Is there really a debt crisis?
By Mike Andrew
Is the country in the grip of a “debt crisis” so dangerous to our future that we need to restructure major social programs that have been in place since the New Deal?
The short answer is NO.
A longer and more complex answer is that the so-called “debt crisis” is being used as a pretext to attack social programs that protect the country’s economy, in particular Social Security and Medicare, for the benefit of the wealthiest Americans.
In other words, the “debt crisis” is really a policy crisis that’s playing itself out in an argument over the federal budget.
Let’s look at the facts.
As of February 21, the total debt of the United States amounted to somewhat more than $16.6 trillion, according to the Boston Business Journal.
Of that debt, more than a third, $4.9 trillion, is accounted for by what are called “intergovernmental holdings.” In other words, the government owes that much money to itself. The rest, $11.7 trillion, is owned by outside investors, and the Treasury Department says that about half of that is owned by foreign investors, chiefly China and Japan.
The debt held by investors amounts to about 74% of the US GDP. Just for the record, this compares very favorably to the debt-to-GDP ratios of many of our internaional competitors. Japan’s debt-to-GDP ratio, for example is a whopping 198%. Even Germany, the champion of fiscal austerity, has an 83% debt-to-GDP ratio.
The next thing to understand about the debt is that no matter how big it is, it doesn’t have to be paid back all at once. As long as foreign and American investors continue to have confidence in the ability of the US government to pay back its debts as they fall due, the government will always be able to borrow new money to pay off old debts.
The idea that “our children and grandchildren” will suddenly be confronted by demands to pay trillions of dollars at some time in the future is a fiction promoted by people who want to justify an all-cuts budget.
The third thing to understand about the national debt is that it’s the result of deliberate policy decisions made by those same people.
In 2001, at the beginning of George W Bush’s first term, the non-partisan Congressional Budget Office (CBO) projected that the US would run a $5.6 trillion budget surplus between 2002 and 2012. Instead, the country went into debt by an additional $6.1 trillion.
According to the CBO, the difference between the projected surplus and actual debt in 2011 can be attributed to:
- $3.5 trillion – Economic changes due to the recession, including lower than expected tax revenues and higher than expected safety net spending;
- $1.6 trillion – Bush Tax Cuts;
- $1.5 trillion – Increased defense baseline budget and non-defense discretionary spending under both the Bush and Obama administrations;
- $1.4 trillion – Wars in Afghanistan and Iraq;
- $1.4 trillion – Incremental interest due to higher debt balances;
- $0.9 trillion – Stimulus and tax cuts since 2008 (Economic Stimulus Act of 2008, ARRA and Tax Act of 2010).
The final thing to know about the national debt is that it’s not at all clear that debt reduction is a good idea at the present time.
According to Christina Romer, Garff B. Wilson Professor of Economics at UC Berkeley and a former Chair of the Council of Economic Advisers in the Obama administration, cuts aimed at reducing the budget deficit might actually be harmful. “A crude rule of thumb is that every $100 billion of deficit reduction will cost close to a million jobs in the near term. If that isn’t a reason to move gradually, what is? But if you need another, just look at Europe,” she said, referring to the catastrophic economic collapse of several European countries after implementing austerity measures.
That analysis was confirmed by the CBO in its report on the probable effects of the impending “sequester.” There would be an increased risk of recession during 2013 if the deficit is reduced suddenly through automatic spending cuts, the CBO said, even though lower deficits and debt would improve economic growth over the long term.
The real problem with debt is that the government has to pay interest on it, and money spent on interest payments is money that can’t be spent on programs. In other words, if the government owes a lot of money, it will pay a lot of money to bankers who own the debt, rather than spending it to build roads, bridges, schools, and hospitals, or to help support unemployed workers, veterans, or retirees.
The conversation we should be having now is not “should we spend money or not?” but “where we want additional revenue to come from” and “where do we want to spend the money?”