THE REAL DANGER OF DEBT
February 22, 2010
In 2000, the United States had a balanced federal budget. Currently, America has a deficit problem that threatens the country's future, says Richard A. Posner, a judge on the U.S. Court of Appeals for the 7th Circuit in Chicago, senior lecturer at the University of Chicago Law School.
Under former President George W. Bush, spending was increased, taxes were cut, and the result was huge deficits financed by borrowing. Then came the "Great Recession," as it is being called. The public debt (the important component of the national debt -- the part that is more than an accounting entity -- that is really owed), which the Bush administration's deficits had caused to double, soared further, says Posner:
- It soared because of falling tax revenues, rising unemployment benefits, and rising government expenditures to fight the depression (such as Obama's $787 billion stimulus plan).
- The public debt reached $7.5 trillion by the end of fiscal year 2009 (Sept. 30, 2009) and is expected to increase another $1.6 trillion this fiscal year and another $1.3 trillion next year; that means it may exceed $10 trillion by Sept. 30, 2011.
- Almost half the debt is owned by foreigners, and the interest payments to them are a drain on American wealth; interest rates on the debt will rise as the world economy recovers, increasing competition for capital.
The United States has a deeply wounded economy. Transfer payments by the government to individuals and families (Social Security, unemployment benefits, tax credits, etc.) exceed the taxes being collected from the household sector. At the same time, private investment net of depreciation is negative, says Posner:
- This means that private savings are being borrowed by the government, combined with the government's foreign borrowing, and then transferred to households to enable them to maintain their accustomed level of consumption.
- People are saving more, but government borrowing overwhelms their saving, with the result that aggregate saving -- public plus private -- is negative.
In summary, the United States has negative savings, negative private investment, an incredible ratio of household debt to disposable income (1.25 to 1, though down from 1.39 to 1 in 2007) and massive government borrowing to finance private consumption. This is a lamentable combination, says Posner.
Source: Richard Posner, "The Real Danger of Debt," Foreign Policy, February 16, 2010.
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