Well, you’re both right. The President submits the budget in total and Congress gets to mark it up and insert things. The President (barring the line item veto) can force a showdown but that’s about it.
So wait a sec. Your defense of the “conservative” position on debt now includes the idea that it would be BAD if there wasn’t a government to spend tons and tons of our money and borrow to avoid taxing us right away?
I tend to agree. Trying to defend the Republican party on this is basically tantamount to sticking a knife in the heart of the conservative movement and then twisting it back and forth.
I was asking if anyone knew of this as a theory or maybe have heard it before. Thanks for your input. It answered so many questions.
You got it. I won’t even pretend I know economics, but I’ll just point out what I consider logical fallacies in your theory. Fair enough?
Here is the first logical fallacy – what would have happened if they had been able to keep up? We were able to cut back on defense spending after the Soviet Union collapsed, but what if it had continued? Would that level of military spending have altered the future? Almost certainly.
That our debt-be-damned spending strategy worked is a success in foreign affairs (capitalism triumphing over communism), not a success in economics.
This would be the correlation-causation fallacy. There are many things that went on in those intervening 15 years, including a moderate depression during the Bush Sr. administration, and the passing of NAFTA (which, good or bad, certainly had a huge impact on our economics). To tie the late-90’s economic boon with mid-80’s tax cuts & spending increases seems like a huge stretch.
If it’s not false, you certainly need some hard economic data to back it up.
This would be a “it worked before, therefore it will work again” fallacy. For the sake of argument, let’s say that Reagan tax cuts and spending increases directly led to an economic revival 15 years later. What is your evidence that things would work the same? Are we in the same situation? Do we need to outspend Afghanistan and Iraq in military spending to break them? Doesn’t the consolidation of EU change the economic situation? The rapid growth of China?
I think the situation we’re in today has very little to do with the mid-1980’s.
A shortfall would be the federal budget deficit for one year. By itself, it’s not much to worry about. The national debt, however, is a collection of federal budget deficits for decades/centuries, plus all the interest it’s tacked on.
Now, most of the rhetoric about “record deficits” and “record national debt” is pundit talk - these numbers hit historic highs just about every year because of inflation and interest. So, the best way to look at the numbers is as a percentage of GDP - that is, compare our debt to the size of the economy as a whole.
These numbers are put out by the White House for FY2005 (so you can’t blame the source), which show the national debt climbing during the Reagan years and during the Bush years.
Good thing that wasn’t addressed earlier.
What you’re talking about is almost a Hamiltonian approach to federal finance, duffer. Our beloved founding father, Alexander Hamilton, was a strong proponent of a significant federal debt as it would ensure that the wealthy (who would be the ones buying bonds) supported the central, federal government in hopes of the bonds being repaid.
While it might seem odd to think of the federal government defaulting on its debts in this day and age it was pretty damn likely (and even common) during the time of the revolution. Hamilton’s agenda during his time as Secretary of the Treasury under George Washington brought financial stability to the United States at a time when it was desperately needed.
The debate there is really how MUCH public debt is required to bring about that stability and have we exceeded that point.
Me? I hate the debt with a passion generally reserved for the St Louis Cardinals. I’m as tough a deficit hawk as exists.
Why isn’t this a major political issue right now? Seems to me like the Democrats would be hitting the Republicans, particularly Bush, with it as hard as possible - an “it’s the economy, stupid” approach. Are they hitting as hard as possible and having little effect, or have they chosen not to attack on this basis?
The debt has kept growing steadily. Sometimes new debt is added because the government is borrowing more money. But even when there’s a balanced budget, the debt grows because of interest on the existing debt.
Why doesn’t anyone care? Because it’s not a problem now. Anyone can demonstrate in their personal finances that borrowing money works great for a while. You get to buy things without having to earn the money to pay for them. You experience great prosperity.
Why is this bad? Because you’re not really as prosperous as you’re acting. The difference between the money you’re earning and the money you’re spending isn’t going away. It’s building into a huge mountain of debt.
How do we get rid of the debt? We have to start having negative budgets. Collecting more in taxes then we’re spending. Specifically, the government should be buying back treasury notes. In personal terms, this is the equivalent of paying off your credit card debts. It’s no fun.
What happens if we don’t get rid of the debt? There’s only so much money out there. The huge chunk of investment money that the federal government has borrowed is not available for private investors who might have used it for real economic growth. As the national debt grows this problem will worsen. Investors will have to pay higher interest rates to attract capital. This will be both a short term and long term problem. And eventually the money just won’t be there; at that point we’ll have to either pay off the debt in one huge chunk (hello, 70% income tax) or default on the debt and cause a global economic collapse (hello, dark ages).
Wasn’t it a good idea to spend all that money back in the 80’s? Only if you assume that it was necessary. If Reagan had wanted to spend a trillion dollars building lasers on the moon to defend against the Klingons would that have been a good idea? Yes, if the Klingon threat was real; no, if the Klingons were not a real threat. By the same token, if the Soviet Union collapsed because of domestic difficulties (which the evidence says is the most likely explanation) than the defense spending was wasted.
This isn’t necessarily the case.
Remember, most of the national debt is in the form of term bonds (up to 30 years, as I recall). All that need be done to retire the debt is to stop having deficits each year for up to 30 years. As those bonds mature and no new ones are issued the national debt begins declining rapidly.
And it isn’t a horrible idea still, as long as the ownership of that debt is in the hands of U.S. Citizens. When we pay our own people back interest, and they spend that interest money - well, I’d prefer less of it, but its not horrible. It still makes ordinary citizens invested in the government with their wallets as well as their vote. Its kind of like borrowing from your 401k - maybe not the brightest idea, but you are paying yourself interest.
However, more and more of our debt is being held by foreigners - individuals and governments. That’s more akin to borrowing from Vinnie the Loan Shark. The interest we pay to some Saudi sheik is money that is likely not going to be spent domestically. The foreign ownership of debt has some economist worried as much as the amount of debt itself.
You sounded happy as a clam about it in your OP.
More worrying than foreign ownership is the increasing dependency we have on foreign banks and governments buying our debt. We can’t issue debt unless there is someone to buy it. Foreign banks and governments have shown increasing reluctance to buy T-bills as the value of the dollar slips.
Enjoy,
Steven
I think the main fallacy with the OP is that one cannot assess the risks of a particular behavior based on whether they are currently in a dire situation. Instead, it is prudent for one to extrapolate the behavior into the future. This is the “walking off a cliff” analogy. If the first two steps didn’t kill you, why worry? Maybe the next one kills you, maybe not, right?
In fact, think of any potentially disastrous situation: crossing a busy expressway on foot, jumping out of an airplane with no parachute, or putting your neck into a band saw. Do you worry when you are heading into disaster, or not? If the last time, someone shut off the band saw just in the nick of time, does that mean it is perfectly safe to stick your neck in this time?
No worries.
I’ve heard all sorts of ratios, but I have no idea what’s good or not. The numbers are just too big. The key idea here is to figure out what is “excessive.” This means, what amount of debt will slow down growth. Reagan may have had some of the highest debt incurred, but the GDP growth has easily outpaced it. Many people argue that this is what really caused the boom. I’ll try to find numbers that back this up later (I have a plane to catch).
On a personal level, I like to think I enjoy some risk, but I would be hesitant to finance a 20% debt on a personal level, unless it is a house. There is a unit in econ which studies how countries collapse, which aren’t due to war or natural disaster. Most modern day examples are in latin america, some parallels are seen in asia. However, you have to understand that the US government isn’t a person, with personal finances, and it shouldn’t behave like one.
Anyway, financial institutions rank bonds like they rank stocks and other debt/financial instruments. I forgot what it’s called when it refers to countries, but I do know that the US has the best rating ever. US debt is, far and away, the best debt to own. The US has never defaulted on a loan and always pays its debt. It is the most attractive/most popular debt in the market.
I’m not sure if this theory has the a name, but it is somewhat well known, despite the overwhelming politics played into it by politicians and the media. The US economy is so large that going into bankruptcy is just as bad (probably worse, imo) as the US paying all its debt. Many countries finance their economies on our national debt. I forget exactly how it happens, but it’s something like this:
- US raises taxes and cuts spending to pay down debt
- economy grinds to a screaching halt because of the higher tax rate as more and more funds are sent to service and eliminate the national debt (like 5 year period)
- assuming that millions of people are not unemployed from the tax hike – from business trying to free up resources to continue investing (I wouldn’t be surprised if unemployment rates double, at least in the short term), those still working would be inclined to take their money out of the economy, either to start saving, or more likely to meet their future tax obligation
- those countries which depend on the US buying their produced goods have their economies collapse, dislocating their own currency and production, which in turn causes a chain reaction depression in the world wide economy, think Great Depression scale;
- some countries will try to save their economies through government intervention: at best they succeed in hamstringing their economies to the point of near permanent, super-slow growth and stagnation, at worst they exacerbate the situation, speeding up the downfall, multiplying the effects where citizens revolt and look at facism/communism as healthy alternatives
But wait, there’s more:
- assuming that the world economy can withstand the shock of the US not having any debt, international finance will most likely collapse
- like I said before, US debt is the best debt to own, without it, there is massive distortions in the bond/interest rate market, people/financial institutions who rely on the US interest rate will not have any basis in realty to charge in interest, thereby collapsing those financial institutions and stunting growth; this is because as the US bonds start to disappear, more people hold on to it and artificially drive up the interest rate, which starts the distortion process; as more and more transactions look for financial backing, the distortions multiply
- without US debt or as US debt starts to disappear, additional US government revenue, in the form of seigniorage will disappear: foreign governments give us (well, the central bank) interest free loans of their money in exchange for our bonds; I can’t remember exactly how many billions of dollars this practice generates, but I think the US is the best at it
- at best, eliminating debt allows the US government to spend the money they currently have on something else in the present term, but I argue that the pitfalls far outweigh the benefits of having a little more cash on hand; the best thing to do is give that money back or lower taxes (it’s my money damnit), but that won’t happen because there is a huge federal bueracracy to finance and millions of people who enjoy government benefits
See above, plus the added benefit of the world no longer trusting the US dollar; financial growth as a whole will slow down, without new GDP growth, those economies saddled with debt will now see real income deplete as the US tries to gain back its credit rating
What you’re thinking of is called “sovereign credit rating”, and the US is currently rated in the top category, along with about 14 other developed nations.
On the other hand, it’s been suggested by some analysts that the US’s actual financial condition might merit a downgrade, and the reasons it continues to be top-ranked are political rather than based on genuine economic robustness.
One reason the debt’s always been important, to some degree, is that the interest we pay each year on past debt is money we can’t spend on other things, or use to balance this year’s budget, or return in the form of tax cuts. As Fear Itself pointed out upthread, we’ve already spent $335B in interest this year - 50% more than we’ve spent on our entire Iraq venture. And that’s each year, every year, that money goes down the tubes, without paying for anything useful now. It’s like perpetual theft.
Forget about the money we pay each year. We’re paying over one and a half billion dollars a day in interest on the national debt. And over a quarter of this debt is owned by foreign investors. So several hundred million dollars of your tax money is being sent off to another country every day.
By the way, there was never a budget surplus in the 90’s. If you don’t believe it, take a look at these numbers, and see if there was ever a year where the total deficit got smaller.
You’re confusing the debt with the deficit, mr_moonlight. Granted that there were and are accounting tricks to take certain government expenses off-budget, the late 90’s did include several consecutive years in which the government took in more money than it spent, which is the definition of a surplus. For many years previously, the budget was in deficit, increasing the debt. The debt continued to accrue interest even during the surplus years, increasing its size even while it was being paid.
Well, I think this gets back to a point I made above which is that the rest of government has been borrowing from the social security trust fund. There was only one year in which our surplus was so high that it was approximately the same size as the surplus within social security…Or, in other words, the budget outside of social security was (within a few billion dollars) perfectly balanced. I think the page you really want to look at is this, which distinguishes debt held by the public from intragovernmental debt.
In other words, in the years when we had a surplus in the budget but it was less than the surplus in the social security system, the government still had to borrow internally…i.e., some money from the social security trust fund was used to fund the rest of government, so the intragovernmental debt increased but the publicly held debt did not.
(I might be simplifying slightly, for example, there are also other trust funds, like Medicare…but that one is not running a big surplus. So for simplicity one can restrict our thinking to social security without really going too far wrong.)