Dan

Calabrese

Read Dan's bio and previous columns here

January 8, 2009

Shouldn’t We Start Paying Off $70 Trillion in Debts and Obligations? Nah!

If you were in so much debt that, even under a best-case scenario, it would take you 200 years to pay it off, you might want to get started, don’t you think?

Nah!

The incoming administration promises to get around to spending discipline just as soon as it finishes a drunken-sailor spending frenzy like few we have ever seen. Isn’t that reassuring?

The U.S. national debt now stands at $10.8 trillion, and President-elect Obama vows to toss another $775 billion on top of that almost as soon as he takes office – to “stimulate” the economy.

The dollar amount of the debt matters less than what it represents as a percentage of the nation’s gross domestic product, but when the economy stagnates and the federal government tries to stimulate it with spending, that percentage only becomes more troubling. In 2007, for example, the amount added to the national debt was about $460 billion – about 3.4 percent of GDP, the lowest figure in nearly a decade. But in 2008, we added more than $1.1 trillion to the debt. We increased the nation’s entire debt by 10 percent in one year – representing a whopping 7.4 percent of GDP.

Obama’s promised stimulus package virtually guarantees that we will do the same thing again in 2009.

At present, the U.S. government is spending $412 billion a year just paying the interest on the debt. We are not paying down any of the principal.

And it gets worse – much worse. The $10.8 trillion national debt is chump change compared to the $58 trillion in committed, but unfunded, Social Security and Medicare liabilities. There is no money sitting in any trust fund to pay these benefits. That’s why we call them unfunded. We don’t have the money, any money, to pay them.

Combine the debt and entitlements, and you’re looking at $70 trillion.

If the federal government started running a $500 billion surplus this year, and ran such a surplus every year from now on, and plowed every penny of it into debt retirement (don’t forget interest) and entitlements, it would likely take more than 200 years to pay off these obligations. Isn’t this something we might want to get started trying to do?

Even worse than the problem, though, are the wrong lessons many take from it. It is now popular among Democrats to cite the Bush tax cuts in conjunction with the fact that the national debt doubled – yes, doubled – during Bush’s presidency alone. Their conclusion, regrettably embraced even by many Republicans, including John McCain, is that tax cuts are irresponsible unless accompanied by spending cuts equal in value.

What’s wrong here is not either of the two ideas. Tax cuts are good and spending cuts are good. What’s wrong is the notion that one is necessary to somehow offset the effect of the other. Federal revenue rises or falls as the economy grows or contracts. Regardless of tax rates, federal revenue is always around 18-to-20 percent of GDP. During the latter years of the Clinton Administration, GDP was growing, so federal revenue was growing. In the early years of the Bush Administration, GDP growth was either slow or negative, so revenue growth slowed. From 2003 through the first half of 2008, the economy was growing again – no doubt helped by the Bush tax cuts – so federal revenue was growing again.

You don’t have to cut spending because you cut tax rates. You have to cut spending because spending is completely out of control, and Obama is about to make it even worse.

The fiscal failure during the Bush presidency was a joint failure by both the White House and the Republican Congress to reduce federal spending and the size of government. Under the “leadership” of Dennis Hastert, Tom DeLay and Bill Frist, the GOP oversaw massive increases in domestic spending, while the administration sought and received massive increases in defense spending. If spending had merely stayed the same throughout the decade – you wouldn’t even need to cut it – GDP growth alone would have yielded a surplus. Modest cuts would have yielded a huge surplus.

To Bush’s credit, he was the first president who had the political courage to attempt a serious reform of the Social Security system, but a Congress controlled by his own party was too cowardly to get behind it.

Any institution mired deeply in debt – whether a family, a business or a nation – can move in a positive direction if it gets its spending under control and begins to achieve consistent positive cash flow. The government of the United States shows no interest whatsoever in even trying to do this, and the citizens of the nation apparently neither know nor care that it should.

Enjoy your stimulus.

© 2009 North Star Writers Group. May not be republished without permission.

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