Debt Stuff

I’ve never learned that much about Federal budget deficits and the debt. I knew that deficit refers to how short we are in a given year, and debt refers to the total amount of money owed.

So I’ve been doing research and learned a few more basic things. (Which you probably already know. Skip reading, if so. Also, it’s possible I got something wrong. Let me know and I’ll fix it.)

GDP

Debt is usually expressed as a percentage of GDP (Gross Domestic Product). There’s a reason for this: the actual number is meaningful only in relation to how rich we are.

Think of it this way: if you have a debt of $10,000, and you make $20,000 a year, then you have a serious problem.

But if you have a debt of $10,000 and you make $100,000 a year, then you can just write a check and be done with it. (You won’t enjoy it, but it’ll be done.)

Public Debt

There are two types of debt-holders: the public and the government. Most of the debt is in public hands, and when we talk about the debt we usually talk about the public debt (since the rest of the debt is money the government owes itself).

At the end of fiscal year 2011, for example, public debt was $10.1 trillion, and debt held by the government was $4.7 trillion.

The public debt is expected to be around 76% of GDP at the end of this year.

Plenty of countries have a worse ratio: Japan’s, for instance, is well over 100%. And plenty of countries have a much better ratio. (Chile and Estonia appear to be in great shape.)

History of Public Debt to GDP

It has been higher: during World War II it was, unsurprisingly, over 100%.

It declined till the mid-’70s, started climbing quickly in the early ’80s, started declining again in the mid-’90s, started climbing again in the early 2000s, then shot up quickly when we hit the 2008 financial crisis.

It’s projected to decline a little from where it is right now, and later start rising gradually.

There’s Always Debt

Since the founding of our nation there has been at least some debt, except for a period during 1835-1836. Some amount of debt isn’t a terrible thing.

How Debt Happens

You run a deficit, which contributes to the debt, when you spend more than you take in.

How To Lower the Debt

The goal is to spend less than you take in.

There are a few options, which are often used in some combination.

  1. Raise taxes.

  2. Spend less.

  3. Make the economy stronger.

Everybody agrees on #3. When the economy is stronger, that means our GDP is higher, and the public debt is a smaller percentage of GDP. It also means that more people are making more money, which raises revenue.

When the economy goes bad, as it did in 2008, revenues go down — even without tax cuts — because corporations and people make and spend less money. We’re less rich.

In very broad strokes: Democrats and Republicans disagree on #1 and #2. Republicans believe that lowering taxes, particularly for wealthy people and corporations (Republicans call them “job-creators”), will make #3 happen. That is, the intuitively-expected loss of revenue caused by lowering taxes will be more than made-up-for by a growing economy. Republicans strongly emphasize #2: spend less.

Democrats believe that lowering taxes is a poor stimulus, though useful at times, and that the best way to achieve #3 is more direct stimulus. (Food stamps, roads and bridges, technological and scientific research, education, and so on.) Democrats emphasize #1: raise taxes.

History would seemingly allow you to argue either side. You could note that debt-to-GDP rose significantly during the Reagan and (both) Bush years, and dropped during Clinton’s administration (which ended with deficit surpluses). But it also rose dramatically during the Obama administration, and you could argue that a Republican Congress was responsible for the lowered debt during the Clinton years.

(I have my own position on this, but the point of this post is not to lay out an argument.)

Why Is Too Much Debt Bad, and How Much Is Too Much

I need to learn more specifics. On it.

17 Oct 2013

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