On Debt and Deficit: Part III

In the previous two posts I looked at the basic facts behind our debt and argued that it is an issue deserving attention. In this post I'll state why I think we need to act to reduce our deficit and debt -- quickly.

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1. We are now paying $360 billion a year just in interest on our debt. There are far better ways to spend taxpayers' money than lining the pockets of people who can afford to invest in (tax free) government bonds.

2. Interest on our debt is now the 4th-largest component of our budget, behind Defense, Medicare, and Medicaid. We spend twice as much paying off debt interest as we do on education.

3. Interest rates are at a historic low. When they rise to normal levels, as they inevitably will, the cost of debt interest will at least double, maybe triple, and that doesn't include interest in the additional debt issued in the meantime. 

4. You can see where this is going. Indeed, the CBO has projected that debt interest and Medicare/Medicaid will chew up 100% of all national tax revenue around 2025. 

Here are the arguments that people who aren't concerned about the budget deficit make: 

1. Deficit spending is necessary to stimulate the economy during recession: False: increased spending is often desirable, but if we were running a surplus, that increased spending needn't create a deficit. 

2. Debt as a percentage of GDP is within reasonable bounds: False. Comparing debt to GDP is ridiculous. The government doesn't own GDP and can't use any of it (other than the part of it for which it accounts--about 20%) to pay either interest or principal. When homeowners take out a mortgage, the bank doesn't ask how much money your relatives own; the bank cares about whether you can repay your own mortgage. 

3. If we cut the deficit, we'll tank the economy: False. It depends on how the deficit cutting is done. The way the GOP is (pretends they are trying) to do it seems to portend a draconian, dystopian economy. But if it is done gradually, with an eye towards distinguishing between "spending" and "investment", it will actually stimulate the economy. More on that in Part IV. 

4. Isn't government debt the same as homeowners taking out a mortgage?  Well, yes, with one very important difference: When you take out a mortgage, your very first bill and all the others require that you pay a portion of both interest and principal. But when the government takes out debt, it can pay off both --and in fact it does this every day -- by simply issuing more debt.

The arguments for deficit spending -- mostly variations on Keynesianism -- aren't totally wrong, but they really are one way, with a ratcheting effect. Somehow, it seems OK to deficit spend when the economy goes into recession, but we never pay the debt off. Thus, both the debt and interest payments grow over time, and the interest payments themselves become a leading cause of both deficits and debt.

Last Comment: Running a deficit is simply morally wrong. It amounts to the current generation having a party and sticking our children with the bill. "Oh, no, I'm a good person; I would never do that." Well, if you're not concerned with deficits, you just did.