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Is Debt America’s Greatest Economic Threat? Here’s a Better Answer
This tweet from Charles Cooke watching a live interview of Scott Walker raises a pretty good economic question:
The national debt — at least the publicly held bit — as a share of GDP has doubled since before the Great Recession. And social insurance programs are on an unsustainable spending trajectory. Yet I disagree with Walker given (a) low interest rates, (b) our debt is denominated in dollars, our own currency and the world’s reserve, and (c) we know how to fix those programs. The US does not face looming bankruptcy or financial collapse. (Reform is easier said than done, I know.)
Not that debt isn’t a problem, but it wouldn’t have topped my list. How would I have answered that question? Maybe like this: “America’s greatest economic challenge is making sure we have a growing economy of work and opportunity where a rising tide lifts all boats.” Debt is factor in that, but so are (a) the quality of our education, healthcare, and infrastructure, (b) the competitive intensity of our private sector, (c) the flow of our invention and innovation — among others. (For instance: When we think about reforming Social Security, for instance, we need to make it fiscally sustainable but also in a way that promotes economic growth and better targets poor seniors.)
A couple of charts:
Interest rates are only low right now because we are fighting deflation by printing money like it is water. We will not be able to stop printing money easily and printing money like it is water inevitably leads to inflation which inevitably lead to higher interest rates.
Couple of other thoughts, we MIGHT know how to fix those social insurance programs, but we don’t have the political will to do so. Also, I think the massive levels of debt put our reserve currency status at risk, because investors know the US Government will have to just start printing paper to pay off the bonds (ie, inflation).
Anyway you look at it, the level of government Debt is a MAJOR problem and we are running out of runway to solve that particular problem, and if we don’t get that problem under control, we won’t be able to solve all the other massive problems our country faces.
I agree. These interest rates are an anomaly that is unlikely to be sustained. The Chinese clearly want to be a second reserve currency. They may or may not pull it off, but the pressure of that threat puts pressure on our actions to maintain reserve currency status.
It seems to me that we mainly are able to print to our hearts’ content because we are currently the cutest ugly girl. What happens when a real beauty comes along?
I am not an economist and the nuances of the interaction between macro and micro economics do sometimes escape me but I do know what I see and have seen with regards to modern practical economic history. There is already inflation and has been for some time. Prices of fuel, housing and food have gone up faster than living wages and certainly some if not a lot of this has to do with our debt issue, although the government no longer recognizes these as indications of inflation – absurd.
If the debt isn’t the biggest looming domestic issue, then something closely related to it is. If we could lower the cost of these three elements then it would seem to me that wages would look pretty good and therefore overall cost of doing business improves and the cycle naturally perpetuates positive results. An upward spiral…
The elephant in the room as far as I’m concerned is “What are we doing to do to pay off the principal on what we borrow?”
Low interest rates mean low finance charges, but that can change overnight. Granted, there’s always going to be a base load debt, but it’s the frivolous stuff that adds unnecessary debt. I’d rather go into debt over:
– Wars to protect us, or
– Things to secure our borders, or
– Real research studies (cancer cures, not why college students smoke pot and have sex), or
– Money spent locking up violent offenders until they can no longer walk.
One of the worst debts is this student loan thing, something I believe is going to explode, like Fannie Mae and Freddie Mac.
But, I’m not a degreed or trained economist, so what the hell do I know . . .
By the way, everyone needs a star nickname. Why don’t we call James Pethokoukis “J-Peth”? J-Lo might even get jealous . . .
I’m surprised Walker couldn’t have given a better answer, given his experience in Wisconsin. This debt is a symptom, not the cause.
I believe the cause is the increasing central control via cartelization of the economy, where government, connected firms, and interest groups divide up, then protect, their pieces of the pie. This approach makes the Left’s zero-sum economy a reality, which reinforces the popularity of control.
To this I’ll add a fourth: State and municipal debt, driven by out of control public pension costs. The day is not far off when states like Illinois are going to try to get the Federal government to nationalize its financial profligacy. Game, set and match.
So you were asked the “greatest threat” and you sneak in three answers? That’s cheating!
If you look at Walker’s actual emphasis I think you’d find he agrees those are important issues, particularly about education. (Actually, judging by his budget proposal, it’s arguably top priority — certainly the issue where he’s taking all the political risks right now.)
But that kind of question doesn’t seem designed to get a particularly insightful answer. “What’s the most important” questions aren’t usually particularly informative, even if the politician answers sincerely, because your priorities are based partly on what you have the power to influence, not just what you think is most important.
I remember an interview with Paul Ryan a couple years ago, in which he said something like “if you ask me our greatest problem I won’t tell you it is the debt, I will say it is moral relativism. But that isn’t something that I as a congressman can pass a law to fix.”
There was a humility about that which I very much liked.
Debt is never a problem until it is.
As long as you can meet the interest payments and roll over the principal as it matures, you don’t have a problem.
At the moment you can’t, you’re in a “debt spiral”, where the cost of servicing the debt is rising as you roll over short-term debt at higher and higher interest rates, and nobody will lend you money long term because in an environment of rising rates you’d be a fool to buy 10- or 30-year bonds. See Greece, in the next two weeks.
Printing your own money only buys you time until investors perceive a currency risk and demand a yield premium to compensate them against it.
Taken to the extreme, the result is as described in Adam Fergusson’s When Money Dies. But it rarely goes that far. Usually it’s more like what has happened repeatedly in Argentina, where savers were wiped out, creditors liquidated, and a reset until the next time.
I would challenge those who are sanguine about the current exponential growth in debt and unfunded liabilities to cite a single case, dating to antiquity, where such a situation has ended well.
Make it “J-Pet”. Rolls off the tongue better.
I worked on an interesting book a few years ago: Russ Koesterich’s The Ten Trillion Dollar Gamble (2011).
One of the points he makes about the debt, including that which is presently being held by the Chinese, is that there are only three ways to deal with it:
One, raise taxes. Koesterich said that the United States is pretty much opposed to tax increases so he doubted that would happen.
Two, reduce the benefits funded by entitlement budgets. He didn’t think that would happen because the political will is not there and the American people will balk.
Three, let inflation go. He said that the Feds have been artificially holding inflation back in response to the economic conditions under Ford and Carter, rather than letting it out a little bit at a time. (When I read this, I pictured a rubber band.)
The problem is that although it is true that letting inflation find its natural, unconstrained level would help the government a lot, it will hurt consumers on fixed incomes. Of course, it will help consumers with high debt. (I’m not sure if that ends with a net gain for consumers: the consumers hurt by inflation versus those helped by it.) However, our inflation will tick off the Chinese because the dollars we will be paying back will be worth less than the dollars they lent us.
The reason Koesterich’s prediction sounded plausible to me is that I’ve seen the government work toward its own self-interest when push comes to shove.
It will be interesting to see what happens when responsible Republicans, with an aversion to printing more dollar bills, gain office. When they shut off the printing presses, will they let inflation go to solve our problems?
I try not to think about how this will end.
I’m a Paul Pilzer fan: I like the idea that prosperity is possible and will solve everything.
I like “J-Pet.”
We need to do this. :)
His name would be passed around Washington easily, no one would be afraid of having to remember how to spell it, and he would get in line for a Nobel Prize.
Thank you, John Walker for your civil answer. I am incapable of producing anything within the COC. The financial world, it seems to me, is a giant CON-fidence game, exemplified by the above post.
The real problem is what Ronald Reagan said. GOVERNMENT is the problem. Over-regulation of every part of the economy is throttling growth. Get the Feds out of the economy, and it would heal itself in short order.
And my pet idea to bring in funds to pay down the debt: Sell the West. Sell the majority of federal lands in the West to the highest bidder, and use every penny to pay down the debt.
Yes, I agree with your cure. People would be shocked to learn of the nationalization (and I mean that in the sense of a communist government’s taking over a private business) of the land supply.
The only thing I would add is to give our veterans a nice chunk of it first. Each veteran would get a land grant. :)
MarciN, isn’t there a fourth way?Default? Does Koesterich consider it?
I wouldn’t want it, but on the other hand I wouldn’t want any of the other three. And default does have it’s good points. Govt would be forced to slash entitlements and sell assets.
No, Koesterich did not include that as an option, but that was in 2011.
Default would help the government for sure. It would enable it to say, honestly, “Sorry to you people expecting benefits. It’s not our fault. The money’s not there.” It might come to that. I expect a big big problem when the federal government has to pay the pension obligations incurred by the cities and towns across the country that I predict are going to go bankrupt all at about the same time. It will be a smart move for them. Zero out their pension debt. That is the next crisis I see up ahead. It will make the savings and loan crisis and the mortgage crisis look quaint by comparison.
Could the government default? What would China do? I worked on a book called Chinamerica. It scared me, frankly. These are not people I want to be in debt to.
I can’t even imagine a default. What a nightmare.
What do you think would happen if we defaulted?
I’d say that the greatest domestic threat is regulation, which stifles innovation, which stifles our economy… which creates a larger lower class, which creates the “need” for more welfare, which puts a drain on overregulated businesses, who end up having to fire lower-paid workers, who end up on welfare, etc…
I’m just an ER doc, so claim no knowledge of economics. But this…..
And This
Cannot be good.
My understanding is that without the Fed suppressing interest rates, even small increases in them would rapidly explode the debt. In the meantime those artificially low interest rates are distorting investment, and robbing savers, many of which are older people on fixed incomes. I know we’ve been kicking the can down the road for decades now, but eventually it’s got to reach the end of the road. Is it a couple of years, another decade, or a century? Looking at graph #1 which is essentially an asymptotic curve, IMHO, it’s years not decades….
The last couple of years, the biggest buyer of Treasuries has been…. the Fed.
In 2013 it bought 71% of the debt issued by the Treasury, $543 Billion.
This is like using one credit card to pay off another.
Jame’s chart is interesting but has been kicking around the laserwebs for awhile – it’s interesting that GDP growth keeps doing a hard bounce against the low growth rate, and it’s happening for several reasons, some of which folks hit on above.
1. The Fed has been money-printing through QE for years now. GDP has not taken off as a result of it. If anything, GDP growth is stagnant – even with the massively larger USG component, which seems to get scant mention when talking heads talk about GDP growth.
2. Those Fed dollars have essentially been re-invested in the stock market, largely, because the dollars have to go somewhere. This would, theoretically, free up capital for investment and expansion projects that every company that wants to grow invests in, and needs capital to do so.
3. From #2 above – if aggregate demand in the market doesn’t increase – and it won’t until incomes do – then no company is going to invest dollars in expansion with no prospect of returns, or a payback period that’s far too long to recoup the investment.
4. The predicted effects of inflation and deflation are both seen, to some degree. Inflation is higher than the GDP rate if you strip out gov’t spending. Deflation is happening in specific places. The housing market shows that the low-end houses – the middle-class houses – have risen 9.3% in the last year, while high-end housing prices have only risen 4.8%. Which is why you don’t see as much movement in sales, and why you hear a bunch of talk from politicians about the middle-class housing crisis. Which they created, and Fannie and Freddie continue to contribute to the same problems that helped cause the last financial downturn.
5. Debt: Debt squeezes out the private sector. Debt servicing as a bigger chunk of federal spending means fewer dollars going to direct services or core functions of the USG. Interest rates are low but they will go up, and when they do, debt servicing as a percentage of USG spending will increase dramatically.
So – debt at historic levels is bad. It’s not good. It’s made infinitely worse by where the gov’t is currently putting its dollars. It’s also made much, much worse, by unfunded liabilities of the USG and the states, states that are, inevitably, going to expect a bailout for their ridiculous pension funds from the USG, because states aren’t printing their own money.
Yet. But they’re thinking about it.
And to finally address James’ post – debt is the greatest threat in the mid to long-term. Immediate? No. But as others have said, it’s not a problem until that random Tuesday when it becomes one.
The Left has already been laying the groundwork for new revenue streams for the US Treasury. There are several “learned papers” arguing that private retirement accounts should be “voluntarily” moved into Social Security, or at least Treasuries. They argue these rates are the new normal, therefore savers are better off in SS.
Obviously, this is a Gruber-like sham, and just a way to make a big grab of private money. But the point is that highly-credentialed people are preparing the ground for this argument. When rates go back to normal and servicing the US debt load quickly becomes the only part of the budget that matters, there will be plenty of politicians and bureaucrats who will want to buy this argument.
If the government tried this, most people would just yank their money out of their private retirement and pay the penalty, which would create a near term acceleration in tax revenue, but only an acceleration (plus the one time penalty).
Of course, I’ve been arguing for years that in today’s low-tax environment (relative to where rates are headed), I’m not convinced that tax-deferred retirement plans are a good idea. They were designed in a steeply-progressive tax regime, where you were very likely to be in a lower tax bracket after you retired, I’m willing to bet almost everyone (well, everyone smart enough to save for retirement) will wind up paying a higher tax rate in retirement than they do now.