Michael Maiello's picture

    All You Need To Know About The Debt In 3 Seconds

    In my mailbox this morning was a little cartoon from Brookings promising "The Federal Debt: All You Need To Know In Three Minutes."

    I can beat that.  All you need to know is that the Congressional Budget Office just reduced its economic growth projection for 2014 and increased slightly its estimate of what the annual budget deficit will be as well as the total amount it believes will be added to the debt over the next 10 years.

    Or, the short version: Less growth leads to higher deficits, more growth leads to lower deficits.

    Memorize that and you know everything you need to know.  This is not strictly about spending and tax rates, it is about having sufficient economic growth to support the spending and tax rates that the people desire.

    One of the problems we face, says financial wise man Barry Ritholtz, is that we have experienced a "Bifurcated Recovery."  High earners with the right graduate degrees and people who own investable assets like stocks have recovered very much.  Most others have recovered not so much.  As Ritholtz tells it, the S&P climbing from 666 to 2000 is not a meaningful number to somebody who does not own any stocks.  A recovery that does not bring most people with it is a recovery that will lack the "virtuous cycle" demand creation that leads to genuine and lasting wealth creation.  That is a very real problem that we have not solved.  It is actually a problem that the deficit scolds are actively ignoring as they change the subject to the potential financial calamity, down the line, of our rising debt totals.

    What, wonders Brookings, will the U.S. do when its debt reaches 100% of annual GDP?

    The answer, and this is another two second answer for you, is nothing.  It would be a huge problem if all of our debt came due on the day that our total debt reached the level of our collective annual economic output.  But, the government borrows at maturities ranging from a few days (for which it pays quite modest interest) to 30 or even 50 years (where rates are higher but the government has time on its side).\

    Interest rates, says David Wessel of Brookings, will not stay low forever.  Surely, that is true. Though, we've been hearing this since 2008.  I'm not saying that rates won't eventually rise. They will.  I am saying that predicting an end to this particular game of musical chairs has made a lot of people look foolish over the last six years.  Besides, the point being made, that rates must one day rise, is not an argument for fiscal restraint now, given that most government bonds are fixed rate borrowings.  If you issue a 30 year bond now at 3% and a decade from now rates are 7%, do you feel wise or foolish for issuing the 3% bond?  The answer (unless you're David Wessel) is that you feel wise.

    We should borrow every dollar we can at long term, low rates of interest.  We should then throw that borrowed money at the problem of the Bifurcated Recovery by investing massively in physical and technological infrastructure as well as cultural capital (education, the arts, the Fulbright program, the Peace Corps., you name it...)

    There's another reality, more important than the balance of the budget: the country's human and physical capital suffers from severe under-investment.  Analogies to the federal budget tend to be at-best iffy because the federal government controls its own money supply, a privilege not shared by citizen or corporate borrowers.  But, let's look at the iffy analogy of the U.S. as a chain fast food restaurant that has fallen out of favor with consumers. Surely comparing the U.S. to Burger King isn't that out of line (though the U.S. cannot merge with Canada to reduce its tax rates).

    So, Burger King has fallen on hard times.  The old formula isn't bringing customers back.  A new CEO comes in and tries to restore profitability by cutting costs.  His first move is to make the Burger King corporate employees into employees of its franchise system.  This is a nice trick and it works.  That really happened.  Now, let's pretend that our CEO takes things to the extreme.  Where else can I cut costs?  He wonders.He finds lower quality food suppliers.  He finds lower quality cleaning materials.  He cuts corporate support for franchisees, leaving them to handle the broken railings, parking lot pot holes and broken windows with less help from the home office.  He cuts the national advertising.  The chain's remaining customers start to notice "The food is bad.  Last time I went there, the restaurant was a mess and I felt unsafe.  I haven't seen a commercial for them in ages.  Are they still in business?  I'm not eating a nasty burger from a place that's on the verge of bankruptcy."  The cost cutting, though it might have helped the income statement for a time, becomes the death of the enterprise.  Now its cost of borrowing also goes up because lenders realize that the place is a huge mess.  Funny how the borrowing costs spike at the worst possible time!

    By this imperfect analogy, the U.S. has an unknown amount of time to borrow money at very low interest rates in order to improve its menu, updates its stores and win some faith from its own citizens and from the world.  If we borrow all the money but spend it all on wars in the Middle East, keeping toenail clippers off of airplanes, sending the National Guard to Ferguson and shutting down the government every 2-3 years, then I can see the international bond buying community eventually upping the price.  If we spend the money of productive projects that improve the country and thus safeguard the investments of our lenders, then rates are far less likely to spike in lasting manner even if they do rise over time.

    To sum up in less than five seconds:

    More growth means less debt.

    That growth will also give our bond buyers a reason to continue lending to us at low rates.

    Let's not be Burger King.





    That was more than 3 seconds. Worth it though.

    The real key for growth would be increased full-time employment figures and lower under-employment figures. Everyone working full time means more people paying taxes which in turns means more revenue flowing into the government to pay off their bills.


    So why is it, these so-called know-it-alls never think full-time employment, fewer people under-employment, and lower to almost non-existence unemployment rates is the path to follow?

    When I first went to college, economics and social sciences were enamored with Millton Freedman.  For profit corporations was the answer to our society growth and government should only be small and make war.  The text books devoted a lot of space to his ideas.  I am in my 60's now and most CEO's and Politicians were fed the same education who are now leaders.

    In 1989 I went back to school to take additional courses in economics and only a little space had been devoted to Freeman.  Economics was far more practical and realistic, then through the Freeman love affair years.  I had to read Kenneth Galbraith's classic book on the depression for that class. The austerity ideas that caused the train wreck will fall to the wayside as the generation in power changes.

    Obama spent time teaching at the University of Chicago.  Freedman's theories was known as the "Chicago school of thought."  It was still clinging to some of that kind of thinking when he was there. I think that is why he didn't break up the banks.

    I took Econ 201 and 202 (macro/micro) in 1978-9. My instructor was Indian. In fact, he worked at the US embassy in India while going to college for his masters and doctorate and I'll give you three (3) guesses who the Ambassador was.



    So you're making the bold assertion that if more people were producing things we'd produce more things? That's just crazy talk! (Yes, common sense seems to be in short supply sometimes.)

    I take it you never took economics in college, eh?


    More production means more people working, earning money, spending it on goods and services and paying taxes all while corporate profits rise. And what someone produces, someone else wants to purchase so each feeds off the other. It's the vicious cycle necessary for a healthy economy.


    What we have now is too many goods with too few consumers so production is retarded. Something is necessary to spur consumption. Corporations are more inclined to buy back their stock so as to increase their costs per share and reward shareholders rather than plow profits back into the business to create more goods to perk consumer interest and drive demand.


    So it's the government who has to stimulate the economy to get the consumer interested in purchasing goods to kick start the economic engine again.


    Keep in mind, days after 9/11, Bu$h pleaded with the public to go out and shop and dine ... everyone was so frightened by the event, they shuttered themselves indoors and businesses nationwide felt as if the Twin Tower fell on them. From what I heard, the economy almost went tits-up simply because no one was consuming anything but the very basics.

    Maybe I misunderstood your response here, but my prior sarcasm was meant to agree with you, not to disagree with you.

    Latest Comments