The New Red Menace: Government Debt

The New Red Menace: Government Debt
October 9, 2013

With the Obama White House and Congress having agreed in October to allow the Treasury Department to borrow money beyond the previous $16.7 trillion federal debt limit through February 7, Washington is girding for another battle over taxes and spending between Congress and the White House.

Regardless of the exact details, recent history teaches us the biggest loser likely will be the taxpayer.

After World War II, America’s main concern for many decades was the so-called “red menace” of Communism and the Soviet Union. Now we’re discovering the real red menace is the sea of red ink that Washington has been piling up—the national debt.

Benefits Today, Payments Tomorrow

The problem is mainly political: Washington’s practice of providing benefits today while postponing payment until tomorrow.

To some degree we all know the story.

During the 70-year period of 1940 to 2010, gross federal debt increased from $43 billion (the equivalent of $670 billion in 2010 dollars) to more than $13.5 trillion—a 24-fold increase. Since then, it has increased at an even faster rate, hitting $16.2 trillion in November 2012 and more than $16.5 trillion today.

President Obama has spoken passionately about the oppressive debt that students incur in pursing their college degrees. On average, students graduating in 2013 were saddled with about $35,000 in debt. President Obama should be more concerned about their share of the national debt, which now stands at more than $145,000 per taxpayer.

The reason we all should be concerned about the mounting debt is because there’s no end in sight. The recent reduction in the budget deficit is no cause for celebration, as it is only temporary. As a result of many factors—including our aging population and the promises associated with Social Security, Medicare, and Obamacare—the government’s annual deficits will continue far into the future, pushing the debt ever higher, unless major tax increases are enacted.

A Global Debt Pandemic

The United States is far from alone in the accumulation of debt. Many countries have accumulated even higher levels of debt relative to the size of their economies.

In fact, if we add up the net public debt of all the nations of the world—that is, gross debt minus money the governments owe themselves, such as Social Security trust fund obligations here in the United States—the average in 2009 amounted to 59.3 percent of GDP. U.S. net public debt in 2009 was slightly lower: 58.9 percent of GDP. Japan’s public debt, by contrast, stood at nearly 226 percent of GDP, Greece’s at 144 percent, Italy’s at 118 percent, and the United Kingdom’s at 76.5 percent. China’s public debt, meanwhile, was just 17.5 percent.

Although the United States looks comparatively healthy in the snapshot above, the truth is that only 35 of the 131 countries we studied had debt levels higher as a percentage of GDP than the United States—and many of those countries (think Greece) have suffered major economic meltdowns.

We all know where the United States is heading. A 2011 poll of the members of the National Association for Business Economics listed the federal budget deficit as the No. 1 threat facing the U.S. economy.

‘Crowding Out’ Investment

They’re right. High levels of public debt slow economic growth for a number of reasons. When the government borrows money, it takes savings from the economy that otherwise could have been channeled into private-sector borrowing and investment. Economists refer to this as “crowding out” private investment.

Another cause for concern is the cost of interest on the debt. The U.S. Office of Management and Budget has forecast that in the year 2017 interest payments on the public debt will exceed the cost of Medicare.

The United States, in other words, is entering dangerous territory. Although deficit spending may provide short-term benefits, it’s time to consider the long-term cost in slower economic growth.

Burton A. Abrams is a research fellow at the Independent Institute, professor of economics at the University of Delaware, and author of The Terrible 10: A Century of Economic Folly: http://www.independent.org/store/book.asp?id=105. Used with permission of the Independent Institute and McClatchy Newspapers, where a version of the article first appeared.

Articles By Burton A. Abrams