Why is the debt so important now?

Great Debates
41

However, since interest paid to service the debit is counted as “spending”, I don’t think your explanation is correct here. I.e., in the years when we ran a surplus, we really did pay down the publicly-held debt.

The only slight confusion that remains in my mind is that between 1999 and 2000, I see that the total debt increased by ~$18 billion whereas I seem to recall there was actually a small surplus of a few billion even outside of social security (if one looks at the federal budget historical tables). So, there seems to be some sort of ~$20 billion discrepancy. However, this could be due to some other accounting issue that I don’t understand involving the trust funds or how interest payments are allotted or something like that…At any rate, on the scale of the numbers that we are looking at, $20 billion is pretty much chump-change.

42

And that gets into the comment about accounting tricks and off-budget expenses. he Social Security trust fund’s use as a means to move money from one pocket to another is just the most egregious. Classifying some normal operating expenses as “emergencies” is another.

43

Yes, it is sort of a philosophical question whether one wants to consider the budget to have been in surplus in those years when we still had to borrow from the social security trust fund to fund the rest of government. However, in the most common use of the terms “surplus” and “deficit” in referring to the federal budget, this is how they count it.

Some organizations I know of, like Citizens for Tax Justice, prefer to talk about the larger deficit (which has some name that I forget now…like “current account deficit”?) that one gets if one considers the intragovernmental borrowing from the social security trust fund. As long as one is clear about which surplus / deficit you are talking about, I guess it is a matter of personal preference which one you want to discuss.

44

No, no, no! Holding on to the bonds drives up the price of bonds, but drives down the interest rate! I am dumb :smack:

45

there you go. Aside from the economic arguments about our international economic stance duet o having a huge debt the interest payments are gigantic. $335 billion is almost as much as we spend on the military, and makes up about 14% of the federal budget. The government is spending 14% of revenues just paying off the interest on their debts. This is like something you see in an infomercial for bankruptcy at 2am, someone spending a huge chunk of income on interest payments while making the principal bigger.

46

Sometimes it’s hard to believe something was written by a satirist . . .

47

Comment: depending on how you look at it we either ran a surplus in the late 90’s or narrowed the deficit down to a very small figure. Supposing that a torrid period of economic growth started tomorrow, could we reasonably expect to eliminate the national deficit in the same way fifteen years down the road?

No, because the real secret to to the late 90’s surpluses was taxing the rich. The rich are the ones who get huge benefits when the stock market takes off. Let’s say that we have a hypothetical guy, John, who got a computer networking degree in 1993 and shortly thereafter created a startup company called buymangosonline.com. He lined up some investors, set up a website, and by 1996 went public with an IPO of 50 million dollars. Wall Street loved it and by 1998 John capitalized on his stock options to the tune of a billion dollars.

John wanted to live large. He wanted a mansion in Palo Alto, a fleet of fancy sports cars, his one private jet for red eye flights to Silicon Valley, and so forth. All of this costs 200 million dollars. To buy it, then, he would have to cash in about 400 million dollars and give almost half of that to the federal government. And in the big picture that’s where we got the money that gave us those federal surpluses in the late 90’s: we took it from the rich.

Because of the recent tax cuts, John’s counterpart in the 2010 technology boom will pay a much lower federal tax rate, somewhere in the mid 30 percent range. Bush has repeatedly ruled out the possibility of raising taxes. Thus it’s unlikely that we’ll scoop up enough cash from the 2010 technology boom (if it even happens) to get back to a balanced budget.

48

I don’t have time to get too involved with this thread, so I’ll just make a quick comment to the OP.

The idea that ‘deficits don’t matter’ is, historically, an entirely new creation. Making its way into the public domain in the 70s, it was Reagan in the 80s who eventually went down this road (Nixon, it’s said, got into a rage when he learned about a meager 0.5% deficit).

So to claim that ‘this has been done many times in the past and it has always worked out’ is just wrong. The 90s were some good years (mostly), stable world markets and the boom of the internet. Nobody knows if this will be the case the second time around, in the 2010s.

The problem with national debt is that more debt means a lower credit value, and a lower credit value means you’ll have to pay higher interest on new bonds. New, high-interest bonds are often replacing old, low-interest bonds (bonds issued at a time when the national economy was healthier). This means that an increasingly larger amount of the national revenue must be diverted into paying off interest, until eventually the amount of interest owed is more than the national economy can sustain without going into a depression.

So it’s not so much a debt to GDP ratio as there’s an interest payment to GDP ratio. This is the figure to watch for, how much more/less interest is paid (and do we expect to pay in the coming years) as a percentage to GDP. I don’t have the data so I have no idea how it looks for the US in that regard.

I’m simplifying of course, the value of the dollar, the trade balance, FDIs, not forgetting that oil is traded in USD, it all plays a role.

49

Erm, war. As in, war = big debt.
After the Revolutionary War, the debt amounted to 75 million. This was whittled down to 45 mil just before the War of 1812, which tripled it to 127 mil.
Somehow, this got almost completely paid off by 1835, after which there was a spike up, then a settling back to 15 mil just before the Mexican-American war, which quadrupled it to 63 mil.
Source: Debt to the penny, history, 1791-1849

On the eve of the Civil War, the debt stood at a slightly higher 65 mil, but by the time that catastrophe was over it was up to 2.7 billion bucks, practically real money.
Debt to the penny, 1850-1899

It sorta wandered around disconsolately after that, and on the eve of WWI stood at 2.9 billion, slightly higher than where it was after the Civil War. By the end of this mess, it was up to 27 billion, which begins to look like modern times, eh? We’re making progress.
It stood at 40 billion or so on the eve of WWII, what with the Depression, although that didn’t even amount to a doubling, chicken feed next to the nearly tenfold increase caused by WWI. By the end of WWII, it was up to 269 billion, more than eight times higher, dwarfing the increase caused by the Depression.
Debt to the penny, 1900-1949

Modern times now. Korea and Vietnam didn’t do too much damage, raising the debt to 493 billion by 1974. After that came the “malaise” of the late seventies, which more than doubled it to a trillion and a bit by 1981.
Reagan then decided to fight the Cold War with a vengeance. By the time Bush I came along, it was up to 2.8 bil, a near tripling.
Bush I got it up to 4.4 bil, not bad considering he only had four years and a relatively small war.
Debt to the penny, 1950-2000

Clinton saw a relatively modest increase, percentagewise, to 5.8 billion, up 1.4 bil over eight years. Piker.
Bush II’s got us to nearly 8 billion with his “war on terrorism”. Not much percentagewise, actually, because there hasn’t been a major war through here. So, really, he’s only a shadow of, say, Reagan.

Conclusion: those peacetime increases may look big, but if you want increases of orders of magnitude, you need a big, fat war. Something quite a bit bigger than the one we’re in now. (And, of course, social spending barely figures in the accumulation of this debt, contrary to right-wing myth.)
The current account deficit, which is only partially a function of the fiscal deficit, which is only partially a function of this accumulated debt, is what we should really be worried about, IMO. Once that causes problems, the accumulated debt really will be a problem, because we’ll have real trouble selling more debt, and may even have to start paying it off at the same time as we’re trying to fund the retirement of the baby boomers. That would be inconvenient, to say the least.

50

Hmph. Those “bils” should be “trils” (and trillions), there after Carter and Reagan. Oh well, it’s late over here, and I should really be in bed. Good night.

51

In my opinion you cannot compare the effects of war debt to a peacetime economy. It’s true that war increases debt. But war also spurs demand, thereby making a recovery much more simpler. Further, a wartime economy is nothing like a peacetime economy, much more money is diverted to military spending - or should I say military efforts. Corporations who normally would take a dive in peacetime can look to the government for contracts in wartime. Just my opinion.

The ‘war on terrorism’ and the Iraq war has little to do with the recent spike in US debt. It’s the tax cuts coupled with increased spending.

Btw, I should take the opportunity to correct myself, it’s not only the interest payment to GDP ratio that’s interesting, total payments to GDP is also important.

52

Per our needing to pay for the huge Reagan debt…

Ya know, 30 years ago a single wage earner could support a family, buy a house, even send kids to collage, and worked something like a 40 hour work week. Nowadays, it requires two full time wage earners to do the same, together likely working about 90 hours a week combined. And we put less into savings, and are almost required to go into some degree of debt to keep heads above water, where before most of our debt, outside of your mortgage was for the car & the washing machine, while you relied on cash for clothing, day to day stuff, entertainment, and suchlike.

Now I’m sure that there are some folks here that know a heck of a lot more about economics than I, but I suspect it’s likely that part of the reason that a dollar does not go as far is due to old debts our economy is still playing off. Any concurrence from those with some expertise on the subject?

We may be “enjoying” a period of low inflation, but that enjoyment is going to go out the window if it creeps up just a few more percentage points. What else might be greater cause of this relative devaluation, where a buck doesn’t go nearly as far as it did? And why wages aren’t really keeping up despite the fact that we earn quite a bit more than one did a generation and a half ago if not from debt?

53

Now wait a minute, while significant tax hikes may dampen the economy for a time, where is your proof that it always brings it to a screeching halt? Or a cite that shows it will radically increase unemployment every time?

According to this White House Office of Budget Management table (click on table 1.1- it’s an .xls file) taxes increases and boom cycles tend to go together.

If you look at some of the boom years in this country, the early 20’s, the late 50’s through the end of the 60’s, and the mid 90’s, you’ll see that there were some notable tax increases. Generally, the boom years were not hurt so much by increases in tax receipts so long as outlays in spending were about the same or less. In the late 30’s and early 40’s FDR increased both from the start, and they made insane jumps during WWII, but once the war ends we see surpluses and then modest deficits. I think part of the key is that if your outlays include large public projects, the interstate highway system and the military-industrial complex as examples. Jobs can be created in the short run and sustained thereafter by growth brought on by using the new infrastructure and through growing consumer purchases brought on by the created jobs. This is not a given, but it can be done.

For the 50’s through the end of the 60’s outlays generally pace receipts overall. In the Clinton era, while tax receipts doubled over the decade at an even rate, (in part from new sources of revenue), outlays came more in line with receipts until they were a bit less. You can see in the surplus / deficit column how he progressed towards the last three years where the OMB shows his surpluses.

Conversely, in the early 30’s under Hoover, taxes go down but outlays go up a lot during the Great Depression. In the 70’s into the 80’s, taxes go up a lot but outlays continue to outpace them into an era of high inflation. Interestingly, Reagan’s tax cuts don’t look very evident when he made them; I assume that sources of revenue increased quite a bit and increased those early receipts. But his outlays always exceeded them; even by the time he eliminated them, as did George H.W. Bush which resulted in the sluggish economy Clinton inherited.

This was the most recent historical table they seem to produce, thus everything from 2004 on is an estimate, but since Katrina, rising gas prices and all, I’m not making any conclusions about their projections.

54

Snag: While I tend to agree with you on the point that tax increases do not seem to hurt the economy, I am skeptical of doing it on the basis of that chart. The problem is that the correlation that you see between boom cycles and increased revenue for the federal government may not be due to tax rate increases but rather to the fact that the booming economy itself leads to increase in government receipts.

In actuality, I do think that at least some of those boom cycles (e.g., in the late 90s) did follow (or occur simultaneously with) tax increases. I wouldn’t go so far as to say that the tax increases caused the boom. However, there is little or no room to claim that they significantly hurt the economy.

55

30 years ago we didn’t have cell phones, DVD players, or PCs. My Dad made pretty good money, and I spent most of my childhood sharing a room with a sister. We almost never took big vacations. My dad drove an nice car, my mom usually drove something ten years old. We ate out on rare occations. My mother was a master of feeding a family of five on 1/2 a pound of meat, noodles and a can of cream of mushroom soup or tomato sauce (that she canned herself). Round out with beans or peas or lettuce from the garden where you can. This is how nearly everyone I knew lived - unless they had a two income household - but most of my friends moms either stayed at home or worked very part time.

Today a middle class lifestyle usually involves everyone in the house in their own bedroom. Vacations are common, so are two decent cars. The bills I have every month that my parents didn’t have growing up - cable, DSL, cell phones - all make a significant dent in our budget.

I know a lot of people who live off one income - and not necessarily one great income - but they usually don’t have cable, cell phones, and they drive POS cars. They still have gardens. They live in smaller houses, their kids share rooms.

When you compare what life was like 30, 40 or 50 years ago to day, you have to take into account many of the variables.

56

I don’t think this is quite the thrust of the OP. Friend duffer invites us to be aghast at the blatant hypocrisy of the left. Who have previously trumpeted deficit spending as peach-dandy, so long as it meant trainloads of food stamps for the slothful and indigent, and another means to degrade the wholesome discipline of free-market Darwinism.

I share other Dopers distrust and suspicion of the “science” of economics, which seems to have no other utility but to explain what has already happened. But it isn’t economics, it is merely arithmetic: to simultaneously cut taxes while committing a gazillion dollars to a futile military adventure is batshit.

57

I agree, and the chart is a basic one, so while it is a clear snapshot that demonstates the general point, only so much can be surmised from it. Nor do I contend that taxes alone did created the boom, but seemed to be a consistant element of them. They also tended to drop a bit in boom cycles as well once outlays come down. However, in the boom cycles I mentioned, we always see some increase in taxation. Some, like FDR, LBJ, Clinton did raise tax rates, and I agree that much of it comes from strong economies. Nowhere did the tax reciepts triple because the tax rate was tripled. However, we don’t see large drops in tax rates, nor excessive outlays for long periods when we look at those eras.

In the bust cycles we see some increased taxation along with some lowered rates. But in both cases you usually see greater outlays, but I’d venture to say when rates are increased simply because they need to be, you may not get the same result as when you raise them with specific goals in mind. One other thing we don’t see are what the outlays are for, but we have a general idea of the philosphical approach that those in power at those time held, and if concentrated more towards pubic works, the results may be more expansive for the economy at large.

58

Well, I was speaking a little to hyperbole. However, I do not believe that I’m too far off. I was talking of paying down the debt quickly, more quickly than expected, and definitely more quickly than the perceived budget surplus in the late 90’s/turn of the century.

However, I also believe that I am correct in stating that higher taxes will not only curtail growth, but will eventually cause government revenues to decline. The government can delay the stoppage of growth by spending, but once it starts spending in the private sector – well, to avoid confusion, the open market (which is distinct from infrastructure, and arguably education) – increases in GDP will be offset by backbreaking inflation and rises in price. The scenario that I outlined above deals with that.
Anyway, there is data that shows that GDP does rise with tax breaks. The extent of which and how long production will increase is highly debatable, but I can’t think of any economist that would disagree that lowering taxes would raise GDP. This is no easy solution, there is also a large debate of how nuanced the tax break should work, including a large faction that believes the rich and large MNCs should be taxed less. I personally don’t subscribe to such a view because it’s too simplistic, though there is an art to that simplicity. I’m more of a Hamiltonian view of debt and finance.

59

Well, I too think that you can only keep raising tax rates only so long before they are it does become a drag. Lowering taxes will produces a short term bost in the GDP, but again, if you cannot keep gov’t spending in line with revenues, that will create a larger drag. Ideally, once you achieve a needed level of spending, you can back off somewhat on both for a while.

Basically, if your economy and population are going to grow and you are going to provide them with adequate gov’t services, gov’t must grow as must revenues although you hope to get them mostly through a more prosperous private sector with more businesses and individuals making more money. I’m on the side of progressive taxation, as those who make more use more services and/or put more wear and tear on the system. They also receive the largest benefits of a well kept business and national infrustructure. However temporary tax credits or subsidies are a good way to boost weaker sectors as needed.

This doesn’t mean that spending can’t be brought down over time, and of course tax rates usually ought to be cut when that happens. But you can only cut for so long before gov’t becomes ineffective, again unless your population is significantly reduced or if we decide to voluntarily live cheaper with smaller profits which is unlikely to happen soon. Thus, unless you want useless gov’t, a thing I believe few people want, you must always plan on needing to expand the size of gov’t simply to right-size it.

And going back to the OP, this is where excessive debts make this impossible. We may have a big GDP, but you can only print so much money and your resources are going to be finite even if they are mega-gigantic.

Also, in emergencies if we need quick cash, a quick boost to cover day-to-day cost that aren’t being covered, you can’t do it with excessive deficits. We’re already on a lifeline using our good credit. It ultimately make growth of the nation impossible if our money supply ain’t worth a plugged nickel.

60

This is, unintentionally I’m sure, a Marxist way of looking at it. War both increases debt and destroys assets. It should be obvious to say this, but it isn’t, because you have both Marxists who claim that capitalism can’t live without war, and the more recent phenomenon of stock-market speculators who buy on every catastrophe, to such an absurd extent that Katrina actually didn’t even cause a dip in stock prices - at least not right away.
Destruction is destruction. Yes, a broken window will cause the owner of the place where the window was broken to replace it, thereby causing economic activity to take place. That is an extremely glib and uninformed way of looking at it though. That window kept out the weather, which is why it was there, and why it had to be replaced. The economic activity that went into replacing it added precisely zip to the assets of the person replacing it. Ergo, the money spent was zero sum: it went from the owner of the place where the window was broken to the manufacturer of the window and the person who’s labor went into putting the new window in place. The alleged spike in economic activity is analogous to the stimulus you get from, say, crank. In the long run, it winds up being downright harmful, done often enough.
Conclusion: war, and other catastrophes, like say Katrina, is bad. Even for the economy. And especially for the debt situation.