The National Debt and Its Consequences Part I

A lot of Americans, and not just those gathering under the umbrella of the Tea Party Movement, see the federal debt as a reason for panic. The 2010 federal deficit of $1.4 trilllion will cause the national debt to rise to $12 trillion. These concerned citizens see the debt not just as reason for panic but, more importantly, as a reason for fiscal discipline, that is, a balanced federal budget.

Their other concerns, supersized government and higher taxes, are seen as logically following from that supersized deficit. They see correctly, and fear, that the national debt will in the next two years become greater than the annual Gross Domestic Product (GDP). Both will reach more than $15 trillion.

First, let's recognize that these are fuzzy numbers that people badly overinterpret. Economists agree that GDP is a misleading and inaccurate measure. For instance, GDP doesn't count as much as 20 percent of output that does not go to market -- housework, drugs, the underground economy etc. GDP often values costs as output and it treats investment as an expense.

The national debt is just as bad. What we call “the national debt,” the total value of the bonds issued by the federal government, is not a measure of what we owe and have to pay back; it is a measure of what we have borrowed. For instance, at present the Federal Reserve and other government agencies own 36 percent of the national debt. The federal government owes that money to itself. For the most part, that part of the debt may never have to be paid back. Another third owed to foreigners will have to be paid back.

The national debt is, like any other entitlement, simply a claim on future tax revenue. The federal government has committed to pay out trillions of dollars in Social Security benefits, Medicare, government pensions, veteran's benefits and pensions and all the other entitlements that we have agreed that we owe people. In both the national debt and federal entitlements, we recognize a legal obligation to pay money toa specified individual or group. There is no intrinsic difference between the two.

What all should be counted? How about our military commitments. Those 700 bases in over 100 countries include promises to spend unimaginable amounts of money. Should this also be counted as part of the debt? Should we include the private sector debt of $30 trillion which we now owe to each other? What about the guarantees we have given to Goldman Sachs and others on toxic assets and credit swaps?

By using this kind of specious counting, a fuzzy $15 trillion of indebtedness becomes a phony $150 trillion. But that does not mean that we owe or have a debt of $150 trillion or even $15 trillion. It is like a young, middle-class couple looking at the cost of raising a child, $170,000 to age 17, plus college. If we did family finances the way we do national accounting that would be a parental debt of $300,000 for each child when they are born. No children would ever be born. No one could afford it, ever.

The national debt does create some problems but it has to be put into historical perspective. In 1946 the national debt was 122 percent of GDP. World War II was the reason and no one considered the debt a serious cause of concern. We did not panic and call for spending restraints during that post World War II restructuring, the Korean War or the beginning of the Cold War..

The national debt, as a percentage of GDP, fell to a low of 32.5 percent by 1981. This was accomplished, not by paying off the debt but by increasing output. Then came the tax cuts, increases in spending and rising deficits of the Reagan era. The national debt rose to 56 percent of GDP in 1990, 57 percent in 2000 and then grew to 83 percent by 2009. We are now borrowing an additional $1.5 trillion this year and the national debt will grow to over 100 percent of GDP by 2012.

Let's remember that although unemployment is approaching Great Depression levels there are no bread lines, mass migrations or serious social unrest. That is because we have that big-government safety net, however expensive it may be.

Federal expenditure and consequent deficits are what has to happen when there are wars not paid for and a Great Recession with almost 20 percent of the population unemployed or underemployed. In fact, the stimulus package was probably not large enough to do the job. In the long run, nothing will increase the national debt faster than doing nothing about a recession.

President Franklin Roosevelt heeded the fiscal conservatives and tried to balance the budget in 1937. That brought the economy crashing back into depression. Let's not panic into that kind of action.