By Les Leopold
The Republicans are out to shred our social safety net -- and they're using debt as their excuse.
Pete Peterson, the billionaire former private equity mogul, is quietly funding a noisy bus tour to whip up debt hysteria across the land. The “Ten Million a Minute Tour” headed by the Peterson Foundation’s former CEO, David M. Walker (and featuring such economic soothsayers as Alan Greenspan and Ross Perot) will end this week in Washington, DC after traveling coast to coast to alert America about the myriad of alleged dangers posed by government debt and deficits.
Really, it should be called the “Million an Hour” cavalcade because that’s about how much Peterson and company made, in part, through obscene tax loopholes designed for private equity firms and hedge funds. If there really is a debt problem, then Peterson and his fellow tax-evading financial moguls have contributed mightily to it.
But America does not face a debt crisis. Nor are we likely to face one in the next 100 years. In fact, we are the last country on Earth that needs to worry about its public debt.
What’s really behind the debt histrionics is a relentless effort by these Very Important People to use a trumped-up crisis to shred the social safety net and bring forth their bleak vision of a dog-eat-dog society where government provides for no one (except the super-rich). Unfortunately, many liberals are also buying into a “debt crisis” that doesn’t exist.
It’s time to inoculate ourselves from deficit hysteria. The first step is recognizing that virtually everything we read and hear about government debt and deficits is misleading, manipulative or just plain wrong. So, here’s your handy guide to the eight biggest lies.
But first, some basic definitions and facts:
- Deficits are how much the government budget goes into the red in a given year. The red ink is covered by the sale of government bonds to investors here and abroad.
- The national debt is the total amount of what the U.S. owes on those government bonds. If we have deficits year after year, then the debt gets larger year after year.
- The projected deficit for this fiscal year is over $1 trillion.
- Our total government debt is more than $16 trillion as of Oct. 1, 2012.
Supposedly, the danger point comes when investors no longer will buy our debt at reasonable interest rates because they fear we won’t pay it back. Are we there yet? Are we getting close?
Let’s start with a look at debt as a percentage of our nation’s annual economic activity (gross domestic product or GDP). The chart below shows our national debt as a percentage of GDP hit an all-time high of 121 percent during the depths of World War II and recently began sharply rising again in the aftermath of the Wall Street crash. In 2011 the debt/GDP percentage reached 102.9 percent. Most forecasts suggest it is now leveling off.
International Monetary Fund.
- Government Debt as a Percentage of GDP, 2011
China 25.8% France 86.3% Germany 81.5% Japan 229.8% United Kingdom 82.5% United States 102.9%
Here’s the rub. Debt is only too high if the underlying economy is shaky. Investors all over the world are betting that the U.S. is the strongest, most stable nation right now, and over the long haul. They expect our economy to grow which automatically will shrink the debt ratio. It’s simple math. Economy up, debt down as a percentage of the economy (all other things being equal).
Despite what you hear from nearly every media outlet and every politician, investors do not see our debt as dangerously high. They are more than willing to pour money into the most stable, dynamic economy in the world – one that is both safe now, and likely to grow in the future.
2. Aren’t we’re in danger of becoming the next Greece?
Greece is in a heap of trouble even though its debt-to-GDP ratio (169.8%) is far below Japan’s (229.8%). With an unemployment rate of over 25 percent, Greece’s economy is shrinking rapidly. The more it shrinks the more it has to borrow to pay back previous loans and to balance its budget. But it can’t borrow unless it cuts its budgets. To cut its budgets, it has to lay off public employees and cut its social safety net, which further increases unemployment and shrinks its economy. Unless you’re in love with retsina, this is not a great time to be living in Greece.
Perhaps the biggest obstacle to Greece’s recovery is that it doesn’t have its own currency. If Greece did, it could let the value of that currency fall, which would make its economy more competitive. Obviously, both the US and Japan have their own currencies. Also, the U.S. and Japanese economies are much, much richer, stronger and diverse than Greece’s. Therefore, there is no chance – none whatsoever --- that the U.S and Japan will face Greece’s debt problems. Anyone who makes that comparison is either a fool or a demagogue hoping to skewer popular social programs like Medicare, Medicaid and Social Security.
3. Won’t cutting the national debt make the economy grow?
When economic calamity strikes, we humans seem instinctively to hoard our remaining resources. (Once we had belts, we tightened them.) But complex modern economies are not like families. Economies mired in major recessions require spending, not austerity, to function properly. As John Maynard Keynes noted two generations ago, when an economy is in a depression, the worst thing you can do is pay down government debt, precisely because families and businesses already are belt-tightening so much. Instead you need to run up even more debt to make up for the demand we lose when households “tighten their belts.” If major governments move to austerity during hard times, the recession grows deeper.
You want proof? Look at Europe today, where a real-time austerity experiment is in progress. Led by Germany, each European nation is cutting back on social services and increasing taxes. The net result: The 17-nation Eurozone is falling back into another recession with unemployment now rising to 11.4%. As the New York Times reports:
Greece had an unemployment rate of 24.4 percent in June, the latest month for which data were available. Spain still had the region’s highest jobless rate, at 25.1 percent, and an even bigger problem among young people. Nearly 53 percent of Spaniards younger than 25 were classified as unemployed in August.There is no way in hell that cutting government debt will put America back to work. Instead it will send our economy into a nosedive. We’ve already unnecessarily unemployed more than 650,000 public employees due to self-destructive cuts in local, state and federal budgets. It would have been far, far, better for the government to borrow more to put America back to work.
4. But isn’t it ominous that the rating agencies took away our AAA rating?
Ludicrous, not ominous.
Rating agencies were first established to help investors judge the ability of corporations to repay their debts (corporate bonds). At first the rating agencies were paid by investors who wanted the information. But, a new business model emerged --- agencies were paid by the corporations and banks who were selling bonds in question. No one seemed to care much about the obvious conflict of interest until the recent Wall Street crash. Then we painfully discovered that these “independent” rating agencies made tens of millions of dollars doling out AAA ratings on every piece of toxic trash that investment banks paid them to rate. Then when the crash hit, the rating agencies had to reclassify thousands of mortgage-back bonds from AAA to junk. In short, the rating agencies are best viewed as pet poodles for the too-big-to-fail Wall Street banks and investment houses.
Rating agencies also evaluate debt offerings by governments and government agencies so that investors can decide how much risk to take on. The lower the rating, the higher the risk, and therefore, the higher the interest rate for the government offering. Fair enough.
But when it comes to rating major economic powerhouses like the U.S., Japan or Germany, what the rating agencies say is meaningless. When the U.S. “lost” its AAA rating, it was supposed to signal a rise in risk and therefore a rise in the interest rates the U.S. would be forced to pay investors to hold its debt. Instead, U.S. government bond rates went down as investors poured more money, not less, into buying our debt.
So why did the rating agencies bother to offer what obviously was a meaningless downgrade? Because again, they were acting as Wall Street poodles, hoping to tip government policy toward debt reduction and away from making Wall Street pay for the unconscionable mess it created. It’s amazing to watch highly educated politicians genuflect before these bogus ratings. It’s theology, not economics.
In short, the cut in our AAA rating should be viewed for what it really is: a political act to help Wall Street support the Republicans, submarine new financial regulations, and redirect the debate away from increased taxes on Wall Street and the super-rich.
5. Isn’t China buying up most of our debt and doesn’t that put us at its mercy?
The U.S. imports more from China than it exports to China. This produces a trade deficit (not government debt). In the first six months of 2012 we imported $235 billion worth of goods from China but exported only $61 billion to China for a net trade deficit of $174 billion. (There are many reasons for this imbalance, but a big one is that China keeps its currency artificially undervalued, which in turn, keeps its products cheap and ours more expensive. That makes it very hard to compete.)
Since China wants to do something with all those extra dollars, it buys U.S. government bonds. How much of our debt does China now own? About 8 cents of every dollar of outstanding U.S. debt. Other U.S. agencies like the Social Security Trust Fund and the Federal Reserve own about 30 cents of every dollar of our debt, and individual investors, corporations and other countries own the rest – about 62 cents of every dollar of debt. (See U.S Treasury Department and Businessinsider.com.)
Yes, China is the biggest foreign player, but it's not about to make trouble. It couldn’t even if it wanted to. China needs us to buy its goods or its economy will collapse. (Think for a minute about the trade. We get real goods and China gets paper…or rather little electronic signals in a currency account. It’s not clear who’s getting the better of that deal.)
In the end, large global economies are joined at the hip. China will buy our debt because it has no other choice. It has no interest at all in roiling the U.S. debt markets. If we go down, they go down.
6. Isn’t the debt caused by runaway entitlements?
Now we’re getting down to what this debt debate is really about. The austerity folks don’t want to tighten just any belt. They want to shred our social safety net. Debt is their excuse. Instead of making an open and honest case for a dog-eat-dog society, the social Darwinists (with Paul Ryan their new leader) make the utterly untruthful claim that so-called entitlements are driving up debt.
With a little addition, we can see how bogus this claim really is.
About a decade ago we were running a yearly surplus, meaning that each year we were paying down our national debt, not adding to it. Then stuff happened.
- The Bush tax cuts (continued by Obama under severe Republican pressure) cost $250 billion a year in revenue.
- The wars in Iraq and Afghanistan added another $300 billion a year in unfunded expenditures.
- The Wall Street crash (which destroyed 8 million jobs in six months) led to a total of $350 billion a year in lost tax revenues and increased expenditures for the unemployed.
- The bailout/stimulus rescue of the economy cost an additional $300 million a year for two years.
As we just reviewed, Obama is not the cause of the rising debt. The tax cuts, the unfunded wars, the Wall Street crash and the bailouts started on Bush’s watch. Obama did indeed push the stimulus through, but that was a good move for our economy not a bad one. Furthermore, it was too small, not too big. (And Obamacare, over the long haul, is roughly neutral when it comes to the national debt.)
Obama, however, is not blameless. He should be faulted, not for running up the debt, but for not running it up more! Instead of kowtowing to deficit mania he should have visited unemployment line after unemployment line to make the case that Congress must allocate the funds needed to put America back to work.
With long-term interest rates at record lows (2.81% for 30 years) we could easily afford to borrow more to rebuild our infrastructure, weatherize all public buildings, provide free tuition for college students, and finance a host of other public programs that would move us to a full employment economy. And Obama could even make the case for funding much of it through a financial transaction tax on Wall Street’s casinos, as well as increased taxes on the super-rich. Of course, the Republicans wouldn’t go along with it. But the Communicator-in-Chief could have done more to educate the public that jobs, jobs and more jobs should come first. No talk of debt reduction, no “Grand Bargains” with the Republicans, until unemployment comes down to 5 percent! (And by then the debt/GDP ratio would be rapidly declining anyway because of economic growth.)
8. Won’t our kids be forced to shoulder the debt we leave behind?
Yes, this is a real tearjerker. Who among us wants to pawn off our debts onto our kids? A sad thought, if were true. But it’s not. Government debt, unlike our mortgages, is rarely repaid in full. Instead they roll over. The cost to taxpayers is the interest we pay on the outstanding debt and the refinancing of it. With the global economy at stall speed there is no danger in the foreseeable future of rising interest rates.
What about in 30 years when our darlings are at the helm? The answer depends on the economy, not on debt. If we borrow cheaply now to put our people back to work, if we invest fully in funding higher education, and if we build up our crumbling infrastructure and tend to the environment, then we’ll leave behind a prosperous economy. Debt will shrink over time as the economy grows. And more revenues will come in as our people go back to work.
However, if we become obsessed with debt and deficits, and slash to the bone the programs that develop future prosperity, we’ll leave behind a faltering economy and an even bigger environmental mess.
Debt hysteria is like a pandemic that quickly cripples logical thinking. Once infected, Very Important People with Very Impressive Degrees sound like fools.