"Character is the one thing we make in this world and take with us into the next."
- - Ezra Taft Benson
February 12, 2013
The Debt Problem
by Adam Smith

Over the next few months, you will be hearing a lot about the national debt. The Republicans will be screaming that our national debt is about to make the entire economy collapse. The Democrats will look calm and say “debt problem, what debt problem”. What is true, what is false, and what is complete hyperbole.

For most of the history of the United States, the federal government tried to maintain a balanced budget except for times of war. In the 20th century, there was an economic theory generally accepted which stated that in times of recession the government should increase their spending to make up the difference in the reduction in spending from individuals and businesses. During these times of recession the government should run deficits. This theory also stated that in good economic times governments should contract and run surpluses. However, nobody in Washington likes that part of the theory.

Over time, there is was much discussion in the economic community about whether this economic theory is correct. I do not believe that deficits are an efficient use of government resources for reasons I stated in my article on the stimulus. But we live in a time when the White House and many in Washington do believe this theory and so understanding the debt is important.

I should state that in the past I have not been very squeamish about the debt. I first heard the sky is falling rhetoric about the debt in the early 80s. I got worked up about the debt at first, but was smart enough to realize that nothing terrible was happening. And as I learned more about our economy and the debt, I considered the debt fanatics way out in left field. All of that has changed over the last eight years.

In the 90s, congress and the White House agreed to welfare reform and some modest tax increases. This put the government on sound financial footing. In the late 90s, the federal government was actually running surpluses and there were articles being written about what were investors going to do now that there were not going to be any risk free treasury securities to buy.

But the 00s were not good. There were the terrorist attacks on 9/11. This caused a bit of a slow down in the economy reducing taxes collected. Tax rates were reduced to try and reverse the slow economy and then the government started giving checks to people ($600 for married couples). The economy did recover but the war on terror was expensive and the government also passed an entitlement program for the elderly to help with their prescription drugs (which I completely support) but did not fund the program (what?). We started running deficits again. Big deficits - $300 billion a year.

And then 2008 happened. The real estate market collapsed, large banks were at risk for going under, and there was panic in the economy. There was a severe recession, millions were laid off, we spent $700 billion on saving the banks (since repaid), and $850 billion on a stimulus package. We spent, spent, spent.

Over the last five years, we have increased our national debt by $5 trillion.

The total debt is about $16 trillion, but the public portion is about $11 trillion. It is the public portion that really matters. And at $11 trillion it is about 75% of GDP. This is not great but it is not a disaster, yet. When it hits 110% of GDP it is time to get into our bunkers.

The problem is that the entitlement programs of medicare and social security are about to grow rapidly. The baby boomers are reaching retirement age so the costs of these programs will be growing much faster than our economy. This means our deficits will start to grow much faster.

If the economy turns around and we do nothing else, then we likely have about 10 years before the deficits take down the economy. If the economy stays sluggish then we will have less time. It is estimated that the current level of our deficits costs the economy about 1 million jobs. This will also increase as our deficits increase.

So what should we hope from our politicians? What course would be prudent?

First, a tax increase was just passed. Like it or not, this was necessary. Both parties have spent too much money in the past and there had to be an increase in revenue.

Second, they need to slow down the increases in discretionary spending.

Third, they need to start the reform of social security and medicare. Social security is actually an easy fix between doing some means testing and pushing out the retirement age a few years. Medicare is a much tougher problem.

Alas, we will we get none of this from our politicians.

Just do not fall for the Armageddon talk. The debt is not currently at a level that it will crush the economy.

Also, do not believe that there is no problem. We do have a huge problem.

You need to know that increased taxes will not solve this problem. The built-in increases in spending on entitlements is just too large.

Lastly, fear what our children and grandchildren are going to think about us. We just lived through one of the economic golden ages. Yet we are potentially passing on an economic legacy of ruin. While we watch the “greatest generation” pass on from the world stage, it is a certainty that those that come after us will not use that adjective to describe us.

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About Adam Smith

Adam Smith is obviously not the actual name of the author of this column. The real author has worked for two Fortune 500 companies, one privately held company, and a public accounting firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate degree. He also has completed coursework for a PhD. in finance. He continues to be employed by one of the Fortune 500 companies.

The author grew up in the Washington D.C. area but also lived for several years in Arizona. He currently resides with his family on the East Coast.

The author has held various callings in The Church of Jesus Christ of Latter-day Saints.

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