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Phil's Rambling Rants
November 19th, 2004
12:29 pm


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Federal debt rantings

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[User Picture]
Date:November 22nd, 2004 08:22 am (UTC)
Before reading, note that I am an opponent of a national debt and in fact would like to see it retired. However, in the interest of my economics minor and presenting another side of the story, here are a few points.

- the US debt as a percentage of GDP is not really much different than it has been in most other years we have had debt. US GDP is (approximately) 40 Trillion dollars, so a debt of 8 Trillion is 20%. In general, if an individual or corporation had this debt ratio it wouldn't make a bank worry at all about ability to repay

- it used to be true that the national debt was internally owed rather than externally owed - i.e. almost all T-bills and other federal debt instruments were owned by US citizens or organizations. While foreign investors own a higher percentage now, the rating on this debt is still very high, and is considered a good investment (unlike, say, New York City bonds a number of years ago). We're not likely to see a default.

- Keynesian economics postulates an inverse relationship between inflation and interest rates - the higher the interest rates, the lower the inflation and vice versa. While this proved to be extremely simplistic (due mostly to lag and to the uneven effects of price changes in different areas of the economy), I don't think we're going to see both double-digit inflation and double-digit interest rates again barring a disaster of nation-destroying proportions.

- As in any other area in this world of ours, what seems bad on one side is seen as good on the other. Democrats believe in Keynesian principles as long as government deficits are going to social programs. Republicans now seem to have embraced the same principles with an idea that money going back to those in most position to invest it will have a better effect than the government investing it directly. It's the same economic principles.

All of this said, the sight of Republicans cheerfully accepting deficit budgets makes this fiscal conservative shudder.
[User Picture]
Date:November 22nd, 2004 09:50 am (UTC)
US GDP is (approximately) 40 Trillion dollars, so a debt of 8 Trillion is 20%.

That didn't sound right, and a quick googling gives 2003 GDP as 11 Trillion (according to the US Bureau of Economic Affairs), not 40.

However, the more significant problem is with comparing the federal government's debt to the total GDB of the nation. Even if we believed it was appropriate for the federal government to direct 100% of the resources of the country, it can't use all of those resources for paying debts; most of GDP has to go to internal economic activity or we don't have an economy. The debt the federal government amasses needs to be compared to the income the federal government actually brings in, or in extremis, the income it could conceivably bring in. Total government revenues are somewhere between 1.5 and 2 trillion, which is pretty tiny compared to 8 trillion in debt. The real effects of tax rates on overall economic activity are more complicated than ideologues on either side want to admit, but I'm willing to go out on a limb and say that raising taxes by more than $500B a year, no matter what taxes they were, would certainly cause enormous economic disruption and a significant drop in GDP. So the debt is at least 320% of the income available for servicing it. Appalling and irresponsible but perhaps survivable, if we treated it as a genuine national crisis and actually started fixing it. What's indisputably not survivable is the intention of our leaders to keep adding to the debt forever.
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