Some economists have argued that the United States could flourish in permanent debt and even with an increasing debt, with sophisticated arguments the non-economist can’t really judge. The ones I read never raised the question of when the limit will be reached as presumably it must eventually (see Greece, Italy, etc.). There is also the question of who holds the debt and to what self-interested ends they might put the power this gives them.
In any case, adding debt to debt can’t possibly be sustainable, a point this video makes amusingly.
March 5th, 2013 | 7:51 pm
Permanent debt isn’t a problem. Using the household example, you can maintain a credit card balance forever without a problem and even grow it as long as it doesn’t grow faster than your ability to pay it on time.
Nobody knows where the limit is. Japan has a debt of 200% of GDP.
The question of who holds existing debt is unimportant. What are they going to do? Invade and raid Fort Knox? Whether they’ll continue to lend is an important question. They have nothing to gain if they don’t but suppose there’s some international conflict and they use it as an economic weapon. In that case, we would be put in the position we would’ve been in had we stopped borrowing so much and no worse.
March 6th, 2013 | 9:21 am
I don’t know how old John is but apparently he has lead a charmed life. The importance of the condition “as long as it doesn’t grow faster than your ability to pay it on time” doesn’t seem to occur to him. It doesn’t have to grow at all to exceed your ability to pay for it. All that has to happen is for a setback in your employment.
Considering personal debt again, I recently paid off my home loan. My ability to save and prepare for other spending took a quantum leap. I never carry a credit card balance forward as I consider the loss of flexibility, call it surge capacity, would be too great. And I’ve used it several times, in particular to attend the funerals of people dear to me who lived on the opposite coast.
Returning to international, maybe John does not remember the 1980s in Japan when the future seemed limitless. Now stagnation has set in, for decades no less, while the country struggles to break out of the slump.
Debt matters a great deal but it is a slow poison not an explosive.
March 6th, 2013 | 10:43 am
It’s interesting to note that the banker says, “Hey, maybe you should think about generating new income.” What would new income be for the United States? Taxes. But the Republicans are adamant about not raising taxes or even closing loopholes that would generate more income.
The banker says, “Your credit rating will plummet if you continue to go along this path.” The “credit rating” (based on the willingness of buyers to purchase treasury bills at extremely low rates) of the United States is excellent. It is interesting that the people willing to lend the United States money seem to have much greater confidence in the United States than the “deficit hawks.”
Of course, everyone acknowledges that the United States cannot continue to pile up ever increasing debt, but the critical problem at the moment is the slow recovery of the economy, not the national debt.
March 6th, 2013 | 11:12 am
It doesn’t have to grow at all to exceed your ability to pay for it. All that has to happen is for a setback in your employment.
Mike Melendez,
Unfortunately for this video, comparing the US economy to the finances of a single household is not at all helpful. Most of the meaningful analyses of government expenditure and debt are in terms of GDP. There is no meaningful equivalent of GDP for a single household. The current interest-to-GDP ratio is near the post World War II low.
The United States ran up a tremendous debt during World War II, which was steadily paid down beginning with the Truman administration in 1945 through the Carter administration to 1980. We have Ronald Reagan to thank for the beginning of the current increase. The point is often made that we are currently racking up bills that our children will have to pay. My father’s generation and my generation helped pay off the debt incurred during World War II, and I don’t think we found it a crushing burden. In fact, the period following World War II up until the early 1970s was a time of tremendous prosperity for the United States.
March 6th, 2013 | 12:29 pm
This is the problem with reasoning by analogy. A nation and a household are two different things. For example, your household maybe has you and your spouse working, making money. That’s nice but in a few decades or so you both are going to be too old to work. Then you won’t make any money. But nations don’t age this way. Yes the population may get older on average but 80 years from now the US will have plenty of people earning a living inside it. It won’t have you!
So now recast your ‘household’ analogy by extending it multiple generations. What was the average debt load of your great grandparents by year? Your grandparents/parents/you and then your kids? You’ll probably find on average the debt load increasing in nominal terms just as it does for nations.
March 6th, 2013 | 1:06 pm
David writes: “…the critical problem at the moment is the slow recovery of the economy, not the national debt.”
If only the problem were black and white, then we could ignore one to solve the other. Except, the national debt has more than doubled since Obama came into office mainly as stimuli of various sorts to get the recovery going. It hasn’t worked. It’s even possible that such spending keeps the recovery slow, especially as it increases the national debt.
March 6th, 2013 | 2:28 pm
Mike, sure the US can have a setback in tax revenue. It can also have a windfall. Everyone would eventually like a lower debt load than we currently have but my point stands that a permanent debt that grows in nominal terms is perfectly sustainable.
Japan’s stagnation has absolutely nothing to do with it’s debt load. Just the opposite. Its debt load is due to its stagnation.
March 6th, 2013 | 3:36 pm
Except, the national debt has more than doubled since Obama came into office mainly as stimuli of various sorts to get the recovery going. It hasn’t worked. It’s even possible that such spending keeps the recovery slow, especially as it increases the national debt.
Evidence? None.
The last time we had a like crises was the Great Depression and unemployment peaked at nearly 25%. This time it’s been less than half that. Other countries, esp. European ones who embraced austerity have seen unemployment over 20% so it’s not like it’s impossible to ever see such high unemployment in modern economies.
Now how does national debt inhibit recovery? here it helps to have some model experience to refer too. The only model that makes sense would be for a doubling of the national debt to suck up savings out of the financial markets leaving banks unable to lend to businesses and individuals in the private sector. Problem: The prime symptom of such a thing is rising interest rates (and NO the Federal Reserve does not magically control all interest rates to hold them down). We’ve seen dropping interest rates, esp. in the long term.
March 6th, 2013 | 4:27 pm
David N. writes:
“It’s interesting to note that the banker says, “Hey, maybe you should think about generating new income.” What would new income be for the United States? Taxes. But the Republicans are adamant about not raising taxes or even closing loopholes that would generate more income.”
It’s at least as “interesting to note” that the only way that some folks can ever come up with to “generate new income” is “raising taxes and closing loopholes”.
Surely one can grasp that the repayment (or significant reduction) of a debt generates “new” income — (ie. income that is freed from one use to be applied to another)? Or that the cutting of budgetary items judged wasteful, unnecessary, obsolete, or redundant can also do the same?
I am lost as to why those who insist that only the revenue side is to ever be considered seem to believe they are holding all the trumps or the moral high ground? Regardless of analogy all budgets are two sided — there is revenue and there is expense. Why the notion that only income can solve any imbalance?
I guess that old saw about “every problem looking like a nail when the only tool one has is a hammer” pertains?
March 6th, 2013 | 5:05 pm
John writes “Japan’s stagnation has absolutely nothing to do with it’s debt load. Just the opposite. Its debt load is due to its stagnation.”
And you find this positive?
March 6th, 2013 | 5:08 pm
Boonton writes of the slow recovery: “Evidence? None.”
But there is evidence. In spite of all the money spent we are still in a slow recovery years after the recession. Yet somehow that doesn’t slow down those who want to spend more.
March 6th, 2013 | 6:30 pm
It’s at least as “interesting to note” that the only way that some folks can ever come up with to “generate new income” is “raising taxes and closing loopholes”.
David C,
If you watch the film, the first thing the banker asks is, “Have you made any cuts in your expenses?” When the guy says he has cut $380 from his annual budget, the banker says, “Hey, maybe you should think about generating new income. Maybe a new job? Maybe asking for that raise?” So the banker has talked about cuts to spending and increases in revenue.
Surely one can grasp that the repayment (or significant reduction) of a debt generates “new” income . . .
When you are spending more than you take in, how do you get the money to pay down debt? The government can only cut costs or increase its revenue. Since about 97% of the federal government’s revenue comes from taxes, the only practical way to increase revenue is to raise taxes. What the Democrats want to do is raise revenue and cut spending. What the Republicans want to do is only to cut spending. Now, it is “mostly true” that taxes on families are at their lowest level in about 50 years. If the American people really want government to shrink back to what it was in the early 1960s, then the Republicans are right. There should be drastic cuts in spending and drastic cuts in what government does. But the American people don’t want that. For the Republicans, the real issue isn’t the deficit. It’s shrinking the size of government. They want to “starve the beast.”
March 7th, 2013 | 2:10 pm
But there is evidence. In spite of all the money spent we are still in a slow recovery years after the recession. Yet somehow that doesn’t slow down those who want to spend more.
Actually most of the spending has been neutralized by cutbacks in state and local gov’t spending as stimulus ended. The last source of stimulus left is that the income tax’s nature is that if you have less income you pay less tax…hence deficits are still here.
You haven’t provided us with any evidence. You’ve assumed that the Great Recession should follow the mold of previous light recessions with a rapid bounceback. If the proper model is a serious recession like Japan in the 1990′s or the US in the 1930′s then recovery is painfully slow and unemployment goes painfully deep. If that’s the case then we are amazingly lucky that we didn’t break 10% unemployment
March 10th, 2013 | 1:38 pm
David N.
It’s a fundamental difference in world view between you and I, I’m afraid. You take the “is” of Federal Government spending and treat it as some sort of sacred “ought” — a given that must not be tampered with except perhaps on the barest of the margins (unless, of course, we’re talking defense dollars).
And from whence cometh the laughable “what the Democrats want to do is raise revenue and cut spending”? That assertion is, in light of facts on the ground, completely unserious. The party and President that has not passed a budget since 2009(!) clearly “wants” nothing of the sort. Understanding that any serious attempt to reign in the budget will involve significant pain for favored constituencies and beloved programs they are more than happy to hide behind endless continuing resolutions and finger pointing at the opposition….
Further evidence of cognitive difference based on world view betwixt us is the citation of the American people as “Not wanting” to cut the level of spending? So what? I “don’t want” a lot of things that nevertheless should be – for my own good or for the good of the community/world in which I live.
I believe, frankly, that there is a prudential and moral case to be made that endless deficit spending (and the attitude behind it) creates a culture of dependency and entitlement and weakens the national fabric. When stakeholders become, instead, net recipients, (as nearly half the taxpayers now are) changes are bound to occur. Tocqueville saw this potential (and warned against it) long ago. It has now come to pass. I mourn that estate, with its concomitant loss of freedom. You clearly see it differently — what is there, really, left to talk about?
Scare quotes around “starving the beast”? As if I would find that somehow compelling? Somehow revelatory of Republican malfeasance? Would that…
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