Why we shouldn't pay off the national debt

Why we shouldn't pay off the national debt
By Nathan Haselbauer

Deficits and government debt are not something to be feared, contrary to popular belief. Government debt, when prudently incurred, can not only benefit a nation, it can fuel an entire economy and become a powerful source of economic energy.

Instead of rushing to pay off the national debt, America should opt for tax cuts and Social Security privatization. Allowing the federal government the ability to borrow additional money each year to lower taxes and convert Social Security into a payroll-tax-financed, worker-investment retirement program would produce a higher standard of living for Americans than having zero debt.

In the United States, the private sector is the leading force for economic growth. By keeping the taxes as low as possible and shifting the burden from a bloated, pay-as-you-go Social Security system to a lean, investment-based retirement program would invigorate productivity growth in the private sector, the key to sustained economic expansion. Keeping taxes high enough to generate massive surpluses and leaving the Social Security system the way it is is not the best strategy for productivity growth.

In 1980, the United States was experiencing stagflation-rising unemployment and growing inflation at the same time. Some economists suggested raising the tax rates to dampen inflation and printing more money to stimulate demand. Reagan's strategy was to cut tax rates across the board instead. His strategy led to collapsing inflation and massive private sector growth. The Gross Domestic Product rose so rapidly during the Reagan administration that, as a percent of GDP, the deficit was virtually the same the day Reagan left the White House (2.8 percent) as the day he entered it (2.7 percent). Reagan, the quintessential capitalist, used tax cuts and financial leverage to enhance growth rather than raise taxes and keep the status quo.

The current situation favors massive surpluses ($5.6 trillion over the next ten years) but is crippling private sector growth. In 2000, the average American's tax burden grew to its highest level since 1944. This tax burden is slated to stay near this record level indefinitely. We are stifling growth with this excessive tax burden for the sole purpose of paying off the national debt. If we begin prudent, controlled borrowing now and lower taxes and restructure Social Security, we will produce a future surplus of higher revenues from a larger tax base at lower rates.

Many people fear the debt just because of the sheer size of it. $3.4 trillion seems like a lot of money to owe. The United States' ability to service this debt is often overlooked however. Over the past fifty years, the GDP has grown at an average annual rate of 3.2 percent after inflation. There is no reason to assume that the GDP will not continue to grow at this rate or faster in the next fifty years. People often overlook the fact that the GDP grows faster than the debt burden. In 1990 the debt burden was 42.4 percent of GDP. In 2000 the debt burden fell to 36.2 percent, without ever paying any of it back. If our economy continues to grow at its classic rate (3.2 percent a year), the country's debt burden will fall to less than 15 percent of GDP by 2015 without a single dollar of debt being retired. If we lowered taxes and promoted Social Security privatization, the economy would most likely grow faster than its classic rate and make the national debt even smaller on a percentage of GDP basis.

Something that is missed by both politicians and the public is the fact that paying off the debt would not eliminate the interest burden. We see another ugly number when we view the interest on our debt. The interest due over the next fifteen years will be approximately $3.45 trillion dollars. The irony here is that we are taxing away nearly $3.64 trillion dollars in order to pay the debt off and make the interest payments over the same fifteen years.

Paying off the debt does not increase saving in the private sector and it does not lead to lower interest rates. If the national debt is eliminated, foreign investors relying on the security of U.S. treasuries will have to go elsewhere, particularly Japanese and European government bonds. If that happens, the value of the dollar will decline and that, in turn, would lead to higher inflation, higher interest rates, and an overall slowdown of the economy.

Successful corporations have used financial leverage for years. Even corporations that produce massive profits still borrow large amounts of money. They know that borrowing money to invest in the future makes good business sense. Have you ever wondered why a corporation like Microsoft borrows billions of dollars? It doesn't seem right on the surface. This company has been wildly profitable since day one and enjoys some of the highest profit margins in corporate America. They have profits in the billions of dollars every year, and yet they still borrow money- lots of it. Corporate America knows that it's "okay" to have debt. It is an essential tool that promotes further growth. It's time Americans realized that paying off our national debt wouldn't be the "silver bullet" everyone thinks it is.


Source: http://www.highiqsociety.org/common/iqmag/200204/index.htm

Shouldn't this be in the Off Topic forum? I thought Land and Economy was about just that, but as it pertains to Second Life.

Setting aside the obvious question about why this isn't in the off-topic forum, no one but the most simplistic and literal-minded of souls thinks we need to pay off the entire national debt. The only question is about what a reasonable amount of debt is and what a reasonable rate for it to grow is.

The growth rate of the debt (i.e. the deficit) has grown by leaps and bounds the last few years. Letting it increase moderately would not have had any significant long-term consequences. Letting it continue to grow at that rate does. For example, one of the reasons for the boom in home-buying and home prices for the last 10-15 years is that reducing the deficit slashed long-term interest rates drastically. If the market's expectations for long-term government debt return to the levels of 1990, I expect we'll see high long-term rates again.

Does anyone miss the 15% mortgage rate? I didn't think so.

Again, that's not to say that we need to eliminate the national debt. But after several years of unchecked growth, it would be nice to see the debt get wrangled down to where it was increasing at a rate less than inflation.

Tax cuts are *not* the answer. The fiscally responsible answer is cuts to government spending.

Not particularly people friendly, but jeez!

How financially stupid can you get.. I'd expect better of you Alby.

Blaze:

Think about this for a moment. It might make your head explode, but try very hard.


If you cut taxes, you put money back into the economy. When money is put back into the economy, it gets spent on goods and services. The very nature of which spawns growth in the economy because more people are needed to service that growth. The beauty is that it grows the economy from the ground up.

Looking at the flipside.. If you cut Gov't Spending, it has zero effect on the economy. Since the government spends its money on targeted projects, cutting G-spending doesn't propagate to the rest of the economy. And at the same time, Uncle Sam is still taking in the same amount of money from the public and its collecting dust in a bank account. Which also doesn't help the economy.

If the Government cuts $100/billion dollars in programs for Tax Cuts, its really putting $100/billion into the economy to be spent, which yields growth. Tax Cuts are GOOD. But the Hippies believe only the Rich benefit from Tax Cuts.. Yet in reality its the poor. Not directly with dollars appearing in your bank account, but indirectly with increased growth in the economy.

I just know that if I was reading highiqsocieity.org, I wouldn't admit to it in a public forum I have no opinion on the site, the domain name is indictment enough.

Alby.. you really are a work of art. I tell you what, when they can fund the programs they 'sold' us on in thier campaigns (No Child Left Behind, for example) - then I'd be up for tax cuts... evenly across the board.

Do rich hippies get tax cuts?

Of course, if the economy grows too fast, we either get inflation (taking money back out of people's pockets) or high interest rates (again, taking money back out of people's pockets). That's why you can stimulate your way out of a recession, up to a point, but you shouldn't go around artificially stimulating an already healthy economy.

Lowering taxes in and of itself isn't artificial stimulation -- if the government doesn't need the revenue, it should be given back to the people who earned it. But lowering taxes well below the level of government expenditures is artificial stimulation, and it isn't healthy for the economy in the long term. Either cut expenditures to fall in line with taxes, or raise revenues to meet expenditures (or some of both). Leaving the balance sheet significantly out of whack for anything other than brief periods is simply bad economics, and we end up paying for it in high interest rates.

Juro:

The end all, be all when it comes to funding Education, is that Local Governments fund the bulk of the public education system. Rich Counties/Cities have more money, thus the quality of education is better. Poor Counties/Cities have less money, thus the quality of education is poorer. Wouldn't it wiser to help improve the economy, give jobs to parents, who pay taxes to the local governments, who inturn have more money to fund a better school system? Why expect Uncle Sam to foot the bill for tens of thousands of school systems across the nation? That socialism at its finest.

Build the Educational System and its Quality by growing the economy, employing parents of children with jobs, who buy homes, increase the property tax coffers of local governments, which in turn employ more teachers and/or better teachers.


See Juro, we both have the same goal, but your looking at the problem through a world view of "Tax Everybody to Death to Pay for the things we want" attitude. Don't be such a Socialist.

Alby.. for me, education has always been my #1 political issue. Our president promised schools additional funding to help cover some of what was lost at the local level - and I think he should stand by his promise. For that, I'm a socialist?

A. First off, as there is already a debt, none of it goes into a bank acct. When the debt reaches zero, then you have a point to make about that.
B. Every dollar of deficit spending eventually has to get paid off eventually (or we will default, either intentionally, or because no one will pick up the tab anymore). And interest is collecting on it.
C. If you create credit out of thin air, the money supply increases, which devalues the dollar and causes the various evils and corruptions of inflation. See Weimar Germany for a good example. Or Argentina for that matter.
D. Government spending distorts markets by favoring politically connected firms, thus corrupting industry. Any dollar that could be spent by government could be spent better by someone who has to show a profit.

It's not like money can just be made out of nowhere. Keynes was wrong. Every dollar that gets spent either has to be stolen from the prior private savings of individuals, or stolen fractionally from all of us by diluting the exchange value of money.

IMO the real answer is to repudiate the national debt and get it (meaning the inability of the government to sell bonds) over with. But that's far too radical for anyone in the mainstream to take seriously.
But I never agreed to this debt, I certainly don't support the US Government contracting more debt, so as far as I'm concerned, I shouldn't have to pay it back.

The other option is that eventually the game ends when everyone sells off the dollar, and/or we go the Banana Republic hyperinflation route.

In an economy managed by an effective central bank, inflation is fought off with higher interest rates, not simply left to run rampant. So instead of having runaway inflation, you have high interest rates. In effect, government borrowing crowds out lending to private individuals and corporations.

The net effect on the private sector of the economy is still negative, just in a different way.

Indeed, but the Fed also doesn't want to induce an asset collapse either, so there are limits... it's a game of brinksmanship.

But unlimited debt expansion makes that game harder and harder to play, until something fails.

Already, the Asian countries want to diversify out of the dollar.

Good point though, I forgot about the Fed in all this heh.

Yeah, if the debt gets past a certain point, it could certainly get beyond the Fed's control, no question. And just ignoring the national debt outright, as Alby seems to be advocating, could accomplish that.

Why don't you spend more time promoting the growth of the local economy to fund local schools instead of hoping Uncle Sam gives you an acceptable share of a cash pot?

1 Business that employs 100 people can indirectly employ hundreds/thousands of other people not connected with that 1 business. How so? In the form of Restaurants when you spend that salary on a night out. Gas stations to feed that new SUV you bought. Construction workers to build that new house, plumpers to fix that pipe which froze, and the list goes on and on. Jobs create jobs. And the more people in your town/county/etc that are employed and paying local taxes (ie: property, sales, etc) in effect increase the money supply for local schools much more than anything Uncle Sam will give you.

So stop crying over what you're not getting from the Feds, and start creating a solution to the problem. Tell your local officals to go solict some German Company to build a factory in your county. I betchya you'd benefit more from that than anything the Feds will give you.

Keynes is a fool.. Hayek is GOD!!!

Diversifing out of the dollar is not the same as selling off US Debt. I think Japan holds the most at around $800/billion.

Expanding Debt hurts the value of the Dollar, but if also has the effect of reducing the Trade Deficit by making foreign goods cost more. Resulting in a reduced supply and boosting US Exports which are cheaper to foreign countries. And as a result, more Americans are employed which creates more tax revenue for the Government without the need of raising taxes.

First, dear Alby, you have no idea what my spending patterns or habits are like. For one, I refuse to cook - so I spend a healthy amount of money on eating out. I also spend my money (where possible) at locally owned and operated businesses - and a nice, healthy amount I might add. So, please save the promotion of local business rhetoric for someone else.

I'm also not 'crying' (god, you're such an inciter) about anything - I'm merely pointing out that he promised us something and has yet to deliver on it. What kills me is that if it were Clinton, you'd be riding his case like the world ended tomorrow. Since its your precious - you seem to look right over it.

This thread obviously belongs in the Off-Topic forum.

Teleporting it now...

Oh geeziewheezie more of the same old less government and less fiscal responsibility and accountability, two stepping double faced talk.
Tom D.'s day will come.

Good advice Alby, what do you do to promote your local schools?

Call your congressman. The President's plan was passed. Funding it is the job of Congress. If you didn't get your check, call your Congressman.

Easy. I tell my local officals to approve any zoning, tax issues, roads, etc that help to bring business into the county. Because more business means more jobs. And more jobs mean more people buying homes and paying property taxes. And more property tax payers means more money for schools.

If your local government isn't Pro-Business, I'm pretty sure the school system in your area sucks (Compared to a school system in a Pro-Business County).

If you don't believe in equality of education regardless of financial circumstances, why do you support having public schools at all? If redistributing funds to pay for education is wasteful and socialist, shouldn't everyone just foot the bill for their own kid's education themselves?