Making sense of the Federal debt and deficit

Since Obama was elected, the GOP has been pushing the idea that our big problem is the Federal budget deficit and the Federal debt. Under Bush and Cheney it was 'deficits don't matter', full speed ahead; now it's Paul Ryan telling us we need to devastate the Federal budget just to stay afloat. But let's put aside this political rhetoric and look at the facts.

When Clinton left office, we essentially had a balanced budget and a relatively modest national debt. Deficits and total debt rose sharply under Bush as he implemented two major tax cuts (yes, that raises the debt - do the math!) and took on two wars, not to mention the popular but overly expensive Medicare drug program, a boondoggle mainly for the benefit of the drug and health insurance companies. But by far the real budget-buster was the recession, which sharply lowered tax revenues while increasing government expenditures for things like food stamps and unemployment insurance. It has been even worse for states and local governments.

So that's the situation Obama inherited. NO MATTER WHO HAD BECOME PRESIDENT in 2008, even if he had a totally free hand and made every right decision, the deficit was going to go up quite a bit for quite a while before the economy recovered, tax collections improved, and the deficit started to come down. So the GOP has been blaming Obama for something he didn't cause, and couldn't have possibly fixed in just three years. I wonder what they would have said about rising deficits under President McCain! So, even if you think Obama is completely wrong on every single issue, you CANNOT honestly blame him for either the deficit or the debt.

But, given the rising deficit, shouldn't the government 'tighten its belt' in a recession, just like the rest of us? (Hint: Ronald Reagan dragged us out of a recession by DRASTICALLY INCREASING GOVERNMENT SPENDING and RAISING TAXES!!) The simple and emphatic answer is 'NO!'. When the government cuts spending, it simply slows down the recovery, which is exactly what is happening right now as police, firemen, and teachers take their unnecessary turn on the unemployment lines.  The recent sequester and now the government shutdown aren't helping either.

In fact, had the government been allowed to keep spending at its previous rate, the economy would have grown about 5% last year, and this would be completely in line with previous recoveries. Instead, because of budget cuts, especially grants to local governments, it grew about 1.5% - exactly the 'slow recovery' that some people are blaming Obama for. But Obama did not ask for those cuts. They are entirely a product of the fervid 'austerity' ideology of the GOP. The sad irony is that, by slowing the recovery, these cuts end up actually INCREASING the deficit.

OK, but aren't there any negative repercussions to raising the deficit (and the debt) even higher by spending more, especially during a recession? Once again, the simple answer is 'NO!' During a recession, interest rates fall, because investors are skittish and looking for safety rather than return. The safest investments of all are typically sovereign (national) debt, so investors gobble these up, currently at near-zero interest rates. US Treasury bonds are the safest sovereign debt of all, at least of those available in any serious quantity. So, while during the recession our deficits and the resulting overall debt were indeed rising, the interest rate we pay to finance that debt fell dramatically to near-zero. As a result, total interest on the entire outstanding national debt is now about 1.5% of GDP, perhaps the lowest ever. 

For a rough comparison, this would be like a family earning $100K/yr paying out about $125/month total in interest payments! Even comparing total Federal interest payments to just the Federal budget (about 25% of GDP), it comes to about 6% of that budget, so our family would still be paying a very modest $500/month. Of course, as the economy recovers, interest rates on government bonds will surely go up as well. But guess what? Tax revenues will also rise, government expenditures will come down, and the deficit will plummet as fast or faster than its been going up! Game over!

This is exactly what Obama has been trying to tell us, over the din of the Tea Party, and now, sadly, the whole GOP. Cutting the budget now will just slow the recovery, dragging out deficit spending and increasing the longer-term national debt. More government spending would actually stimulate the economy. This includes tax relief for the middle-class, who immediately spend most of their refunds. Reducing the taxes of the so-called 'job creators' won't do anything at all, because they won't spend or invest a stinking dime more - much less hire new workers - until there is demand spending for products and services from the rest of us.

Now the trick question: When is the right time to reduce the deficit, or even reduce the national debt via a budget surplus? The simple answer is: during an economic boom! Yup - during a boom tax collections are high, and government expenditures are relatively low. If you don't screw things up by cutting taxes and spending off-the-books on two wars like Bush, the deficit will go down, and you may even generate a surplus. Don't believe me? Let me introduce you to Bill Clinton, who did EXACTLY that.

In fact, rather than cut taxes during a boom, as Bush did, it might even be wisest to - get ready - RAISE TAXES! Huh?? Yup, by raising taxes during the boom, the resulting surplus will start to pay down the long-term debt. In addition, the added taxes will act as a restraint to the boom, leading it toward a soft landing, which the government can also more easily cushion because it has been able to squirrel away a budget surplus.

Finally, the real zinger: even after Bush's fiscal blundering and the resulting massive recession, neither our deficit nor our national debt is especially high! What? Aren't we $11+ trillion in debt?? Sure, and that's sounds like a big number, but it's only about 60% of GDP, which is about $15T - and that's during a slow recovery. 

Based on our comparison to a family earning $100K/year, that would be similar to their holding a total debt of just $70K!  As much as I hate to admit it, Cheney was partially right (this time): in a country with a strong, diversified country, deficits really don't matter all that much.  Of course, as I just pointed out, Cheney was dead wrong to support a major tax cut during a boom, especially with two unfunded wars in progress.  Even if the Bush administration had not raised taxes, but simply not cut them, our current deficit would be hugely lower.

So, what's the big fuss regarding the deficit? Obviously if we continue to make stupid moves like Bush and Cheney, cutting taxes and raising expenses during a boom, then EVENTUALLY we will run into real trouble. But we will run into much, much deeper doo-doo much, much faster if we do what many of the same repackaged GOP politicians want us to do now - drastically cut the budget and drastically cut taxes on the rich during a recession. This could drive us into back into an even deeper recession and undercut our ability to climb out of it later as well.

In any case, such a policy sure as heck won't do much reduce the deficit or the debt -  it will actually act to substantially increase both. Draconian cuts in government spending are not really something we need to do to 'save the economy'. They are the end in themselves, a sop to their right-wing wedge-issue supporters who just love - and live - to hate government programs of any kind except those that feather their own nest.  The over-played 'budget crisis' they've worked so hard to gin up out of nothing is just the excuse.

By the way, I haven't described to you some crackpot economic theory. This explanation is based strictly on Macroeconomics 101, and would come in some form from every major economist you might ask. So why is there so much hoopla in the media - and maybe some of your friends and family - to the contrary?

If you have a few extra hours, let me tell you a sad story about climate change :-(. Just like most people are not meteorologists, they are not economists. If a right-wing politician - or media star - makes up something that sounds half-believable, about half the people will take it seriously immediately, and then the other half will begin to wonder if they are missing something, too. So it is with Paul Ryan, Ron Paul, Rush Limbaugh, etc., etc.

If you've made it this far, thanks for hanging around my soapbox for so long. Such patience! You deserve an extra tax break - but only if you are not super-rich, and promise to spend it immediately to help the economy! :-)

Oh, yeah, just one more thing I almost forgot. The country does have a major debt problem, but, as you know now, it's not public debt, and certainly not Federal debt. We have a serious PRIVATE DEBT problem. The middle class owes too darn much on too little of an asset base. Guess why? Because the don't earn enough, and because the recession wiped out 40% of their assets. But let's leave that for another time....

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