What is the National Debt?

I would like for all of you to pretend with me for a minute. Say we all have excellent credit ratings and we have access to virtually boundless amounts of borrowed money. Now, the kicker of this deal is that we also don’t have to ever pay any of the money back, all we have to do is pay interest and keep borrowing. Doesn’t sound bad at all does it?

US Debt Clock

That is how life would be if you were the US government. Almost every year since the turn of the 20th century, the US government has spent more money than it has earned. There are a number of reasons for this, but the most basic is a politician can easily justify spending money on different programs that s/he feels will benefit his/her image with the voters. On the other hand, it is very difficult to convince voters that they should pay more taxes to pay off debt accrued in the past. Keep in mind that the main task for an elected official is to win the next election or position your party to succeed you upon retirement – all other tasks are secondary. I will get into a possible rationale for this mentality later, but for now I will stick to the debt.

So, every year the level of government borrowing increases. Which means every year the government has to go out into the market and find investors for their treasury securities (bonds and T-Bills) for most of the money it needs to borrow. The rest of the money is “borrowed” from the welfare trust funds, mainly Social Security and Medicare – I will talk more about this later as well. Since the government has to pay interest on growing sums of money each year, like any other borrower, a certain portion of each annual budget is directed at paying money to owners of the debt. When interest rates to borrow money are low like they have been thus far in 2009, this is a fairly cheap way to run a government in the short term. Since easy money is readily available for politicians to borrow, they can keep taxes low and spending high. But if – and I would say when – the interest rates go up, paying the interest on the debt will become increasingly expensive. An analogy here would be the teaser rate offered by a credit card or mortgage company to sucker you in to borrowing and spending. At first it is easy to keep up with the interest payments and still increase your spending, but once the rate spikes upward, you are saddled with a debt you can’t repay.

In the media, when this issue is discussed, it seems that many talking heads have a hard time explaining something this simple. I won’t get conspiratorial on you and say that they are intentionally obfuscating, so we will just assume that they are fucking idiots. So, these overpaid-underinformed idiots talk about two words (sometimes interchangeably) when they talk about fiscal imbalance; deficit and debt.

A deficit is the amount the government must borrow every year in order to pay for all of its spending programs after all tax money has been exhausted. I am sorry if you feel like a third grader when I am writing this, but if you get your news from the mainstream media (or if you are in the mainstream media) I feel like the definition of terms is necessary. It isn’t your fault, you are probably not stupid. You are just being informed about issues by fucking idiots.

Where was I? Oh yeah, debt. The debt is the total amount that the US government owes investors for all of the deficits it has ever run. You may remember the famous debt clock located near Time Square in NYC that is occasionally mentioned in the media.

If the numbers in the picture at the top seem really big to you don’t worry, they are terribly outdated and much larger than that now. As of 7/20/2009 the US government owes $11.35 trillion ($11,350,000,000,000). It is estimated that the interest cost on the debt for 2009 will be around $500 billion. That means that the government will either need to tax or borrow $500 billion more than it otherwise would just to stay current with its creditors. To add some perspective on that number, that is more than the US government spends on the wars in Afghanistan and Iraq ($136 billion) and federal health care programs ($353 billion) combined!

There are many economists and government bureaucrats that will say that although this debt is large, it isn’t too big in relation to the US economy’s gross domestic product (GDP) – the sum total of all economic activity in the country. Left leaning economists will justify budget deficits during tough economic times because government spending can spur economic growth. What they do not mention is the other side of this Keynsian argument, once the economy recovers the government should cut spending and raise taxes to pay back the debt.

Before I go on further, I would like to mention that the debt or deficit spending is not a problem of democrats or republicans. Both parties are good at two things, blaming the other party for deficit spending and voting for huge spending increases whenever it is beneficial to their political aspirations. It seems to particularly be the case when one party controls both the executive and legislative branches (as the democrats do now and the republicans did for a good chunk of time under Bush). Conversely, while Clinton was president and the republicans ran congress (most of the time), the total debt increased by only (ha ha ha) around $1 trillion in 8 years. In Bush’s 8 years the debt increased by about $5 trillion and in the first few months of Obama’s presidency the debt has increased more than $1 trillion. I had mentioned in an earlier post just in passing that it took Bush 8 years to double the debt and I think that Obama may be able to do it in 4. The way he is going he may be able to do even more than double it in his first term.

Perhaps the most interesting thing about the debt, and about deficit spending, is that it is seldom discussed in a manner that clearly explains the issue by politicians. I am not sure why this is, partially because they are successful politicians and are therefore adept at manipulating information to their benefit – while avoiding subjects that don’t have much of an upside. I can’t imagine how a politician could explain to a constituency that the government dumps hundreds billions of dollars every year with no return and no end in sight in a way that would be useful to said politician in any way. Maybe we should start calling the interest payments bailouts and that will get people’s attention. I don’t know how people will pay attention to it, but it is certainly the most effective fleecing of the government. It is also not very sexy as far as the people running the news cycle are concerned.

Hopefully more people like me that are writing about this will get people to pay attention.