one of particular interest to him.

We’re rapidly approaching a level of debt that is equal to our entire national GDP.  It would take all goods and services produced by our country in one year to pay off the debt.  It’s a way to measure the debt in relative terms, and a debt the same size of GDP is somewhat alarming.

Worse, however, is the growth rate of our debt relative to GDP.  In 2007, the national debt was just 65% of our GDP.  Today, it is 98.7%.   Debt continues to grow faster than our economy, and the threat of a recession – when the economy shrinks in size – makes the situation more grim.

Scott is concerned, but remains optimistic.  But he wanted to make it clear that these are the numbers that are driving Republicans demands for spending cuts.  He also made it clear that those in the House are looking at the big picture.  Unfortunately, the magnitude of the problem isn’t being captured by the current sound bites.

The reason we need to fix the debt is simple.  While the US economy and budget certainly have problems, we are also living at a charmed moment in time.  Europe is currently in worse fiscal shape than the US.  China has industrialized at such a rate that they must cooperate with US fiscal policy so that we can remain their largest customer and keep their factories busy.

The result is that interest rates are at record lows.  The cost of carrying $16 trillion in national debt is therefore artificially low.

Eventually, Europe will right itself and China will grow other markets.  US interest rates will go up.  Debt that we’re financing for .5% could easily rise to 5%.  While that doesn’t sound like much, it’s a magnitude of ten times what our interest costs would be.  We run the very real risk of interest on this debt dwarfing all other spending programs in the very near future.

The fiscal cliff is getting our attention, as it should.  But the real focus needs to be on the debt, not just the deficit.  It is time to fix the debt.

saltycracker December 19, 2012 at 5:11 pm

“…..interest rates are at record lows.”
The lowest in U.S. history while the debt is the highest in history by any measure.

There is no will on the part of our legislature to address debt or limit spending to a % of GDP.
No one knows what level it takes to pop a bubble.
The camp of the “debt is meaningless” is as full of tenured economic professors as there were investors claiming a company doesn’t need to make money or home prices will continue to rise.
It isn’t over until it is over.

I Miss the 90s December 20, 2012 at 11:15 am

The debt has meaning, but it does not mean what pedestrians like yourself think it means.

Charlie December 20, 2012 at 11:17 am

Your tone towards the other commenters will change immediately if you’re going to continue to troll here. This is non-negotiable. And applies to all of your characters.

Noway December 19, 2012 at 5:45 pm

The congressional version of football great, Ray Guy, will just punt this football down the road all the while sucking more tax blood from an already feeble body. Ain’t nuthin’ going to be done. The first serious cuts of anything will send the citizens who depend on plunder into a riotous mob that will dwarf anything this country has ever seen. Greece will look like a sorority pillow fight.

saltycracker December 19, 2012 at 7:08 pm

Greeks aren’t much on paying taxes or being generous.
Americans will do the right thing after all other options are exhausted.
Winston C.

Noway December 19, 2012 at 10:04 pm

Yes, Salty, Americans doing the right thing was displayed magnificently by the union thugs the other day when they beat up a news producer who was covering the right to work vote in Michigan. Fine, upstanding Americans they were. The Americans Churchill referred to were truly the greatest generation when it came to personal sacrifice. He’s be horrified is he saw us today. A great great many of today’s Americans ain’t even worthy of being mentioned in the same breath

Dave Bearse December 19, 2012 at 10:30 pm

The greatest generation you speak of was the most unionized generation ever.

I Miss the 90s December 20, 2012 at 11:12 am

They were also the highest taxed and most able to retire.

Funny how all those benefits started going away when right-to-fire laws starting passing state legislatures and the federal government cut taxes to historic lows.

Where are your pensions now?

Joshua Morris December 20, 2012 at 12:57 pm

In bankruptcy with all the companies that were pushed to offer them.

The greatest generation was willing to sacrifice for the future of their children. This generation is not.

John Konop December 19, 2012 at 10:07 pm

The biggest issue we face via the debt is entitlements especially Medicare…..and military spending. Beyond the cuts that are needed we cannot finance an aging population with payroll taxes the ratios will be way out of whack. That is why we must change it to a vat or national sales tax and end payroll taxes. We also cannot afford the policemen of the world foriegn policy. Finally we must end the moral police policy in our own country, and instead focus on treatment ie end war on drugs…….

Young_Pun December 19, 2012 at 10:55 pm

Charlie, it sounds like you want to have your cake and eat it too. You lay out all the fears of sequestration, but you then call for dealing with the debt. Generally, debts on a national stage are dealt with at three paces: immediately, moderately, or slowly. If the federal government produces surpluses over the next ten years (with interest rates included) that will pay down the debt. Of course, the margin of the surplus impacts how much that debt is paid down.

But a lesson from FDR’s administration would be wise here: The Roosevelt Recession followed as FDR produced an austerity budget which drastically reduced government spending and the economy crumbled; unemployment ballooned to 19% from 14% and generated deficits reached nearly 30% of G.N.P.

What FDR, and his administration learned, is that when you have a sick economy, the worst thing you can do is tell it to “get out of bed” or “act like a man.” Instead, it must be nurtured and given all that it needs to ensure it is strong again.

The fears you produce in this article, and those that are mirrored in Congress, have been around much longer than anyone on this thread. Economists know and explain on a daily basis that debts should be managed, but not feared, in times as these. Instead, we should focus on getting back to work with tenacity (during FDR’s day, they paid people to dig holes one day and then fill them back up the next).

Let’s take things one step at a time. Let’s get the unemployment rate under five percent nationally, and seven percent here in Georgia, before we get all “serious” about the debt.

mpierce December 20, 2012 at 6:33 am

Generally, debts on a national stage are dealt with at three paces: immediately, moderately, or slowly.

You left out the fourth pace which we currently use: “not at all”

mpierce December 20, 2012 at 7:14 am

There are many possible causes of the Roosevelt Recession. If you want to take lessons from it, you shouldn’t declare austerity as the cause and I wouldn’t call the budget cuts “drastic“.

saltycracker December 20, 2012 at 7:42 am

Define “unemployed”. The “unemployed” today would not dig holes and fill them back up. The safety hammocks and options in the underground economy are too good.
Setting spending to a % of GDP and allocating funds away from redistribution to individuals, corporations and foreign countries (including military bases) to increasing public projects would be ok but not in today’s political “me first” climate .

mpierce December 20, 2012 at 8:30 am

Define “unemployed”

That brings up another interesting possibility for the rise in unemployment rate:

“In May 1937 the Supreme Court upheld the Social Security Act as constitutional and by August 1937, the 48 states, Alaska, Hawaii, and the District of Columbia had enacted their own Unemployment Insurance laws.”

An increase in taxes combined with increased incentive to call oneself unemployed. There are many today working “under the table” and collecting unemployment. There are also season workers who rely on unemployment to carry them between seasons.

Charlie December 20, 2012 at 9:19 am

In what world of $1 Trillion + budget deficits every year that the CBO can project do you get “If the federal government produces surpluses over the next ten years…”?

Seriously, this may be the most unserious comment ever on Peach Pundit, and that includes our old Thread of Dreams.

Scott65 December 20, 2012 at 9:48 am

Come on people…we live in a sovereign currency country. The US government has sole authority to create and set interest rates for currency. Most of the debt that you guy rail about is owed to back to the US. Its not China. About 6% of treasuries are owned by China. The US CANNOT GO BROKE…WE ARE NOT GREECE. The US can create currency out of thin air. High unemployment is not the time for austerity. Its wrong factually, its wrong morally, its wrong. I dont know how many times it has to be said! The only restriction on printing money is inflation. You dont have inflation with high unemployment. You dont have inflation when you produce more goods than there are consumers to buy them. The Peter Schiffs, Pete Petersons have been wrong at every turn since this started…They screamed about the debt, about hyperinflation, soaring interest rates. NONE OF THESE THINGS HAVE HAPPENED!!!
Also, I find it intellectually dishonest for all of you who screamed that stimulus doesn’t work are now saying that the removal of what is in essence stimulus will cause a downturn. Which is it guys…you cant have it both ways. The debt is a manufactured crisis. You address it when unemployment is low. Why people want to punish the poor and middle class is beyond me

Charlie December 20, 2012 at 9:56 am

“You don’t have inflation with high unemployment”

Yes, yes you can. The late 70’s was but one example. And it is what happens when you exceed the bounds of monetary policy and do exactly what you describe above, that is print money to fix economic problems.

I have no interest in debating generic talking points like those in your last paragraph. Challenge something I said directly and I’ll respond. I’m not going to spend all day debating crudely constructed strawmen based on what you think a hodgepodge of right wing economic talking points are.

Scott65 December 20, 2012 at 10:08 am

It was due to the oil shock…were suddenly there were not enough goods (oil) to supply the market. I believe that was one of the conditions for inflation I mentioned. I was not being specific to you Charlie but all the posters here that claim otherwise. People are upset that the economy will tank if the sequester occurs are the same that railed against stimulus. Its the same thing…and its talking out both sides of ones mouth. I think this is EXACTLY the debate we need to be having. Printing money does not cause inflation. If it did, we’d be swimming in it… and we are not.

Charlie December 20, 2012 at 10:26 am

Well, sticking to points I’ve argued only, if you go back to the 08 crash I’ve pointed out many times about the amount of money that vaporized due to the banking collapse and the de-leveraging of banks that followed. Trillions were lost in the money supply at the time, but much of the effects were contained in real estate (as it wasn’t measured as inflation when RE prices went up, and hasn’t shown up as deflation as housing prices came down). Unlike many others, I didn’t argue that we couldn’t afford the stimulus, I said that as constructed it didn’t work because it was largely transfer payments, which is akin to rearranging deck chairs.

But as these structural problems do correct themselves, the amount of money we’re putting into circulation will be a problem. Especially considering the US economy is about 22% of the total world economy. I pointed out in the column above part of the reason that we’re in a charmed point in time where it does not appear these actions have consequences. To think that this pattern is long term sustainable is dangerous and folly.

mpierce December 20, 2012 at 10:48 am

Printing money does not cause inflation.

Yes it does. And the lack of demand from a poor economy causes deflation. There are multiple forces affecting inflation.

Dave Bearse December 20, 2012 at 10:10 am

I was going to cite the stagflation of the 70’s too, but as extraordinary, not garden variety as you imply. The tripling of energy prices is what likely drove the inflation component. A large hike in government borrowing expense (interest) might produce such a jolt, but that’s currently not in the cards.

Young_Pun December 21, 2012 at 2:25 am

Not to sound rude but I do not think you know what the word “if” means. The sentence was simply used to illustrate the previous sentence which merited how debts and deficits are paid down. Again, the point of the sentence was not meant as stating any realm of reality but merely showing an example via the written language.

That being said, my overall point was that the debt is not an issue of near importance as the unemployment rate, income per capita, and other indicators that demonstrate a healthy economy. True, the debt should be watched but the essentials must be thought of first (see FDR example for more points).

The secondary point I made is to your article’s call to prevent sequestration so that we may save parts of the GA budget (which, undoubtedly, without said money GA is going to suffer greatly). Yet, you also want to lower, and possibly, eradicate the debt. You even appear to call for a “good fixing” of the debt now. Well Charlie, like most GA Republicans, the problem is our great state is one of the states that receives more money than it pays in. The cuts that will come at the top will impact us more than other states because our state relies on said “outlays” from the federal government. If we do it your way, you can kiss those “essential” programs goodbye because that is what “revenue” cutting does. It eliminates or reduces federal programs and relief. Respond to that, if you please.

Dave Bearse December 21, 2012 at 9:08 pm

Georgia, unlike most red states, is close to a break-even state by most all accounts.

mpierce December 21, 2012 at 9:35 pm

the problem is our great state is one of the states that receives more money than it pays in. The cuts that will come at the top will impact us more than other states because our state relies on said “outlays” from the federal government.

We are below average in that regard.

mpierce December 21, 2012 at 9:45 pm

my overall point was that the debt is not an issue of near importance as the unemployment rate, income per capita, and other indicators that demonstrate a healthy economy.

We are stealing from our children’s future at an alarming rate to maintain those other indicators. When interest rates rise (and eventually they will), you may change your mind.

mpierce December 21, 2012 at 9:58 pm

the debt should be watched but the essentials must be thought of first (see FDR example for more points).

Debt to GDP
33% when FDR was elected
106% Now

A think things have changed.

Scott65 December 20, 2012 at 9:51 am

Stimulus …bad…didnt work
sequestration….bad…cause economic downturn.
Cant be both…

northside101 December 20, 2012 at 8:51 am

Today’s lesson on why we can’t control spending:
(1) 1990 Vote in the US House on a Balanced Budget Amendment to the US Constitution:

Nancy Pelosi—NO
John Lewis—-NO
Dick Durbin (then in the House, now Illinois senator)–NO
Chuck Schumer (then in the House, now New York senator)—NO
Steny Hoyer (current Democratic leadership in House)–NO
Ed Markey (36-yr House incumbent from Mass.)—NO

Seven years later, 1997 vote in US Senate (failed by one vote):
Dick Durbin–NO
John Kerry–NO
Harry Reid–NO
Pat Leahy (Vermont senator)—NO
Barbara Boxer (far, far left California senator)—NO
Dianne Feinstein (slightly less far left than Boxer)—NO
Joe Lieberman (Republican’s favorite former Democrat)—uh, hate to say, but also NO
Patty Murray (far-left senator from Washington state)—NO
Ron Wyden (so-called not as liberal senator from Oregon)–NO
Carl Levin (career politician from Michigan)—NO

Anyone care to guess if any of the names above have ever worked in the private sector, had to meet a payroll and deal with lots of regulations?

Dave Bearse December 20, 2012 at 10:04 am

The GOP could have balanced the budget anytime it wanted for a half dozen years, but instead cut taxes and increased spending.

I don’t know how much private sector experience those above have, but it’s likely comparable or more than Paul Ryan.

Harry December 20, 2012 at 11:00 am

Politicians of both parties require the discipline of a Balanced Budget Amendment. It would be one step in the right direction. Would you join us in supporting such an amendment?

I Miss the 90s December 20, 2012 at 11:19 am

Time for my two-cents.

Private sector experience? It does not seem to be doing you, northside, any good…that is if you even have any.

Congress knows a lot more about this than you. They know there is a debt…they also know there is a revenue stream. What they know that you do not is that the government also has assets. Those assets are the reason why the debt is no big deal, it is the reason why econ professors and rich people like myself know that the debt is much ado about nothing.

Balanced budget amendments are stupid, short-sighted, and aimed on the destruction of the US.

Harry December 20, 2012 at 11:32 am

Did you make your money the old fashioned way?

Charlie December 20, 2012 at 11:36 am

Yes, by trolling about it.

I Miss the 90’s is in timeout. There was a time when he was one of our better trolls. Lately, his bit has grown combative, rude, old, and tiresome. The “I’m rich and you’re stupid” bit is worn out, and isn’t conducive to constructive conversation.

mpierce December 20, 2012 at 12:08 pm

What they know that you do not is that the government also has assets. Those assets are the reason why the debt is no big deal

As of Sept 30, 2010
Government Assets: $2.884 Trillion
Government Liabilities: $ 16.357 Trillion

As of Sept 30, 2011
Government Assets: $2.707 Trillion
Government Liabilities: $ 17.493 Trillion

Noway December 20, 2012 at 8:54 am

They’ll never vote to place limits on the vote-buying schemes done with the grotesque levels of spending we’ve seen for the last two generations.

John Konop December 20, 2012 at 6:27 pm

That is why we have not seen the simple tax reform of a few levels and no special interest write offs. The lobbyist would be out of business…….

northside101 December 21, 2012 at 8:56 am

“Government is like the serpent in the Garden of Eden, tempting us by promising to give us more than our resources would allow, if we will just turn over our lives to the government. It’s understandable that people so easily give into the temptation.”
—Harrby Browne, 2000 Libertartarian candidate for president, in his book “The Great Libertarian Offer.”

“If you point out to the average liberal that the Constitution does not empower the federal government to impost a compulsory health care plan, he will say ‘oh, but the Constitution is a living document! It has evolved with the times! It no longer means what it meant in the dim prieval days of Jefferson and Madison.”
—Joseph Sorban, 1993 op-ed, “Cosntitution must be fixed standard, not rubber yardstick.”

Which brings us to Lesson 2 on why we can’t control spending (Lesson 1 being yesterday):

Number of Senate Democrats willing to stand up to Harry Reid in 2011 and vote no on Obamacare: Zero
Number of Senate Democrats who read the entire, confusing hundreds of pages before they voted on it: Zero

And some follow-up from yesterday: Yes, Republicans had a chance to produce a balanced budget during first 6 years of Bush Jr and did not do so. Unfortunately, a balanced budget was never a priority of Bush–the Iraq War (which obviously helped push Obama into office four years ago) was. And Bush promoted his unconstitutional No Child Left Behind legislation (expanding federal role of government—a non-starter for conservatvies) and unfunded Medicare Prescription Drug program to buy votes in anticipation of the 2004 presidential election. Which explains why we need an amendment.

And as for “I Miss the 90s” claimign Congress know a lot more about the debt than I do, well, yes, I plead no contest, I don’t have experience running up $16 trillion in debt…

And cheers to failure of Boehner’s failure to reach a spending agreement—if there are no REA: spending cuts in the proposal (and I don’t mean cuts in the rate of growth—so-called “Washington math”—but REAL reductions in spending—then Republicans need to say NO to any fiscal cliff compromise. The problem, after all, is SPENDING…

Harry December 21, 2012 at 11:10 pm

As I had predicted weeks ago, the Fiscal Cliff is in fact the best available fix.

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