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Honey I Shrank The Deficit (But Grew The National Debt) (Forbes.com) April 24, 2014

Posted by daviddavenport in Op/Eds.

President Obama and the independent Congressional Budget Office (CBO) recently released their dueling views of the federal budget over the next ten years.  The President is quick to celebrate a reduction in the federal deficit—that is the amount being added to the national debt every year.  It’s the age-old government ploy to assert bragging rights for spending reductions when, in fact, all they’ve really done is reduce the rate of increase.  But, as the CBO points out, even this reduction is only short-term, with annual deficits again increasing in 2018, while the overall national debt itself has risen at a shocking rate, from $10.6 trillion when Obama took office in 2009 to $17.5 trillion today and still growing strong.  An independent Harvard study indicates that it would take a bonus payment of $106,000 from each American to pay the debt.

But here are surprising contemporary questions about public debt:  Does it really matter?  Does anyone really care?  There was a time when our presidents spoke of government debt in moral terms, with Calvin Coolidge in the 1920s referring to “carelessness” in the “expenditure of public money” as a “condition characteristic of undeveloped people, or of a decadent generation.”  And Coolidge—nicknamed “The Great Refrainer” by recent biographer Amity Shlaes—did something about it, lowering the post-war debt from $22.3 billion in 1923 to $16.9 billion in 1929 by meeting with his budget director almost weekly, cutting government spending wherever he could.  President Herbert Hoover at first tried to hold down spending in the late Twenties and early Thirties, finally giving in to less austerity and more stimulus spending in the face of the Great Depression.  Still, Hoover famously said, “Blessed are the young for they shall inherit the national debt.”

Somehow much of our national thinking has evolved to the point where we think of debt less as a moral or even a financial obligation and more as a mere instrument or tool of economic policy.  Debt has become one more knob we turn toward “open” as a countercyclical tool of fiscal policy when the economy is slow, not fully appreciating its long-term consequences.  As one of my Italian colleagues pointed out in the height of the recent worldwide recession, the big difference between the Italians and Americans now is that you can still print money, and your politicians are busy doing that, by issuing more currency and building more debt.  But we can no longer print lira, he added, we have to wait for Germany to decide whether to print more euros.

Is it really true that government debt should be viewed now as a mere tool of economic policy, rather than a moral or financial obligation to be repaid?  I think not.  For one thing, other countries (especially China) own a good deal of our debt instruments and they will expect ongoing repayment.  Indeed, though our projected debt to GDP ratios are still well below those of Greece and other marginal economies, that could eventually become a concern to our trading partners.  As former chairman of the Joint Chiefs of Staff, Mike Mullen, pointed out, “the single biggest threat to our national security is our debt,” with former Defense chief Robert Gates adding, “at some point, financial insolvency at home will turn into strategic insolvency abroad.”

There is also the ongoing moral question of transferring obligations from one generation to the next.  It would be a far more appropriate use of debt to be spending on long-term infrastructure projects, from which capital growth and multi-generational benefits might arise.  But, in fact, the U.S. is using debt to finance short-term spending (Social Security and Medicare payments, for example) that really should be covered on a pay-as-you-go basis through taxes.  That does raise a serious moral question:  is it right to simply shift forward the year-to-year costs of one generation to the next?

In his book Debt:  The first 5000 Years, author David Graeber wrestles with a woman’s simple yet profound conversational comment:  “Surely one has to pay one’s debts.”  It is, as Graeber points out, not just an economic statement, but also a moral statement.  Or, as George Washington put it, such debts “ungenerously throw upon posterity the burden which we ourselves ought to bear.”  Before we blithely redefine the moral and financial obligations of government debt to become just another instrument in the economic toolkit, one must consider all the implications of debt:  financial, moral, generational, diplomatic and strategic.

Link to Forbes.com:  http://www.forbes.com/sites/daviddavenport/2014/04/24/honey-i-shrank-the-deficit-but-grew-the-national-debt-2/


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