Tuesday, April 19, 2011

Denying the Debt

The biggest obstacle to expanding the government is the size of the national debt. If we can't afford the government we have now, how can we afford a larger one? There have been various arguments from the left about how to solve this. President Obama's solution mainly boils down to taxing the rich. Others are into deep denial.

Writing in the Huffington Post, Bob Burnett gives an amazing example of denialism. Early on he says "If you and I owed $14,280,782,221,253+ we'd be stressed. But the US isn't an individual, or a corporation, and so there is an imperfect analogy." He then uses household finances as an analogy.

Burnett starts out with some sleight of hand to reduce the debt.
To complicate the analogy, only 67 percent of the US debt is debt held by the public, the other 33 percent is "Intragovernmental Holdings ...securities held by Government trust funds, revolving funds, and special funds," the most important of which is the Social Security Trust Fund -- in other words money we borrow from ourselves. Of course, families don't have "intragovernmental holdings" but many borrow from family members or friends. Suppose that you have a trust fund you can access only in an emergency; if we borrowed from it because I am unemployed that would be analogous to the circumstances that account for one-third of the US national debt.
There are several problems here. Yes, a third of the national debt is money that is owed by one branch of the government to another. It still has to be treated as real debt. In some ways it is worse than public debt. For public debt, the government only has to pay interest. It can keep accumulating debt. Up until recently the Social Security Trust Fund could be ignored because Social Security taxes brought in more revenue than was needed to cover payments. The balance has tipped and Social Security has begun drawing from the trust fund. The left keeps telling us that Social Security will be solvent for decades to come because of the trust fund but that means that our nation has to start honoring those intragovernmental loans. This will eventually convert intragovernmental holdings into public debt and the process has already begun.

Burnett then moves on to the history of the debt

That brings us to the present political situation where we are faced with two similar stark choices: Republicans want to cut back government in order to pay off the debt and Democrats want to invest more in government to increase employment and thereby raise tax revenues. Before we consider the merits of these alternatives -- debt reduction versus public investment -- let's ponder another consideration, how did this debt accumulate?

If you and I amass a debt of $62,000, entirely because I am unemployed for a lengthy period, we might consider selling our house. On the other hand, if much of our debt accumulated for other reasons -- such as paying the legal expenses for your deadbeat brother after he was arrested for a DUI -- then we might look at the debt in a different light.

It turns out that much of the US debt results from decisions made by our own version of the "deadbeat brother." When Bill Clinton left office, the public debt was $5.73 trillion. When George W. Bush left office, the debt was $10.7 trillion. Under Clinton the US ran yearly surpluses and paid down the debt; under Bush the US ran deficits and ran up the debt. [...]

The debt is all Bush's fault so we can ignore it. After all, Bush is gone so we won't be adding any more to the debt, right? Oh boy!

There is a lot of missing data here and it is important. The government has a web site that lets you see the national debt on a week by week basis from any period between 1993 to the present. For most of this period, only the total debt is available with no breakdown by public and private (intragovernmental) debt but I just finished explaining why private debt is important. Using this site we find that the total debt was $4.18 trillion when Clinton took office and $5.72 trillion when he left. While there were some dips in the debt they were never enough to get the debt below what it was when Clinton took office. In fact, the debt increased by just under 40% during Clinton's tenure. It went up by $100 billion just in Clinton's last month in office.

Under Bush, the debt went from $5.7 trillion to $10.6 trillion - an increase of 86%. This was a big increase over Clinton but nothing like Burnett would have you believe. Then there is the increase under Obama. Between January 20, 2009 and April 15, 2011 the debt went from $10.6 trillion to $14.3 trillion. That's an increase of 35% in a bit over two years. Burnett shrugs this off saying "Many Liberals believe that most of the $3.5T in US debt accumulated under President Obama is due to the financial legacy of the failed Bush presidency." My response is that many Conservatives believe that most of the $3.5T (actually $3.7T) debt was the result of overreach by the failed Obama presidency.

Regardless, both parties have racked up considerable debt. The debt accumulated during the Clinton and Obama years nearly matches the Bush debt so we cannot simply blame Bush and move on - which is exactly where Burnett is leading us:

Let's be clear: the US is not broke. The problems the Obama Administration faces are problems caused by the failed Bush presidency.

Sure, the debt is a problem. But it's not the number one problem facing us, which is how to get America back to work. ...

And how does Burnett want us to do this? He gives a clue early on:

That brings us to the present political situation where we are faced with two similar stark choices: Republicans want to cut back government in order to pay off the debt and Democrats want to invest more in government to increase employment and thereby raise tax revenues.

I love the way that he uses the term "invest more in government" as if prosperity depends on hoards of government employees.

If we do that (get America back to work) and return to a commonsense tax system, where corporations and the rich pay their fair share, then we will once again run annual surpluses and begin to pay down the debt.

It all seems so simple. We just soak the rich and use the money to hire more government workers and all our problems will be solved. Just how much is the corporate fair share? We already have one of the highest corporate tax rates in the world (even after figuring in tax breaks). How much is the corporate fair share? As for the rich, you can take all of their money and not have enough. Ever-expanding government is what got us this debt. The only time it declined was when the Republicans controlled Congress under Clinton and the resulting stalemate slowed the growth of government.

Government isn't an investment, it is an overhead. It diverts money from going elsewhere (like hiring more employees) and impedes growth. Burnett doesn't see this. His goal is an ever-expanding government and it blinds him to economic realities.

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