Thursday, March 25, 2010

debt and the deficit, thoughtful Thursday

Robert Heilbroner and Peter Bernstein, The Debt and the Deficit 1989, WW. Norton, New York

Arguments over our debt being too big are not new! As our book pointed out, when Kennedy proposed a ten billion deficit to deal with what we would now consider a mild recession, people were aghast. In 1988, a poll of the American People said that the deficit was the number one issue (by fourty-four percent to the next closest, "protecting jobs from foreign competition.)

At the time of the book, the deficit was 2.6 trillion or ten thousand dollars for every man, women and child. Now, the United States household debt (including mortgages and credit card balances) is 13.5 trillion and the federal government debt is about seven trillion (1) or about 20 trillion. That works out to $43,874 and $30,000 per United States Resident. Or more realistically, as some people are not working, about $60,000.00 per worker for the public debt and $30,000.00 for private debt. The average student graduates with about $23,000.00 student loans outstanding.

Drs. Heilbroner and Bernstein also pointed out:

  1. If we adjusted for inflation, the debt owned by the U.S. government itself, the fact that some of the debt goes into productive assets, which would be a capital budget if the government were a corporation, and that the states have a surplus, as a whole the United States governments, local and federal, have a net surplus
  2. Debt as a whole is increasing. Even though mortgages are generally paid off, the total mortgage debt increases as people take out new mortgages, either to buy existing houses under mortgage or new constructed houses. Between 1970 and 1988, home mortgage debt increased seven times Corporate debt went from $363 billion to two trillion and major corporations never pay off their debt. IBM and EXXON debt went up by a factor of nine as well.
  3. There is no correlation between how much a country increases its debt and its real interest rate--government borrowing does not "crowd out" private borrowing
(Dr. Krugman, and noble laureate and excellent blogger, showed a graph of borrowing for Britain and Britain twice had very high ratios of deficit spending (250% of GNP)--in 1830 and 1950.) And Mr. Souza of Brasilia, Brazil, in a comment on same, quoted extensively from Lord Macauley. David Hume declared that Britain's National Debt would be its ruin and earlier, Adam Smith made similar warnings about a bankrupt society. But Lord Macauley cited the many signs of progress in Britain at the same time as the debt was reaching unprecedented levels, at these times.

Also, they observed that perhaps the trade deficit caused the federal deficit. Note that in the late nineties when we had a balanced Federal budget, there was still a bad trade deficit. Table Eleven ranked the major economies on the basis of government debt and on their trade deficit. The United States was six out of seven on the federal deficit size and the worst on the trade deficit.

And, of course, the United States is by no means the highest on the list of countries, when ranked by public debt as a percentage of GNP. Japan is the highest at 198 per cent (excluding Zimbabwe). My University college of business and Technology ethics day had a talk on sovereign debt. They pointed out that although Japan had a very high public debt, 90% of this was held by Japanese. The United States was at 61.5 percent and is comparable to countries such as Canada, Germany, France.

Scary Numbers!

But what if we converted our debt to a share economy, dividing that figure by five per cent. And make it a share of income. Average income is $30,000.00 in the United States. Assume that this income is for the next twenty years. Or we are left with about a ten percent share. That means the United States worker would be free of all debts and worries, The median Salary in the United States for men is $45,000 and $35,000 for women. They would just pay about ten percent of their income.

Dr. Krugman looks at the federal deficit differently. Currently, the Federal Government pays 1.5 percent on ten-year debt. Even if our total debt was equal to our gross domestic product, then the cost per individual is 1.5%--probably not even noticable. Paul Krugman pointed out the danger of relying on short term debt and a commentor pointed out the folly of relying on ten year bonds--what happens in ten years? We may not be able to renew the debt. This is why the share economy calls for the end of arbitrary time restrictions on contracts. We saw what happens to reliable companies when debt becomes due at some arbitrary time that has no relation to the real world.

Whichever percentage and way one looks at, the debt holder would be in about the same position. There is no interest but assuming wages or income rises with inflation, the debt holder would not be damaged by inflation. And the debt holder also benefits from the natural growth of the economy, improvement in productivity, assuming same are reflected in the wages.


Mark Whitehouse, "Americans Pare Down Debt" Wall Street Journal March 12 2010, Page S1 , CCLV no 58. Note, the article said that reason debt fell 1.7 per cent in 2009--people cleared their debt by declaring bankruptcy, giving them a fresh start in life, but creating problems for our financial system.

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