Debt/Defict Hawkery is bad economics. What matters is not the absolute size, it is the payments. If you’ve ever bought a house or a car you know it’s highly unlikely that you showed up at closing with a wheelbarrow full of cash, dumped it on the desk and said, “Here.”
If you had a check it was probably one issued against a special account set up for you by your Lendor for the specific purpose of making the purchase. In any event you signed some papers obligating you to make specific payments for a period of time to repay the money you borrowed (principle) and a fee to the lender (interest).
Unless you are fabulously wealthy and exceptionally frugal the total amount is almost surely not only more than you have on hand just sitting around but more than you make in a year. This is not a problem, it is called credit.
Likewise for a Government expenditures on this or that item or for all of them put together can easily exceed annual revenue (taxes) provided that the amount of the payments do not (there are actually many, many flaws in this analysis, but it’s the one the Hawks use).
Well, guess what Hawks? Everyone in the world is so anxious to lend money to the United States that they are fighting to do it at a loss.
In the more conventional Econospeak we use when talking about Governments, demand for our Bonds is so high that the market is begging us to sell more of them despite the fact that the yield is below the expected rate of inflation. The future money we will pay when the Bonds come due is going to be worth less than the money they’re lending us today.
Now you’d think that would put Debt/Defict Hawks in a bit of a pickle regarding their predictions of doom and dire consequences unless you realize that they want to put Sick and Old People out on an ice flow to starve to death not because it serves any Economic purpose, but just because they think Sick and Old people should die.
Economics in not a reason, it’s an excuse.
Interest Payments on the Debt Have Fallen to 0.8 Percent of GDP, So WaPo Wants to Cut Social Security and Medicare
by Dean Baker, Center for Economic and Policy Research
Published: 27 August 2016
Both parts of that headline are true, although the Post did not connect them in exactly this way. It’s editorial instead highlighted the debt-to-GDP ratio, trying to hide from readers the fact that the real burden of the debt is near a post-World War II low.
This is a classic case of the ends justifying the means. The end here is to cut the Social Security and Medicare benefits of middle income retirees. The Post sees this as the obvious policy option to pursue in a context where there has been a massive upward redistribution of income over the last four decades. And if they have to use a bit of deception to get there, well that’s okay.
The piece begins by telling us the horror story that the Congressional Budget Office projects that the deficit will rise this fiscal year from its 2015 level, the paragraph ending:
“The bigger deficit will push the national debt to 77 percent of gross domestic product, the highest level since 1950, this year.”
Of course if we didn’t have hysterical editorials from the Post and the professional deficit hawks we would never have any clue of the fact that we are seeing the highest debt to GDP level since 1950. A large debt can have negative effects in two ways.
First, it can mean a high interest burden. This means that we would be diverted a substantial portion of GDP from other purposes to pay interest to the owners of government bonds. This issue is assessed not by looking at the size of the debt, but rather the size of the interest rate payments. Currently interest payments measured as a share of GDP are a bit less than 0.8 percent, after subtracting the interest payments that are refunded by the Federal Reserve Board to the Treasury. By comparison, the interest burden was over 3.0 percent of GDP in the early and mid-1990s. In other words, that one doesn’t come close to passing the laugh test. (This information is available in the same CBO report cited by the Post.)
The other way that the debt/deficit can pose a problem is by creating too much demand in the economy. This leads to higher interest rates and/or higher inflation. The effect of higher interest rates would be to crowd out investment and thereby slow the rate of productivity growth, making the economy poorer in the future than it otherwise would be. Higher inflation will eventually require the Fed to raise rates to prevent it from accelerating out of control.
This story clearly does not describe the U.S. economy over the last eight years. In fact, the vast majority of economists would agree that the economy’s main problem over this period has been a lack of demand. In addition to massive unemployment, weak demand has also resulted in a reduction in investment. This falloff in investment, coupled with the drop in the size of the employable labor force, has led CBO to drop its estimate of potential GDP for 2016 by almost $2 trillion (in 2016 dollars) from its pre-recession estimate of 2016 GDP.
It is unbelievably hypocritical of the Post and other deficit hawks to claim that they are concerned about the threat that deficits post to our children’s future when they completely ignore the extent to which the policies they have demanded (lower deficits) actually impose a far higher cost. It is quite clear that the agenda of the Post and their fellow deficit hawks is redistributing income upward. Their guiding philosophy is that a dollar that is in the pocket of a poor or middle income person is a dollar that could be in the pockets of a rich person.