We should all feel better. Paul Krugman, Nobel Prize-winning economist, columnist for the New York Times and apologist for the Obama Administration recently headlined an op-ed: “Newsflash: There was no debt crisis.” He references the Congressional Budget Office (CBO) projection that the U.S. federal debt will be no higher in 2039, as a percent of GDP, than it had been at the end of World War II! In doing so, Comrade Krugman accepts as absolute the prophecy of a vision-impaired seer. He appears unconcerned that today’s federal debt borrowers lack the discipline of their post-World War II compatriots. He seems unwilling to account for the fact that while the last baby-boomer turns 65 on 2030, life expectancy continues to rise. Given current trends, there will only be two workers for every retiree in 2039. No matter. He sums up his opinion, in case anyone misunderstands him: “We don’t have a debt crisis, and never did.”
The federal deficit has declined from a $1.4 trillion peak in 2009 to an estimated $500 billion this year, which is good news. The reasons: slowly rising GDP has resulted in rising tax revenues; sequestration helped on the expense side; and the wind-downs of the wars in Iraq and Afghanistan have reduced defense spending. Those three points are positives. But two other factors exude a whiff of the ephemeral: One, the real cost of ObamaCare has not yet kicked in. Keep in mind, nothing is ever free, especially a government program that is advertised to be so. And, two, average interest rates on federal debt are currently 450 basis points below where they were in 2000 and 300 basis points below where they averaged during the post-War years. Were rates at their long-term historic levels, interest costs on $17 trillion in debt would be $500 billion higher – a meaningful increase on a $3.9 trillion budget.
The CBO’s projections, as to the future of interest rates, assume that markets have down-shifted permanently to the current level. Perhaps the Federal Reserve can work its magic and keep interest rates low. But history has shown that price fixing (including the cost of money) does not work over the long term. In times of crisis, for brief periods such as we had in the fall of 2008, it may be necessary for government to intervene in an extraordinary way, but over time free markets self-adjust and work best. I may not have learned much in forty-seven years in capital markets, but the one thing I feel pretty comfortable forecasting is that prices of all asset categories, including money, will fluctuate. At any rate, combined, all of the above factors have produced an unusual level of complacency about the possible threat of rising debt.
An injection of reality should be considered. Over the past six years, the rate of increase in federal debt has greatly outpaced the growth in GDP. Total national debt was just under $12 trillion in 2009, at the height of the financial crisis, $3.5 trillion above where it had been three years earlier. This year it is forecast to be $17.9 trillion – an 8.3% annual compounding over five years. On a per capita basis, the national debt is 40% higher than it was in 2009. Publically-held Treasury debt – that portion which is not held by various government agencies like Social Security and the Federal Reserve – is forecast by the CBO to increase from $12 trillion today to $52 trillion in 2039, a 6% compounded annual increase. The CBO’s optimistic forecast is that nominal GDP will grow at 4.3% over the next twenty-five years, 180 basis points faster than it has grown over the past six years and 50 basis points above where it has grown since the start of the century. In an equally Panglossian projection, the CBO expects tax receipts to average 19.5% of GDP by 2039, versus the 17.5% they have averaged over the past forty years. It makes one wonder: has pot has been legalized at the CBO? As most economists acknowledge, higher taxes tend to impede, not abet, economic growth.
Total federal debt today, including interagency debt, exceeds 100% of GDP, for the first time since 1947. Back then the country was coming out from under the massive debt that had been incurred defeating the Axis in World War II. This time we are paying for a stimulus that did not stimulate, but mostly for increases in a variety of public assistance programs, like food stamps, mortgage abatements and unemployment insurance. Entitlements are something that every politician likes to grant, but none want to pay for. Since recovery began, the number of Americans living in poverty has climbed by 2.9 million, while the number of those on food stamps has increased by 11 million.
Consequences of low interest rates include concomitant rises in asset prices, again at levels that exceed the rate of increase in economic growth. The result has been an assist to the wealthiest, as they are the preponderant holders of stocks, bonds, gold and energy. The mirrored reflection of those asset price increases has been a rise in the price of necessary consumer goods, which act as a regressive tax on the nation’s low and middle-income people. Stated CPI may make government bureaucrats and left wing media types content. Overall inflation, as measured by the CPI, has risen by a manageable (but still too high) 10% since recovery began in June, 2009 – or about 1.9% annually. But families that must feed themselves, fuel their vehicles and warm or cool their homes on an average income cannot share in that opinion: According to a recent article in Investors Business Daily, Milk is up 25%, meat up 27%, eggs up 33% and gasoline up 40%. At the same time, median household income is 4% below where it was in June 2009, with the bottom 60% of households suffering far more than the top 40%. The country’s poor and middle-income citizens have been unfairly hurt by the policies of the Obama Administration, so eloquently defended by Comrade Krugman. When will mainstream media assign ownership to the Obama Administration for an economy that has been so detrimental to the nation’s most vulnerable?
There are steps that could be taken. The tax code (both corporate and individual) should be greatly simplified and broadened, with stated rates lowered. The effect would be to diminish the clout of lobbyists, reduce the complexities on which lawyers and accountants feed, and improve the visibility and confidence of those making long-term investment, business and personal decisions. Second, regulations should be simplified and/or eliminated except in those cases where the safety of the consumer is at risk. Third, entitlement reform is badly needed. As people live longer, the retirement age should be upped, and means-testing should be employed for upper income employees. And, fourth, broad-based, patient-centered healthcare should be pursued.
Those steps would lead toward less dependency, and greater personal and fiduciary responsibilities, all necessary if we are going to leave our children and grandchildren a better place. The risk of excessive federal debt is not default – we are, after all, the world’s reserve currency. The risk is persistent and accelerating dollar depreciation – a form of regressive taxation that primarily hits the poor and those in the middle. Five years into recovery, we should all feel better. But we don’t. Comrade Krugman, for all his credentials, has it wrong.
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