Will the US government go the same way?
[Thanks to Wikipedia, “bankruptcy” entry.]
“Another Day Older and Deeper in Debt”
[From “16 tons”, lyrics claimed by George Davis, Kentucky coal miner.]
As we approach the new debt ceiling Doom’s Day (in the merry month of May) a reflection on the nature of the public debt itself seems appropriate. I begin with the hard-Right take on the debt.
During 2012 all us Americans every day went further into debt by about $1.7 billion dollars. If you work that out, it means $6 million for every woman, man and child (I leave the reader to make the calculation per hour, minute and second). As I wrote in another column, the German (and Dutch) word “schuld” means both “debt” and “guilt” (I thank Stuart Holland, former UK Labour Party Member of Parliament, for reminding me of this, which I must have missed in my college German courses). This dual meaning immediately suggests the question, should we all feel mega-guilty because every day we go deeper into mega-debt? Selling our souls to who-knows-what?
Actually, no. If anything, we should be pleased about that daily dose of schuld and hope for more. The debt builds up because our economy, largely thanks to legislation passed during or inspired by the New Deal, has several automatic mechanisms to protect us against instability far worse than we have suffered over the last five years. I explained that in article here in the Real News, posted on 10 November, and will not repeat myself (‘Why Public Sector Deficits are the Solution, not the Problem”).
The purpose of this 99%’er is to show why we should shed all fiscal schuld and learn to love the public debt. It is a harbinger of neither fiscal disaster or economic ruin. On the contrary, the public debt is a counter-weight, helping to prevent further contraction of the economy in recessionary times.
Why Some Think the Debt is a Problem
It is no mystery why the reactionaries point to the US public debt and revel in predictions of imminent damnation (perhaps even the immanence of damnation; i.e., divine retribution for our schuld). The Right, from the superficially respectable to the Troglodyte Tea Party, wants to rid the public sector of expenditures on social support such as Medicare and social security. Provoking fear and loathing about the public debt play a very important role in the campaign to convince people that there-is-no-alternative (TINA) to eliminating the civilizing elements in public expenditure, to prune it down to the business of war (killing people) and corporate welfare.
But, we also find a lot of people out there, even sensible and progressive people, who think something must be done about the debt. There are several standard reasons for this debt anxiety. First, and foremost, is the belief that because it is very big, it represents a per se problem. Second, lodged in the folklore of public debt is the idea that it is a “burden on our children”. And, third, accumulating debt allegedly invites speculative attack by the gnomes of New York and other centers of financial malfeasance. The Right tells us that this would have devastating effects on the federal budget by inflating interest payments.
The chart below frequently makes people’s blood run cold, as they reflect on the implications of the federal debt exceeding our annual national income itself. The debt to GDP ratio almost doubled, going from 56 percent of GDP in 2001 to over 100 percent in 2012, in just twelve years. Shocking? When reflecting on shock value of this increase, it is worthwhile to look back a few years. We can notice an earlier twelve years, 1980 to 1992, when the debt GDP ratio did more than “almost double”, double it did, with some to spare (33% to 67% of GDP).
To my knowledge no one in the Republican Party threatened to close the federal government down during 1980 to 1992 as a result of the debt increase. The reason for this oversight by the forces of reaction is obvious. The growing debt-GDP ratio resulted from tax breaks for the rich bestowed by the late and unlamented Ronald Reagan (unlamented by me in any case). My point is simple. There is nothing transcendentally disastrous about 100 percent of GDP, especially because the ratio at the end of this calendar year is almost certain to be no larger and likely to be lower. Leveling off or decline will be the necessary consequence of US economic growth (see my article in the Real News, “what Deficit? What Cliff?”, 28 November 2012).
In any case, the much feared and loathed 100 percent of GDP is a faux figure, a statistic with no practical significance. As I and many others point out, the federal government owes a substantial portion of the debt to itself. To be specific, a large part of it consists of the manner by which we fund the social security system. Many countries, the United Kingdom being an example, fund pensions out of the general budget. In this form of funding public expenditure on pensions is part of current expenditure allocated annually by the legislature when it passes a budget bill.
The designers of the US social security system, including President Roosevelt himself, decided against this form of funding, for a very practical political reason. They feared that some future reactionary Congress and/or president might attempt to cut or even dismantle the pension system (tell me, were they right?). To reduce the likelihood of this they designed the system to be “self-funding” through a specific tax, “social security contributions”.
A complication arises with this type of funding. Some years benefit payments might exceed or be less than the revenue from the “contributions”. This means that the system finds it necessary to maintain a surplus over time. This surplus should not sit idle (as “cash”). It should be invested to earn a return. Invest in what? The Great Crash of 1929 made it obvious that placing the social security surplus in private stocks and bonds would be extremely unwise (George Bush fills would unsuccessfully seek to do this in his second term).
What would be the safest possible asset? Federal bonds; that is, federal debt. To bring this story to a close, as a result of funding social security through a “fund” rather than annual budget allocations, about one-fifth of our debt represents the assets that pay social security benefits (go to the Economic Report of the President 2012, Table 78). This is not debt that any sane person would ever want to “pay off” (I am implicitly excluding Representative Paul Ryan here). The maximum debt for “paying off” purposes consists of that part not held by the federal government itself (“by the public” in the jargon, which is the measure used in the chart below, though its is an overestimate for reasons explained blow). That debt represented only 74 percent of GDP at the end of 2012.
Another substantial portion of the federal debt serves as assets of state and local government pension funds, as well as private sector funds. A frequently encountered estimate of the part held by private investors and foreign governments is 48 percent (found at http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm). That is to say, the part of the federal debt that anyone might be motivated to “redeem” may be less than fifty percent of GDP, not over 100 percent.
Federal government debt, total and non-federally held,
as percentage of GDP, 1977-2012
Why the Debt is not a Problem
But all of that fiddly calculation of what part of the debt is held by what, which and whom really is beside the point. The US government is quite capable of carrying a debt much larger than the current level. How could I suggest such heretical foolishness? Take a look at the next (and final, I promise) chart. At the end of 2012 the interest on the entire federal debt was just less than 1.5% of GDP, compared to well over three percent in 1991, when it reached its thirty-five year peak.
When we take out the part of the interest payments going to the federal government itself, most of which funds pensions, the percentage drops to one percent. As for interest payments to foreign holders of the federal debt (think China), for 2012 that edged below one-half of one percent of GDP.
In case you wonder how much of the federal budget goes to interest payments, the total was 5.9% of all expenditures, the lowest percentage for the thirty-five years except for 2008 and 2009 (when it average 5.5% of all federal spending). The peak, as might be guessed from the chart below, was back in 1989, when it hit 14.8 percent of federal expenditure, well over double the present level.
Interest on the federal debt as a percentage of GDP, total,
not held by the federal government and held by “foreigners”
Source for both charts: Economic Report of the President, 2012, Table 78. No reliable estimate of foreign debt holding before 1989.
Neither the size of the debt nor the cost of it represents a problem to anyone except those who want to dismantle what is left of the social expenditure of our federal government. Even more, a very large portion of that debt is good for us, an asset funding us in old age. But what about the “burden on future generations” and speculative attacks by the evil empire of financial capital? That’s for next column. In the meantime, follow the Real News Network and contribute to getting a bit of good sense out there.