Deficits and War

What is one to make of the current and widely shared handwringing over our growing Federal debt? As of today total public (national government) debt is close to $13.5 trillion, or some 96% of the 14 trillion dollar value of all goods and services produced in 2009.

What is one to make of this? If the country’s indebtedness were to remain at today’s level and no longer grow, that would still mean some $500 billion in annual interest payments, monies taken directly from American tax payers and transferred to the holders, mostly Chinese and Japanese citizens, of U.S. Treasuries.

But our debt is hardly stationary. Just last year alone the federal government with revenues of $2.1 trillion spent nearly twice that amount, $3.5 trillion, adding 1.4 trillion to the deficit.

The Obama government is projecting a similar amount of additional debt for 2010, while projecting a growth in interest payments on the debt to nearly $900 billion by the end of the decade.

In an article, America in the Red, from National Affairs of Spring, 2010, Donald Marron writes:

“These [deficit] figures are alarming, but they pale in comparison to budget projections for the years ahead. Recent numbers from the Obama administration show that if current policies were to remain in place, deficits would average more than $1 trillion annually for the next ten years, amounting to more than 5% of GDP…. By 2020, the United States would owe more than $20 trillion, the equivalent of about 85% of GDP. At that point, interest payments alone would consume about $900 billion a year…

“The outlook grows even more bleak when we account for the ongoing retirement of the Baby Boomers and further increases in public spending on health care. According to the Congressional Budget Office, spending on Medicare, Medicaid, and Social Security is on track to grow from about 10% of GDP today to about 16% in 2035. At the same time, the aging of the population means that the labor force — and, therefore, tax revenues — will grow more slowly in the future.

“The twin pressures of increased entitlement spending and slowing revenue growth mean that the debt will skyrocket — to roughly 200% of GDP in 2035, under one CBO scenario — unless there are dramatic cutbacks in all other government activities or an equally dramatic increase in taxes.”

Marron goes on to point out that there is no one solution to the problem. Many actions will be necessary. Yes we will need additional economic growth to grow Federal tax revenues. Yes, we will need tax increases, most likely on the middle class and probably on consumption in the form of a VAT.

And yes, we will need spending reductions, that which would mean reductions in defense budgets, social security reimbursements, and medicare and medicaid payments —all three of which will be vigorously opposed by the impacted beneficiaries, making it highly doubtful that these actions will ever be taken.

Those who think about these things, and who write about them with the most clarity and understanding, are not usually elected office holders or members of the Obama administration. (Marron was acting director of the Congressional Budget Office in 2006.)

For our elected leaders to seriously address the problem of the deficit, and get behind any one or more of the necessary and painful measures that would be needed to correct unsustainable trends, would probably mean their not being reelected and returned to office.

So what are we to make of all this? What is to be done? The “solution” now seems to be to go on doing little or nothing, for if we do nothing the problem may go away. In earlier periods we have similarly overspent our means, in war and in depression, rung up deficits comparable to those of today, but always that debt was owed to ourselves. Now it’s different, we owe trillions to the Chinese and other foreign bond holders, and what this means we really don’t know.

Now there is another point of view regarding all this, that of Paul Krugman, for example, who shows little interest in deficit handwringing. He is even ready to increase the deficit still further. In an article, 1938 in 2010, in today’s Times he maintains that the Obama administration is clearly being too timid in its actions to revive the economy.

What is needed, he says, is a second, and even larger stimulus. For Krugman, and many on the Left, many Liberals and many Progressives, unemployment, not deficits, is the country’s principal problem, and only additional Federal spending bringing additional jobs will grow the country’s wealth, thereby forestalling a second depression and lowering the unemployment numbers.

While not wishing the deficit away, or pretending that it doesn’t exist, Krugman does seem to be one of those who would rely entirely on new growth (OK, he would also restore the higher tax rates on the rich) to reduce the deficit.

In support of his position he cites the depression of the 1930s and how it finally, after some 10 years, came to an end. World War II, as he reminds us, coming as it did to a still widely depressed economy, was above all a much needed, and additional burst of deficit-financed government spending.

I would point out, as an aside, that Krugman does not mention the role, if any, of the present wars in Iraq and Afghanistan, how they are contributing to the growth of our economy and the ending of the present depression. They’re not of course. What happened this time around?

But in respect to W W II Krugman was right. Over the course of the War the Roosevelt government borrowed the equivalent of what would be roughly $30 trillion today creating thereby an economic boom and laying the foundation for future prosperity.

(The present wars do obviously benefit portions of our economy, mostly the military/industrial complex that makes the drones, armored vehicles, shoulder fired missiles and innumerable other such.)

Krugman says that thanks to the resulting additional economic growth the overall debt during WWII, both public and private, actually fell as a percentage of GDP. And that after the War increased government tax revenues enabled the economy to thrive without continuing deficits.

So what is the answer? Deficit reduction as Marron describes it, meaning growing government revenues through new growth initiatives and new income and consumption taxes, along with substantial reductions in defense and social services spending?

Or is it additional stimulus money as Krugman recommends? Can we spend our way out of recession, and by doing so, as in World War II, bring down unemployment to Bill Clinton levels of 4 to 5%, and long term sustainable debt, again to Bill Clinton levels, of some 40% of GDP?

So far no one seems to have the country’s answer, and hence the handwringing goes on apace.

One thought on “Deficits and War”

  1. Philip:

    Comments:

    Japan and ROC only hold about $1.67 trillion in debt as of July and a list of major foreign holders may be viewed as follows:

    http://www.ustreas.gov/tic/mfh.txt

    VAT tax is a very bad idea as it will kill economic growth – the govt. needs to drastically cut spending and the Fed needs to stop printing money.

    The govt. does not understand business, economics or finance – no more wasted stimulus – they need to stop scaring the hell out of business and stop their meddling in the private sector. Left alone the private sector will heal on its own.

    The fix is ending the wars, killing the new health care bill, no more bad stimulus, cutting govt. by 50% and lessening entitlements (i.e. SS at 70).

    There is no way to grow out of our problems with govt. spending. It worked during WW2 given all the labor involved and the sheer amount of money, but won’t work now.

    Furthermore, after WW2 the US was the only large industrial nation not bombed out or war torn so our economy got going and we earned our way out of it because our industries had very little competition.

    This is not the case today with India, China, Germany, Brazil, Japan, S Korea, etc.

    The Fed is trying to spend and inflate our way out of the problem and this only serves to accelerate the end (collapse) of the US dollar.

    On the current course expect Weimar inflation or worse.

    However one looks at it times are going to be lean for a while and abysmal if the spending isn’t cut.

    This is the price we have to pay for 3 decades of boom/bust ponzi schemes – LBOs 80s, tech 90s, mortgage 00s and finally the govt. debt bubble.

    Brendan

    Like

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