Acton Institute Powerblog

National debt is a real threat to America

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Donald-Trump-Americas-Debt-900If President-elect Donald Trump wants to make America great again, he needs to find a way to reduce the federal debt.  Samuel Gregg, in a new article at the Stream,  explains why this is so important. There’s much at stake if no action is taken to reduce the federal debt:

On December 30, 2016, the United States’ official public debt was $19.97 trillion. It’s almost doubled since 2008. It also exceeds the size of America’s economy in nominal GDP in 2016 ($18.56 trillion).

Put another way, America’s public debt is approximately 107% of nominal GDP. To make matters worse, these numbers don’t include state and local government debt or the unfunded liabilities of entitlement programs like Social Security.

The reasons for this rise in public debt aren’t hard to grasp. At its most basic level, it reflects a failure of Congress and the Executive Branch to match spending and revenue since 2000. The gap has narrowed over the past 5 years. Nonetheless, spending continues to exceed revenue. In terms of what’s driving federal expenditures, it is social programs such as healthcare, income security, education, and housing. Spending on activities such as national defense has remained static.

So why should we care? What’s another trillion here or there?

Americans should worry because there’s plenty of evidence that this level of public debt can have grave effects on economic growth.

Once a country’s debt/GDP ratio reaches a particular threshold, one consequence appears to be slower economic growth. Economists argue about the exact threshold at which debt starts to impact growth. Some cite the figure of 85% of GDP. Others say 90%. Economists also debate how fast high debt negatively impacts growth. Yet there’s considerable consensus that, at some point, high debt-to-GDP ratios do have this impact.

Gregg goes on later in his article to explain what should be done about the issue of public debt:

To address these and other problems associated with high public debt, governments have several options.

One is to raise personal and corporate taxes across the board. That, however, makes a country less competitive. That in turn has negative consequences for growth.

Another option is to cut expenditures in real terms. Here, however, we face a major problem.

A growing majority of federal government spending is now mandated and funded by what are called “permanent appropriations.” This is spending based on existing laws rather than the budget process. That includes “big league” programs like Social Security and Medicare. To get federal expenditures under control in these areas, Congress would have to change existing laws.

To conclude his article, Gregg explains the significance of reducing the federal debt:

Excessive public debt is one of those long-term problems that undermine a country’s well-being and which democratically-elected governments have few political incentives to address. It’s politically easier to punt the problem to future generations.

Any serious effort to make America great again, however, requires a willingness to sell hard choices to the American public. That’s the essence of leadership, which is what Donald Trump has promised. And when it comes to public debt, it’s just what we need.

You can read Gregg’s full article at The Stream here.

Kyle Hanby

Comments

  • David Duerre

    Nonsense, the national debt is money that the government creates and then spends into the economy, it is just a function of our currency. It can’t be paid back and there is noone to pay it back to. If we had no “debt” we would have no dollars. The author of this article assumes we are on the gold standard, but we are not.

    • So how did economies work for the first 10,000 years without gov debt? In fact, Americans became wealthier at the fastest rate between the Civil War and WWI when there was almost no gov debt and money was gold.

      • Bill

        Roger, you seem to be missing the point. David is talking about our current monetary system. We are no longer n the gold standard. I don’t think he said anything about failure over other monetary systems over the past 10,000 years.

        • No, it’s not missing the point. If money wasn’t debt for 10,000 years then there is a strong reason to believe it is not now. It is true that only about 10% of “money” today is paper currency. The rest is digital, entries in accounting software. And it came into existence through loans. But it was only debt to the borrower and is not debt to the person receiving it. That was the case even during the gold standard as gold was base money and the rest was credit expansion.

      • Sam Levey

        All money is debt.

        The currency in your wallet is an IOU from the government to you. The money in your bank account is an IOU from your bank to you. The reserves that banks hold at the Federal Reserves are IOUs from the government to the banks. Sometimes these IOUs are associated with a promise to convert to something (like how your bank promises to convert its IOUs to government money if you withdraw from your account, or how at various times governments have promised to convert their IOUs into gold) or sometimes they are just associated with a promise to be accepted (like how the government promises to accept its IOUs back in payments to the government, such as for taxes.)

        But in any case, all money is somebody’s IOU, circulating in the market. When the government takes on “national debt” it’s not increasing the level of government debt out there, just changing the form, from currency to bonds. It’s a swap of one IOU for another. It’s like if I replaced some of your green dollars with red ones. It makes very little difference. Your problem is really only with definitions. If you count bonds as “debt,” then you really ought to count currency as debt too. Or conversely, if you count currency as “money,” then you really ought to count bonds as money too.

        https://www.youtube.com/watch?v=CO6GS13rEuE

        • No, they’re not IOUs. This sounds like “modern monetary theory.” That is a fringe, strange monetary theory. Even mainstream econ, which I detest, doesn’t get things that wrong. It’s bad monetary theory and worse economics.

          Money is whatever people decide is money. Bitcoin is money and it has nothing to do with government debt. In prisons prisoners use cigarettes and cans of mackerel. https://www.wired.com/2011/01/st_prisoncurrencies/

          If the Fed created too much money we would end up like Germany in the 1920s where no one would accept dollars as payment and they would become worthless.

          The different between gov debt and currency is that I can stash the currency under a mattress and if the gov goes broke and can’t repay its debt my currency still has value as long as the Fed doesn’t expand the money supply too rapidly.

          The most popular method of saving for most poor people in the world is stash $100 bills in their mattress. As long as the Fed doesn’t expand the money supply too fast, those $100 bills all over the world retain their value no matter what the gov does. But those poor suckers who hold US gov bonds will lose everything if the gov defaults.

          US bonds fluctuate with interest rates, their value going up and down. Currency only fluctuates with the quantity of credit expansion. The differences between bonds and currencies are vast and the similarities only superficial.

          • Sam Levey

            It is MMT! Good catch :).

            But it’s not just MMT, because anthropologists will tell you the same thing: money comes from debt, economists are wrong. (http://www.bbc.co.uk/programmes/b054423q) Sure people *can* use a commodity as a unit of exchange. That doesn’t make it into a monetary system, and flies against the historical evidence. When there’s evidence of commodity money, like in prisons, or with bitcoin, it is always from people who are actively trying to substitute for the money system they can’t or don’t want to use. It’s not an explanation for money, it’s a duplication. And usually unstable at that. In a true, stable monetary system, like the one we have, all money-things are somebody’s IOUs. Including US dollars, which are an IOU of the US government, (Don’t believe me? It’s right here on the Fed’s balance sheet, in the liability side on page 4. https://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201611.pdf), and the money in your bank account, which is an IOU of your bank (google their balance sheet).

            Of course the government can’t “go broke” under current arrangements, even without telling the Fed to do anything, but let’s pretend it could. Suppose the government collapsed, and stopped collecting taxes. This is exactly what caused hyperinflation in the South during the Civil War, so I doubt very much your money would still retain value.

            The quantity theory of money, implicit in your arguments, is load of crap, and you should drop it. The quantity of money that exists doesn’t matter. Suppose the Fed printed $10,000,000,000,000 and locked it in a room. Does the value decrease? Of course not. Now suppose the Fed gifts $10,000,000,000,000 to some already-rich person who doesn’t feel like spending it. Does the value decrease? Of course not. What determines prices is the demand and supply of goods and services, and the quantity of money in circulation is not a proxy for demand. The old monetarist argument, that the quantity determined the value, was based on two ridiculously flawed assumptions: stable velocity of money, and full employment of resources (so that supply couldn’t just grow to keep pace with demand). Both of which are patently false today.

            The quantity theory of money will lead you astray. It would have you believe that there’s hyperinflation happening in Japan right now. After all, their national debt is twice ours relative to GDP, but they’ve already monetized half of it. Equivalently, they’ve “printed money” to pay our entire national debt! And not one lick of inflation. In fact, they keep slipping into deflation. If anything Japan’s experiment ought to show that “monetizing the debt” lowers velocity.

          • MMT is just half true. But a half-truth is worse than an outright falsehood because it fools people.

            The earliest known money was barley and cattle. That’s just history. It had nothing to do with debt. For most of history silver, gold and copper were money and had nothing to do with debt. Government debt began to “back” money as gold had in the 19th century.

            You’re right that most money today is based on debt, but that doesn’t mean money always is debt or has to be debt. It’s just the nature of the modern system.

            A government going broke doesn’t mean it can’t collect taxes. It only means that it can’t pay its debts. Honest governments in the past just defaulted. Modern governments default by stealth, dishonestly, through inflation.

            The quantity theory of money is nothing but the theory of value applied to money. It is among the most proven principles in all of economics.

            “The quantity theory of money will lead you astray. It would have you believe that there’s hyperinflation happening in Japan right now.”

            Only if you make the mistake of taking the quantity theory as working mechanically, which a lot of economists do. There are many reasons why a large expansion of credit doesn’t create inflation, some of which are a desire on the part of businesses or individuals to hold more cash or the carry trade in which the money goes overseas.

          • Sam Levey

            I’m inclined to disagree with your historical narrative, but I’m no history buff myself. Instead, I’d have to point you to Innes (https://www.community-exchange.org/docs/what%20is%20money.htm) and Graeber (https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years), and let you make what you will. Although I would like to point that, if I’m not mistaken, the longest living currency ever is actually the tally stick, a pure debt-record currency, which circulated for 700 years. Although maybe I am mistaken, who knows.

            “A government going broke doesn’t mean it can’t collect taxes. It only means that it can’t pay its debts. Honest governments in the past just defaulted. Modern governments default by stealth, dishonestly, through inflation.”

            Again, how is it possible for a government to be unable to pay its debts that are denominated in the currency that it is the monopoly issuer? Such a statement makes no sense. Now, in the past, most major currencies were on fixed exchange rates, and maintaining that fixed exchange rate competed with the government’s ability spend without bond sales, or to grow its debt. Such a government could find itself reaching a catastrophe and be forced to make a choice: either 1) reduce its deficits or even run surpluses, 2) give up the fixed exchange rate (or gold standard), or 3) default on its debts. But I repeat: the reason this is possible is because of the constraints imposed by the necessity of maintaining a fixed exchange rate. But on a floating exchange rate currency, there is no such constraint, and so the government is not forced to do any of those. On a floating exchange rate, the stock of government bonds outstanding (the “national debt”) can grow without limit, and the only constraint on deficit spending is inflation.

            “The quantity theory of money is nothing but the theory of value applied to money. It is among the most proven principles in all of economics.”

            Uhhhh, no it’s not? This is the same quantity theory of money that dictated that the best policy for central banks was money aggregate growth rate targets. And when the central banks tried this, they discovered it’s not possible and they couldn’t do it.

            Here’s the problem with the quantity theory of money: it’s thinking about it backwards. Of course PT = MV, that’s an identity. But the quantity theory brings in all kinds of other assumptions about the behavior of T and V, that are basically silly.

            But you sound like that’s not the main problem for you. The main problem is that it gets the causation backwards, because it fundamentally misunderstands what kind of currency system we have. We do not have a disciplined, static ‘quantity of money’ system, where a central authority sets an amount. Not at all. What we have is a naturally elastic, endogenous money system, in which private entities substitute their own IOUs which they create from thin air as money. In such a system, it doesn’t even make sense to think about a fixed quantity. Instead, it’s elastic, it expands and contracts as needed. In this system, the causation does not run from the money supply to prices and transactions; instead, the causation runs from prices and transactions to the money supply.

            It’s fundamentally backwards. In the real world, the money supply grows when the private sector wants it to grow. The banks make more loans, creating more deposits, and the central bank is forced to liquidate assets to provide whatever reserves the banks need in order to maintain a stable interest rate. And when the private sector retrenches and banks contract credit, the bank money supply shrinks as loans are repaid, and the central bank is forced to take up excess reserves which it does by issuing securities, in order to maintain a stable interest rate.

            Watch this for more about that: https://www.youtube.com/watch?v=__e63RaZ-Ww&t=186s

            So thinking about what a change in the money supply is going to do is silly. What you ought to think about is, what are private spenders doing? Will a certain policy cause people to spend more? And a policy like QE certainly can’t do that. All it’s doing is changing the form of investor savings, from bonds to reserves/deposits, it’s just a portfolio reallocation. If you had a financial adviser and he called you and said “I moved your portfolio from 50/50 stocks/cash to 100% cash,” would that make you go on a spending binge? Probably not at all. Same story with QE.

            A little on QE: https://www.youtube.com/watch?v=CO6GS13rEuE&t=114s&list=PLZJAgo9FgHWaMs-WzbMAUw91u5pjGaR59&index=7

          • “the longest living currency ever is actually the tally stick, a pure debt-record currency, which circulated for 700 years.”

            I’m afraid gold and silver were money for close to 4,000 years.

            “how is it possible for a government to be unable to pay its debts that are denominated in the currency that it is the monopoly issuer? ”

            Read about Germany’s hyperinflation.

            “This is the same quantity theory of money that dictated that the best policy for central banks was money aggregate growth rate targets.”

            No, the theory has no policy recommendations. Fed policy is based on Keynesian socialism.

            I have investigated the MMT as much as I could stomach and found it failing in logic, history and theory. It’s complete nonsense. But clearly I can’t convince you to consider anything that might contradict it.

          • Sam Levey

            “I’m afraid gold and silver were money for close to 4,000 years.”

            Perhaps I’m falling short on the details (again, not a history buff) but my understanding is that this is wrong. Currency *had gold in it* for quite a long time, but that didn’t make the gold money. Taxes were demanded in the King’s token, not in gold or silver, and merchants demanded the King’s tokens as well, not simply a pile of gold. Gold had a price of course, just like it does today, and might even be accepted periodically in barter, like it is today. That doesn’t make it money.

            More on that here: http://neweconomicperspectives.org/2011/08/mmp-blog-12-commodity-money-coins.html

            and here: http://neweconomicperspectives.org/2011/08/mmp-blog-13-commodity-money-coins.html

            “Read about Germany’s hyperinflation.”

            I said debts denominated in the country’s own currency. The debt crisis that precipitated the German hyperinflation was war reparations to England and France in gold and foreign currency. Obviously Germany could run out of gold and foreign currency. But the mere existence of the hyperinflation ought to make it pretty obvious that they couldn’t run out of their own currency, and thus can always pay debts denominated in that currency.

            And since America doesn’t have any debts in any currency other than US dollars…clearly we’re not in the same situation at all.

            “No, the theory has no policy recommendations. Fed policy is based on Keynesian socialism.”

            Lol, that sentence suggests to me that you’ve probably not read a word of Keynes nor Marx. I say that because Keynes was virulently against socialism (“‘when the revolution comes, you will find me on the side of the educated bourgeoisie”), and Keynes’s recommendations for interest rates (to “euthanize the rentier”) is dramatically different from the Fed’s strategy since 1951.

            “I have investigated the MMT as much as I could stomach and found it failing in logic, history and theory. It’s complete nonsense. But clearly I can’t convince you to consider anything that might contradict it.”

            No, probably not. But I would suggest that if you want to know what the theory says, be sure to go to the source, and not the second-hand or for-mass-consumption versions. Here: http://neweconomicperspectives.org/modern-monetary-theory-primer.html, or the book version (https://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sovereign/dp/1137539909/ref=pd_sbs_14_t_1?_encoding=UTF8&psc=1&refRID=8246CWHNFF8S2EB4MEAP ). This book is pretty good too: https://www.amazon.com/Understanding-Modern-Money-Employment-Stability/dp/1845429419. There are plenty of idiots on the web who would like to tell you what MMT says, but if you haven’t read the books, then you probably don’t actually know.

  • Bill

    National Debt is real threat to America? Why do you feel threatened by savings in Treasury securities?

    • The threat is to the savings. If the gov can’t pay the debt then those who trusted their savings to gov will be much poorer.

      • Bill

        When you say can’t, do you mean if they choose not to? The fed gov can always pay any amount denominated in US dollars.

      • Sam Levey

        How could the government become unable to pay the debt? It’s the issuer of the currency. All US dollars in existence came from the US government.

        • See German hyperinflation of the 1920s. If the state prints too much people will refuse to accept it and quit using it. The state cannot force people to use it. Germans who held gov bonds lost everything and became poverty stricken. Those who exchanged marks for gold or land became ridiculously wealthy.

          • Sam Levey

            1) That’s not what happened in Germany. What happened was collapse of real output (from a mass worker strike, among other things), which forced prices up because supply couldn’t meet demand. The money printing and deficits are consequences, not causes.

            2) What do you mean? Of course the state can force people to use it. That’s what taxes do. If the government says “give us $500 or else you will go to jail” then you had better get at least $500 from somewhere! Like by providing goods and services.

  • taxedmore

    The government hands out $1 Trillion a years in unearned means tested welfare and the debt is going up $1 Trillion a year. Hmmm – could there be a connection? Maybe even a little overlap?

    • Bill

      Of course there is a connection. Every dollar that gets created and not destroyed by taxes adds to the economy and consequently the national “debt.” This is why we have dollars in the economy. No national debt = no dollars and no net savings for us.