May 31, 2012

To the Moon and Back, Twice

Want to hear something frightening? If someone were to stack the U.S. government’s debt in $1,000 bills, it would be almost 67 miles high. Want to hear something even more frightening? That was a fact during Ronald Reagan’s presidency in 1981! As of 2011, that stack would be more than 900 miles tall!

If that didn’t connect with you, I can also tell you that our national debt could buy 3,824,812,630 Super Bowl tickets, 58,000,000 homes at an average price of a little over $240,000, or all of the country’s 400 largest companies based on market capitalization. If I’m still not breaking through, I ask you to look at the moon tonight and try to fathom that our national debt in $1 bills could reach the moon and back, twice.

Now that I have your attention, I want to briefly discuss our national debt. Some economists, pundits, and politicians would have you believe that the U.S. could be imminently facing an economic Armageddon. Some would have you believe the national debt is not a big deal, and it could actually be a good thing. Well, which is it? 

Before we decide, let’s briefly consider federal government debt. In simple terms, a government deficit, or debt, arises when the government needs money to pay for a program or project that exceeds tax revenue. The government can address this deficit by increasing tax revenue, printing more money, or by issuing bonds. Increasing tax revenue requires politicians to increase taxes, and that is not always popular. Printing more money is an impractical, short-term fix because, though it allows the government to pay for the program or project, it will devalue the currency and cause inflation, as everyone suddenly has more money. The unpopularity and consequences of the previous options are why most federal governments in the world prefer to issue and sell bonds. By issuing bonds, the government is able to fund its programs and projects with money borrowed from bondholders in return for promising to pay the bondholders back in the future (with a little interest).

If you’ve had your television on in the past decade, you probably know that most nations have government debt. This is because during economic downturns tax revenue falls, and when there are natural disasters, wars, or new entitlement programs, government expenses rise. Theoretically, during times of economic prosperity and peace, there should be government surpluses, and over the long term, government budgets should stay in balance. As you probably know, that has not been the case for the U.S. and many other countries.

For those who firmly believe we should always have a balanced budget, I would ask you to consider why a person is willing to take out a student loan to go to college or why a company is willing to spend substantial amounts on research and development for a new product. Going into debt for the potential of higher earnings or for the potential development of a new or improved product that will yield huge profits is not such a bad idea. Similarly, when the government goes into debt for infrastructure, technology, education, and other programs that promise a better and brighter tomorrow, it is also not a bad idea. It’s those wars, social programs, and other controversial geo-political expenditures that only have an immediate impact with little or no future potential for cultural, social, or financial gain that get governments into fiscal trouble.

The real issue with our national debt is sustainability. Just like people will be financially okay as long as they can make interest payments on their loans and eventually pay down the principal as their earnings and income increase, a government will be okay as long as it can make interest payments on its debt and eventually pay down the principal as the country’s gross domestic product (GDP) grows. In short, our national debt is sustainable as long as GDP grows faster. If you look at the three charts below, you will see our national debt from 1792-2011, our GDP from 1792-2011, and our national debt as a percentage of GDP from 1792-2011. If you are like me, you will have two takeaways and one conclusion:

Takeaway #1: Our national debt has never been higher.

Takeaway #2: Our gross domestic product has never been higher.

Conclusion: Since our national debt is growing faster than our GDP, I would say our national debt is currently not sustainable. However, our country’s financial situation was more precarious right after World War II than it is right now.

How much debt is okay? I don’t know and neither do any of the economists, pundits, or politicians! All I do know is that our country is operating at an unsustainable rate of incurring debt. I believe it is okay to not have a strictly balanced budget as long as the extra spending is used for projects and programs that offer the potential for a future return that exceeds the current expense. I also believe that our policymakers should look to the 1950s as a guide, and they should cut our current spending and increase tax revenues until our GDP is once again growing faster than our national debt. At least then, our debt will become sustainable again. Then, going forward, our policymakers must create and stick to budgets that allow our country to start paying down our national debt principal so that our financial position can stabilize and improve. Similar to how people should never max out their credit if at all possible, our government needs to return to a financial position where it could comfortably sustain additional debt so our nation is ready when the next economic downturn, national security issue, or natural disaster arises.


1 comment:

  1. Interesting article, so, in my opinion, and only my opinion, we need to elect officials that want to make sure our national debt is sustainable. We have fallen short at this time in our economy. To borrow the Falcon's mantra, America needs to RISE UP! The time is now. Oh, oops, sorry, I will get off my soapbox! Thanks, Tom!