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A Progressive Primer on the Issue of America’s Debt Problem – Ten Things You Really Need to Know

David Coates: Worrell Professor of Anglo-American Studies, Wake Forest University, Department of Politics – Posted: 09/22/2012 9:01 am

Central to the Republican critique of the Obama Administration in this election cycle has been the Administration’s supposed failure to address and resolve the problem of America’s growing debt. There is much wild and loose talk in beltway circles these days about federal over-spending, about federal over-borrowing, about the nation steadily going broke, and about the national security threat creatd by the size and character of the federal deficit. There is much Washington talk too about the resulting need for tough decisions, shared sacrifices, the pruning of government programs and the ending of entitlements. Indeed the Republican Party has got the deficit-reduction bug so badly right now that they are currently committed to the addition of a balanced budget amendment to the constitution, an amendment explicitly designed to constrain federal spending in exactly the same way as similar amendments to state constitutions now constrain most state governments. And Mitt Romney has the bug so badly that he is committed to policies designed to cap federal spending at 20 percent of GDP, even though demographic pressures alone will be sufficient to challenge that cap — so that the cap will be maintained only by a fundamental erosion of basic welfare services to all but the wealthiest Americans.

This is Mitt Romney, writing in his Believe in America: Mitt Romney’s Plan for Jobs and Economic Growth.

Over the first three years of President Obama’s tenure in the White House, federal spending grew from $2.98 trillion to $3.82 trillion, an enormous 28 percent increase. Future spending is also expected to continue expanding unchecked. This sharp rise has been entirely a matter of choice….To return the United States to the path of fiscal discipline, America must cut its government spending, cap that spending at a sustainable level, and pass a Balanced Budget Amendment to the Constitution. Cut, Cap and Balance are three words that are spoken far too rarely in Washington…In a Romney administration, they will be heard loudly and acted upon in a consistent manner.

Indeed there is a spectrum of deficit proposals now on the table in Washington. It is a spectrum that begins with the draconian budget reductions of the libertarians (Ron Paul, you will remember, promised to cut a massive $7.2 trillion off the federal budget over 10 years). It passes through the Ryan budget’s still tough but more modest $5 trillion reduction, and the proposals of bi-partisan commissions such as Bowles-Simpson ( their spending cap was 22 percent of GDP, a kind of soft Romney); to run right through to the president’s own proposals. For even the White House is not challenging the fundamental claim here: that the United States has a federal debt problem which is so severe that its resolution must take precedence over other domestic policy goals. The White House is simply claiming that Democrats can cut federal spending more slowly, more carefully, and in a more civilized and humane fashion. Romney may think the federal deficit is a choice. The president thinks it is a problem; but he too, like Romney, thinks he has a solution: “a total savings of more than $4 trillion over the next decade,” bringing “the country to a place, by the middle of this decade, where current spending is no longer adding to our debt, debt is falling as a share of the economy and deficits are at a sustainable – if not preferable – level.”

So who is right? To find the answer, it is worth bearing in mind at least the following 10 things.

When discussing debts and deficits, the first things we need are conceptual rigor and verbal precision.
Not all debts and deficits are the same, and we do ourselves no service by pretending that they are. Collapsing them together into one term — debt — obscures the relationship between them, ducks the possibility that policy addressed to the resolution of one kind of deficit may make other deficits worse, and denies the chance that some forms of deficit may even be desirable. There are/can be immediate budget deficits, trade deficits, long- term deficits on the national accounts, and deficits on people’s personal accounts. The government can be in debt. The nation can be in debt. You and I can be in debt. Particular categories of you and I can be in debt: students can be in debt, old people can be in debt, the poor invariably are in debt. And not all deficits are money deficits. There are/can be employment deficits, investment deficits, and growth deficits.
You cut budget deficits by pruning programs and/or raising taxes. You cut the proportion of the GDP absorbed by the National Debt by borrowing less or by growing GDP more. You cut personal debt by strengthening wages and generating employment. Cutting budget deficits by pruning programs and raising taxes can make immediate job security worse and short-term GDP growth more difficult. Bear this in mind also. Not all government spending adds to federal debt. Some spending is merely a transfer payment between citizens. So let us not drop into thinking that the entirety of federal expenditures are legitimate targets for those who would cut programs as a way of reducing deficits. Social Security, long a target of the right, is a transfer program, passing money from taxpayers to the elderly. It is not a spending program. A dollar “spent” by Social Security does not add to GDP. It simply shifts the capacity to spend that dollar from one American to another. Regardless of its solvency as a system (and it is solvent) Social Security has no place in any discussion of deficit reduction.

The second set of things we need are a clear understanding of the interconnections between deficits, and a clear sense of which deficits are causally primary and which are not.
We need to be careful how we prioritize deficit reductions, to make sure that as we focus in on one deficit, we don’t inadvertently accentuate the difficulties associated with other deficits. We need to be careful too about how we measure our success in reducing the deficits on which we focus: measuring the success of public policy not just against book-keeping numbers but against the real things that matter — not least against the job security and material well-being of ordinary American families. We need, that is, to make sure that we are not waging class warfare under the guise of simple accountancy. Most of all, we need to realize that if the debt problem we currently face is the product of some deeper crisis — as in our present conditions it most definitely is, a federal deficit problem caused by a prior global financial crisis — then it is highly unlikely that a solution addressed solely and simply to the second-order issue (the issue of the federal deficit) will solve even the issue on which we choose to focus. The accurate framing of our main problem therefore becomes a vital early task. As the British political scientist Colin Hay wrote in criticism of the Republican Party’s equivalents in the UK (the program-slashing coalition government led by the Conservatives), “were the crisis constituted differently, as a (first-order) crisis of growth not a (second-order) crisis of debt, then austerity and deficit reduction would be no solution at all.” Or as the American liberal economist James Galbraith told the Bowles-Simpson Commission, “The only way to grow out of our deficit is to cure the financial crisis.”

We are currently suffering from many kinds of debt, of which the current federal deficit is arguably the least important.
The budget deficit and the scale of overall public debt in contemporary America is disturbingly high, but so too is the level of our international debt, and the scale of personal debt here at home. Total federal debt at the end of fiscal 2010 was $14.1 trillion, of which $9.4 trillion was held by U.S. and foreign investors, with the rest made up of borrowing from within the government itself, mainly from the Social Security Trust Fund. At about 62 percent of GDP, that borrowing constituted a higher debt-to-GDP ratio than in any year since 1955. Big numbers, of course, but there are other big numbers too. Total student loan debt in the United States now exceeds $1 trillion. Total credit card debt is just slightly less ($962 billion, or $14,750/household ). The U.S. trade deficit is currently running at $42 billion a month. The trade deficit with China makes up at least two-thirds of that. The broader measure of America’s debt position with the rest of the world — the U.S. Net International Investment Position — was $4 trillion in the red in 2011, up from negative $2.5 trillion from the year before. At 69.4 percent in 2011 and projected to rise to anywhere between 70 percent and 80% by 2020, the public debt-to-GDP ratio in the United States is currently comparable to Germany’s (81 percent in 2011) and way lower than Japan’s (225 percent). It is also comparable to the debt-to-GDP ratio of the U.S. household sector in 2011 (88.2 percent).
Yet at the same time, the proportion of GDP being taken in taxes by the federal government is at a 60 year low; the central government tax-take in the United States is lower than in all but three other OECD countries; the drift of taxation under the Obama Administration has been downwards; and the effective rate of US corporation tax is currently lower than it has been since the Clinton presidency. Meanwhile, unemployment caused by outsourcing is at a record high (2.7 million jobs lost between 2001 and 2011 ), while the long-term trajectory of discretionary spending by the federal government is both low and modest. (Health and pension spending is going to rise, but the rest of the non-military federal budget is actually falling as a percentage of GDP: down from 7.7 percent in the late 1970s to five percent now, and projected to hit a near 40-year low by 2017. ) The real deficit we have is an output gap. We are at least 12 million jobs short to get back on track to the 2007 peak. With that deficit before us, bipartisan commissions that focus exclusively on issues of federal fiscal responsibility serve only to distract. James Galbraith suggested to the Bowles-Simpson Commission that the best way they might serve the Republic was not to report at all. He had a point.

The budget deficit with which we are currently struggling is one created by the very policies now being canvassed by the Republican Party.
It is worth remembering too that the United States enjoyed a budget surplus in the last three years of the Clinton Administration. The Clinton legacy to the Bush Administration was the very balanced budget by which contemporary Republicans set such store. It was policy initiated by the Bush Administration, and not by its Democratic predecessor, that turned that surplus into a deficit: primarily by introducing tax cuts in 2001 and 2003 that benefited predominantly the very richest Americans, and by running two wars financed by borrowing. If running a federal deficit is a choice, as Governor Romney says that it is, we need to remember that the choice was initially made by George W. Bush, not by Bill Clinton, and that President Obama entered the White House with the CBO forecasting a budget deficit for 2009 of over $1 trillion. But even then, government spending as a percentage of GDP remained on a low and sustainable trajectory right through to 2007 (the budget deficit was still just 1.2 percent of GDP in 2007 ). It was the collapse of the U.S. financial system — the collapse produced by inadequate/absent regulatory supervision in the Greenspan years — that called forward big federal spending programs designed to put a floor under the recession, and sent the budget deficit up into new and unprecedented territory. That spending, however, was not unique to the United States. The governments of all major economies initially responded to the crisis in a similar way; and in truth the U.S. stimulus package was actually smaller than many introduced elsewhere.
So when contemplating a further round of tax cuts for all Americans — including for the richest amongst us — it is worth remembering that the federal deficit that is now so distressing to Congressional Republicans was a deficit built up on their presidential watch, and was built then by the very policies that they now are so keen to reintroduce. And it is striking in this regard that, in the face of a looming recession again in 2012, the Chinese, South Korean and now the Swedish governments are once more spending public money to stimulate their economies. Far from cutting spending by central governments, moments like these remain ones in which extra federal spending has an important role to play in aiding an economic recovery that would otherwise either stall entirely or grind on at an unacceptably slow pace.

The debt crisis of which Republicans so regularly speak is one entirely manufactured by themselves.
Moreover, we should also remember that the sensitivity of financial markets and credit rating agencies to the size of the immediate federal deficit, and to the accumulating scale of the U.S. national debt, is almost exclusively a Tea Party creation. The mid-term election victory of ultra-conservative House Republicans released into American politics two phenomena that shook global confidence in the hitherto established role of the U.S. economy as the world’s consumer-of-last-resort. The first was an entrenched refusal to co-operate with any Democratic Party proposals that used public funds for job creation purposes, even when those proposals contained (as they invariably did) a larger degree of tax reduction and program pruning than Democrats in Congress and the White House would normally have countenanced. The second was a parallel propensity to play political brinkmanship, using a willingness to close down the government as a lever to gain even deeper tax and program cuts. We saw that in the tax reforms negotiated in December 2010. We saw it in the Republican threat to close the federal government entirely in April 2011. We saw it in the debt ceiling fiasco of last summer, and we saw it in the failure of the super-committee set up as part of the settlement of the debt-ceiling fight. We may yet see it again this December, as we approach the “fiscal cliff” left in place by the failure of the super-committee to come to a bipartisan agreement.
Historically, raising the federal debt ceiling had been a bipartisan process of no significance. It had been raised many times without rancor since its initial creation in 1917, and until 2011 received the votes not just of liberal Democrats but also of fiscally conservative Republicans. There were 91 debt-ceiling bills passed between 1940 and 2010, 73 of which increased the limit and 11 extended the limit’s duration: collectively taking the limit from $3,122.7 trillion to $14,294 trillion without major political controversy. It was only Tea Party-driven Congressional Republicans who, bound by their pledge to Grover Norquist never to increase taxes, then made raising that ceiling politically significant. It was they, and they alone, who chose to make the debt ceiling an issue; and because they did, the rest of us can always choose to make it a non-issue instead. And we should, just as quickly as we can.

The proposals currently on offer from the Republicans are more likely to increase the federal deficit than to bring it under control.
The modern Republican Party is currently proposing to do three things at once: maintain the entirety of the Bush tax cuts, increase the size of the military budget and reduce the federal deficit without cutting either Social Security or Medicare/Medicaid. But those three proposals fall victim to the test that Bill Clinton suggested had guided his budgetary planning in the 1990s: the test of arithmetic itself. The Romney budget numbers just simply don’t add up. On the contrary, to make them work at all, “you have to assume that by the end of his presidency, Romney will have cut every federal program that is not Medicare, Social Security or defense spending by 57 percent.” The implementation of the latest Ryan budget (the original one was even more draconian) would involve $4.5 trillion in new tax cuts over ten years and $3.3 trillion in cuts to non-defense federal spending on things like education, infrastructure and basic R&D, and yet still leave the federal budget in substantial deficit as late as 2030. Of course, both Romney and Ryan claim to offset their tax cuts by closing tax loopholes: but loopholes closed are actually taxes raised. The earlier Bowles-Simpson proposals had a transparency and an even-handedness about them that the Ryan-Romney proposals have yet to match; and in the Bowles-Simpson proposals, two major tax loopholes that were to be capped (and in relation to health care, were ultimately to be phased out) were those giving tax relief to the middle class on mortgage payments (particularly on equity lines of credit) and on employer-provided health care insurance.
Ryan-Romney have either to go that way — adding to the tax burden of the very middle class they claim they are liberating from the cost of federal government largesse – or put all the emphasize of their loophole-closing on corporate America, adding to a corporate tax burden they already claim is too high. As Fareed Zakaria put it, “You can use euphemisms such as ‘ending tax expenditures’ and ‘closing loopholes,’ but when you do that, someone’s taxes will go up. And when you close big loopholes such as the deduction of mortgage interest – which is the only way to get real tax revenue — tens of millions of peoples’ taxes will go up.” No, the numbers don’t add up; and the politics of making them add up are beyond the capacity of the Republican ticket to manage.

The Republican emphasis on debt reduction is so often a cover for a sustained assault on welfare programs.
Many of the key conservatives making the repeated calls for deficit reduction are also on the public record as advocates of fundamental reforms to mainstream welfare programs. Indeed it is remarkable with what speed in the conservative presentation of the debt crisis case (and even in bipartisan presentations of the Bowles-Simpson variety) cutting Social Security, or limiting Medicaid, or voucherizing Medicare, emerges as the way to bring federal deficits under control. Nowhere do we see any similar speed or focus on taxing speculative financial transactions, or on taxing capital gains at the same level as income is taxed; and nor will we. For beneath the Republican assault on public spending is a covert strategy to undermine/remove entirely the last institutional legacies of the New Deal. The strategy has to be covert because those legacies are generally popular — and they are popular because they work. Social Security does provide security. Medicare does give seniors peace of mind. Medicaid does get health care to at least the children of the poor. All three, when taken together, do point to the superiority of public over private provision in key aspects of American life. These are not pointers that Republicans care to hear; and so though normally I would argue against criticizing the messenger when properly we should be criticizing the message, here is an exception. So many of the messengers in this conservative attack on welfare are writing the messages themselves, that they become legitimate targets for criticism: alongside the message they preach. Alan Simpson, for one, is on record as recently describing Social Security as “a milk cow with 310 million tits.” He is clearly no fan of publicly-funded pension provision: so when he (and others) speaks loudly of deficit reduction, we need to be on our guard. Deficit reduction is not the only target here. It may not even be the major one.

The immediate crisis we currently face is not one of federal debt. It is one of inadequate private sector investment and job-creation.
If this was a genuine crisis of federal debt – if the United States’ standing in the financial world was equivalent to that of, say, Greece – the financing of the budget deficit would be an on-going problem. But it is not. We do not face a sovereign debt crisis in the United States. Nor is one imminent. On the contrary, interest rates in America are currently at historic lows, and yet still the U.S. government has no problem in selling Treasury bonds. In fact, with “record demand this year for government bonds,” it is actually “cheaper for the U.S. to finance its debt now than it was during the surpluses of the 90s. While Congress [is] mired in a battle over the deficit, the market [is] begging the government to borrow more.” With interest rates lower than inflation, people are effectively “paying the U.S. government to borrow their money;” which is surely exactly the time for us to “accept more of these gracious offers and use the funds to finance pressing needs for job programs, infrastructure projects, even mortgage foreclosure mitigation.” After all, Debt-to-GDP ratios have been higher in the United States in the past – and have been higher without causing difficulties – because those ratios have been brought down by subsequent GDP growth. In the wake of a recession that will cost us at least $7.6 trillion in lost GDP by 2018, and in the lee of a limited stimulus that did hold rising unemployment briefly at bay, it is rapid GDP growth that should be our singular focus now – rapid GDP growth that no immediate cutting of public programs should be allowed to block.
There is no squeezing out of private sector investment by over-costly federal programs going on right now. Corporate America is currently replete with profits and with cash. What it is not replete with are customers and confidence. America’s debt will only come down when the economy picks up; and the economy will not pick up unless and until consumer demand grows (and continues to grow) on a trajectory that the private sector can both see and believe in. Building that demand, and that belief, does not require the immediate culling of federal programs. Programs culled mean jobs lost and wages gone. Building that belief requires putting demand back into the whole economy by targeted public investment on projects with long-term economic benefits (buildings roads is good!) Building that belief requires putting money directly into the hands of those who will spend it – into the hands of the American poor, into the hands of the American middle class – not into the hands of the American rich who already have more money than they know how to spend. There is no “austerity route to growth,” as the recent UK experience of a double-dip recession demonstrates so well. No matter how often the Republican Party tells us that public austerity and private growth go together, they do not. Growing the immediate federal deficit to stimulate economic growth is the only viable way forward: growth to generate the tax revenues that will then bring the deficit down.

National Security is not threatened by the size of the federal deficit. Nor does it require cuts in discretionary federal spending to guarantee it.
A serious assault on the scale of the federal budget and on the size of the military budget within it — of the kind that “going over the fiscal cliff” in January might actually trigger — would only directly threaten national security if the existing size and character of U.S. defense spending was deficient in comparative terms. But it isn’t. On the contrary, the United States is currently responsible for over 40 % of total global military expenditure, with a Pentagon budget bigger than that of the next five countries taken together. As report after report has now documented, what the Pentagon actually does is waste enormous amounts of public money, particularly on programs of nation-building abroad that ideally would be redirected home. So if cutting the Pentagon budget can trigger the more efficient use of a limited set of military resources, then that part of “going over the fiscal cliff” cannot happen soon enough. And if the rejoinder comes that, because of the trade deficit with countries like China, part of our foreign policy independence is in hock to Beijing, then the solution surely lies in the pursuit of policies that reduce trade dependency by reconstituting a strong and competitive U.S. manufacturing base, not in the pursuit of policies designed to reduce a set of federal discretionary programs which makes no direct contribution to our existing trade imbalance. Indeed, the case could equally be made that, for reasons of national security as well as of social justice, the federal government should spend more (rather than less) in a discretionary manner, targeting infrastructure programs and support for basic R&D, both of which over the long term will enhance U.S. competitive capacity in ways that further Pentagon spending will never do.
We already know that cutbacks in public spending made by state governments in the wake of the wind down of ARRA assistance (the Obama 2009 stimulus package) added to unemployment rather than reducing it. These were cutbacks that cost public sector workers their jobs without generating any compensating rise in private sector employment. We also know that the number of federal and state employees is currently falling, not rising; and that “if government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers etc., than are currently employed in such jobs.” So much for the myth that public spending is “out of control” under this administration — it is not. Nor is excessive public spending currently our major current problem. Looming austerity is the real issue facing us right now: the genuine danger that, by cutting government spending too rapidly and too deeply, we will tip ourselves back into the very recession that Republicans imply excessive government spending caused.

The answer to the problem of long-term debt lies in economic reconstruction, not in welfare reduction.
Conservatives are fond of comparing the federal debt to the debt known by so many American families, and of telling those families that, just like them, the federal government must live within its means. But the comparison is a false and a misleading one. Families don’t print their own money. Families don’t tax their neighbors. Families don’t design the rules by which they and others work. Families don’t, but governments do. Money spent by governments has a multiplier effect through the economy as a whole. Properly targeted on those with a high propensity to consume, a dollar released into the economy by a government program generates incomes for everyone that the dollar reaches as it passes from hand-to-hand; so that it is possible to calculate — just as soon as we know peoples’ marginal propensity to save – how much extra income that dollar will create. There are even tables available for this purpose – tables that tell us that giving tax breaks to the rich generates a far smaller injection of extra demand into the economy than giving a welfare check to a young unemployed mother. If Republicans really want to see federal debt come down, they need to join more progressive political forces in directing public resources to those parts of the US economy and society best positioned to trigger the economic growth which alone — over the long haul — will bring federal spending and revenues back into balance. Right now, that means a more generous welfare net, not a thinner one.
But of course, the rejoinder always comes back that unless we cut welfare programs savagely now, we will leave a huge burden on generations to come. “Taking hard decisions” is the normal euphemism, obscuring the fact that those taking the decisions will rarely directly experience themselves the consequential hardness. To which the response has to be two-fold. First this: that generations to come, like this generation now, will contain both debtors and lenders. They will not be generations full only of debtors. “It’s always important to remember that one person’s debt is another person’s asset.” So any debt left by us on the public accounts will be paid to children also yet unborn; and so — like this generation — those children in their maturity will be free to decide who bears the cost of whatever debt comes down to them. And second – if we spend wisely now, we will leave them economic growth, a strong infrastructure and high quality human capital. We will not leave them debt; and we will particularly not leave them debt if, instead of pruning programs to avoid some hypothetical burden to unspecified people in years to come, we focus our attention and our spending on real people experiencing real burdens now. One in seven Americans currently lives in poverty. More will live in poverty if basic welfare programs are cut. The children of the poor remain locked there unless and until we (the non-poor) direct public resources disproportionately in their direction, and unless and until the non-poor design economic programs to bring back well-paying jobs to non-college trained young Americans. Let’s see the Republicans put their energies into that, if they really want to leave an America to future generations in which public debt is low, controlled and only mildly burdensome.

The current Democratic Party platform is not perfect for this more progressive purpose; nor is the President’s America’s Jobs Act. Both give way too much credence to Republican enthusiasm for tax cuts and program culling. But both point in the right direction — the one we really need to take. At least the president appears to understand, and is prepared publicly to say, that the Republican vision “is less about reducing the deficit than it is about changing the basic social compact in America.” That basic social compact is one that he is prepared to defend and to champion. In relation to the sick, the disabled and the poor, Barack Obama has committed the Democrats to “not abandon[ing] the fundamental commitment this country has kept for generations.” We need not simply to take him at his word. We also need to hold him to that word. Rejecting Republican pressure for Balanced Budget Amendments and federal spending caps is a crucial first stage in a vital progressive campaign to strengthen America by uniting it in social justice again.

First posted, with fuller notes than are possible here, at

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About tenthltr2u (1036 Articles)
A child of the 60's I often feel out of place in the world as it exist today. Too much excess, too much materialism, too few people who genuinely care or give a damn. It is only with the heart that one can see rightly; what is essential is invisible to the eye. Antoine de Saint-Exupery

2 Comments on A Progressive Primer on the Issue of America’s Debt Problem – Ten Things You Really Need to Know

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