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.
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.