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Understanding the ‘Looming’ National Debt Issue – Brief Suggestions on Re-aligning Our Perspectives

A great many people across all societal levels, from the wealthy to the poor and even amongst politicians, have completely understandable and dramatic concerns about the “out of control” national debt figures.  Are we permanently hobbling ourselves, and mortgaging our futures?  How can we make sense of these enormous debt numbers?

I believe this is a profoundly misunderstood issue, even for some at the highest echelons, and so we are – as a country – in greater peril of making severely damaging policy decisions by not comprehending it properly.  My purpose here is to offer a simple, easy to understand point of view and framework, and hope that it helps clarify the picture.

First of all, hearing numbers in the “trillions” is just plain staggering.  Before the economic crisis, numbers even in the billions were shocking.  Only a decade previously in 1998 the biggest financial bailout up until that time of the investment company Long Term Capital Management was a mere $7 billion, and that seemed enormous.  So it understandably appears like our government is just being fiscally irresponsible and denying reality by spending at the current levels.

But although it is right and appropriate to worry about these figures, it’s important to put the amounts in proper perspective.

Our annual Gross National Product is $14 trillion, for example, and we’ve been pressed to run higher deficits on occasion before in our history (as a percentage of GDP).  Although continuing with these kinds of deficits is dangerous and unsustainable in the long term, economists for the most part know it is not an immediate problem.  It is much more important to properly understand and fix the causes of these deficits by implementing a smart, sensible and strategic financial plan than to be afraid of the numbers and simply cut spending, which doesn’t demonstrably solve the problem.

As individuals we are not used to these numbers, but our country is a giant entity and the scope of the budget is way out of our comfort range.  The United States deals in billions and trillions!  We are indeed at the big gaming table and playing for big stakes.  This is not a standard recession, but something much more damaging systemically.  To make a dent, we have to get used to those numbers.  That’s the reality and the scope of the playing field we are now in.

*(Those who are free market purists believe the system will cleanse itself, left to it’s own devices.  In that view, interventionist government spending is unnecessary and perhaps even impedes recovery.  I do not agree with this philosophy and think it is dangerously imprudent, but cover this topic in a lengthier paper, footnoted below).

But we must then ask a key question, considering our large current and ongoing deficits… do we have a “spending problem”, or is it something else?

To answer this, let’s look at recent budget history and try to understand it.  The following is a table of the deficits run (revenue minus spending) during the Obama administration…

FY 2009: $1,413 billion

FY 2010: $1,294 billion

FY 2011: $1,300 billion

FY 2012: $1,087 billion

FY 2013: $973 billion

FY 2014: $744 billion

FY 2015: $577 billion (projected)

* (source: http://www.usgovernmentdebt.us/federal_deficit)

Some things are very important to make note of here. Foremost, the deficit trends are markedly decreasing.  And don’t forget, the initial numbers are significantly inflated because of false accounting in the Bush era that covered up approximately $1.2 trillion spent on the Iraq and Afghanistan wars as well as changes in Medicaid Part D, that the Obama administration absorbed.

The next key part of this whole explanation to understand and remember is this.  The greatest cause of the excessive deficits shown here are from loss of tax revenue because of the hemorrhaging of employment in late 2008 into early 2009, and the increased cost burden of providing those millions of people who lost jobs with unemployment support. Not having this revenue from income taxes, real estate, sales taxes etc… is by far the biggest cause for our budgeting shortfall. Much less revenue – significantly higher social support burdens – due to the deep recession.

So in actuality and contrary to much of the general public’s perception, the current administration has done an admirable job of reining in spending while balancing between the pressures of depressed revenues, additional cost burdens on social programs, and the need for investment and expansion.

The final essential piece to understand about our economy is that, because of decades of reliable stability, we have built up a government infrastructure of a certain size and scope, which was consistently supported by a fairly predictable income stream, mostly from tax revenues.  However all of a sudden, due to the financial collapse in 2008 and subsequent deep recession, we immediately lost a substantial portion of the revenue that supported a great deal of this gigantic machine that we have already made.

To present this another way, it’s very much like the individual who has a consistent job and salary for many years, and relying on that consistency buys a big house with a mortgage, puts their children in private schools, enjoys a social life with dinners out, etc…  Suddenly though, that person walks in to work only to find their salary cut in half!  What should they do?!  The answer is fairly obvious.  They have to find some way to elevate their reduced income, either by finding a new job entirely or another supplemental income.  At the same time they can try to temporarily cut corners.  But, if they’re eventually not able to find another job or additional income, they’ll probably have to face the reality of possibly selling their home and downsizing their life expenses.

The upshot is, our economy is going through a jobs crisis and therefore an income/revenue crisis, which on a national level is derived from having a vibrant tax base.  We are not having a spending crisis!  We can try to cut costs and corners, but this will just slow the deterioration and eventual spiral downward. The only way to solve this problem is by repairing the job growth engine of the private sector, creating the tax revenues necessary to run our government infrastructure and reducing it’s need to support the unemployed.

Eventually, if we cannot rekindle this jobs engine, then we should – but only then – dramatically cut spending and downsize our government.  This will not be a choice based on economic ideology, but simply because we built a governmental machine that ran on an expected level of revenue which is simply not there anymore. We will be forced to do it, and will all suffer the loss of less available services. This may very unfortunately become “the new normal” that we, as a country, will have to deal with.

Before then, the bottom line is jobs – jobs – jobs! (driven by private sector growth, which has to emerge from it’s defensive position). Excessive concern about the debt causes fear and urgent pleas to cut spending. That is exactly the opposite of what we need to do. Playing too carefully is a losing strategy. Other worries about over taxing the wealthy, or just about any other issue, is a distraction from what should be our single concern… JOBS!!!

Rather than thinking, “you can’t spend more than you make”, we need to think in terms that “you have to spend money to make money”.  We’ve all heard both sayings, and common sense tells that both can true.  It depends on the specifics of what you’re talking about.  The fearful are focused on the first, but there’s a right and wrong time for each.  For now, we need to be confident and expansive.

Focus on the strategy, not on the numbers!

ADDITIONAL NOTES -

This paper did not address possible strategies of how we might implement recovery.  That was not what I was intending to do here.  I’ve written a lengthier paper on that subject (http://www.economonitor.com/blog/2013/02/improving-our-understanding-of-recessionary-dynamics-and-developing-more-advanced-strategies-for-reparative-interventions/).  My purpose now was to re-align our focus and understanding of the essential problem at hand.

There are many politicians and policy makers who may have already understood these concepts, or can see this logic more clearly now, but are afraid to support them because it is politically “radioactive”.  They want to get re-elected, and simply can’t afford to appear weak and financially irresponsible to their constituencies.

Hopefully this paper will aid in developing the tools and talking points necessary in order to make these arguments clearer to those in the general public.  It is essential that smart and rational thinking lead policy and not uninformed and emotional thinking!  The financial future of not only our country’s economy, but that of many other nations, depends on clarifying these concepts and goals for ourselves and for our citizens.

2 Responses to “Understanding the ‘Looming’ National Debt Issue – Brief Suggestions on Re-aligning Our Perspectives”

burkbraunNovember 4th, 2013 at 2:12 pm

The writer seems to forget that the government prints money, and can spend as much as needed when inflation is low to get employment back up. This whole frame that we should be scrimping on costs and taxing more in a recession is simple ignorance of macroeconomics.

EugenRNovember 4th, 2013 at 3:21 pm

The article above did not touch the issue of differentiation between the domestic debt, government or private and foreign debt mostly government securities and guaranties, hold by foreign governments or private entities.

The US economy, due to overpriced US$ became in the last 20 years the vacuum cleaner of the world excess production capacity, and payed for it with borrowed money. The same happened in Europe in much smaller scale between the northern producing (mainly Germany)and the southern borrowing and consuming countries. This imbalance had to bring economic crisis, unless some politician would stop this trend before the crisis and change the trend. The economic crisis did not come yet because of the responsible economic policy of China, which in-spite of common understanding that US will never eventually pay back its debt in the real terms, agreed to continue their policy of lending to US and gradually reducing the mutual dependance of Chinese and US economy. Stable economic growth in US can start again after the US debt problem will be solved.

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Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

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