Is the deficit and debt necessarily a bad thing?

I keep on hearing people complain about how we’re living off the backs of our children by creating an insurmountable level of debt that they’ll never be able to pay off destroying America as we know it.

Scary thoughts.

As, a matter of fact, the flames of our beloved Tea Partiers are largely fanned by the words “deficit” and “debt.”

So I decided to take a look at some of the underlying numbers.

First, some facts:

· The current budget deficit stands at about 11% of GDP, about 1 percentage point more than in the last year of Bush’s administration. The percentage of deficit to GDP has risen as high as 28% during WWII, obviously a less-than-normal time in terms of fiscal policy. Right now we’re carrying on two wars (one that’s winding down, thank God) and are hopefully recovering from the greatest economic meltdown since the Great Depression – I think that qualifies as a “less-than-normal” time and justifies higher than usual spending. Historically, the percentage of deficit to GDP has fluctuated in both directions; it will go down again.

· Over the last several decades, much of America’s economic growth has been fueled by deficit spending. During the Reagan years, for instance, GDP grew by 83% while total federal debt grew by 187%; during Clinton’s administration we experienced 45% GDP growth and a 24% increase in debt and during George W Bush’s eight years GDP grew 45% while total debt grew 75%.

· When my parents bought our house for a grand total of $21,000 in 1962, they were scared to death of the $16,000 mortgage they signed up for. 20 years later they sold the house for almost $100K and paying off the mortgage was a non-issue. LESSONS LEARNED: the economy grows, prices go up (hopefully through productivity growth, not rampant inflation), debt is fixed.

· The current federal debt is approximately $15Trillion; it’s hard to get a definitive number for unfunded entitlements through 2050, but I hear that it’s somewhere between $50-80Trillion. If we take total 2010 tax receipts at $2.17Trillion and increase them by 2% per year (about the projected productivity growth for the intermediate term) through 2050, we generate cumulative tax receipts of about $130Trillion over that time (at 3% annual growth in tax receipts, it would be a cumulative total of $163Trillion). Entitlements come out of the budget, so by my simple reasoning we should be able to cover those “unfunded” entitlements as well as pay back the $14Trillion in current debt. Obviously, we would eventuallyhave to get back to a balanced budget or nearly balanced budget for this scenario to play out.

Now let’s ask the converse of the question: what would have happened to our economy 2008-2010 WITHOUT the bailouts, the govt “takeover” of the US auto industry, and the modest stimulus package?

Here’s my prediction:

· Well, if the current unemployment rate is 9.6% WITH all of the above, one would have to predict that it would be significantly higher WITHOUT all of the above. Same for the “real” unemployment rate which most people estimate is somewhere between 15-20%. So let’s say the official unemployment rate goes up to 15% and the “real” unemployment rate to 25-30%. The consequences would be disastrous.

· First of all, tax receipts would plummet and welfare payments, especially unemployment payments, medicaid and medicare payments would rise dramatically. In effect, by not spending we would in effect be creating the very deficit that we were trying to avoid.

· The housing market would take a major nosedive – worse than it is now. People would literally be put out on the street, leading to many social/law enforcement issues. Jobs of anyone employed in construction, the banking industry, the mortgage industry and other related industries would be in severe jeopardy.

· Due to low consumer demand, companies would lay off more people exacerbating the unemployment rate and all of the effects thereof.

· There would be a major sell-off of the dollar.

· The Chinese would probably demand a significantly higher interest rate to buy our debt (if they were willing to buy it at all). This, of course, would increase the amount of the federal budget devoted to interest payments and further exacerbate the “involuntary” deficit we created.

· The balance of trade might actually tip in the US’s favor because of generally less demand, depressing imports. Over time, though, if enough US production capacity was closed down in response to less domestic consumer demand, this situation could reverse, maybe dramatically – hard to tell.

· Multinationals with production capacity in the US (companies like Toyota, Sony, Siemens) would probably shut down over time due to lack of domestic US demand. Instead they would most likely choose to import their products to the US, further weakening the US balance of trade and the value of the dollar

· Public school budgets would be slashed, leading to classroom sizes of 50+ kids in most areas. Same for budgets for law enforcement, sanitation, and public works maintenance.

· Despite, the self-inflicted deficit, the wealthy would scream for a tax cut, which would be counterproductive because 1) they would probably NOT spend the money, but hoard it (most likely they would convert it to non-dollar currencies, further weakening the balance of trade in our Short Term Account) and 2) a tax cut would benefit hardly anyone else because X% of nothing is still nothing.

Perhaps in Milton Freidman’s world all of this is necessary to allow the free market to “adjust” the economy. Yes, eventually the dollar will weaken to such a level where there is incentive to buy US goods, increasing employment and consumption blah…blah…blah….However, I personally would not want to live through such a prolonged “adjustment” period. (According to Keynes, "in the long run we're all dead).

In effect, by not increasing the deficit in the short term with the intent of lessening the burden of debt passed onto our children, we might in fact not only unintentionally increase the level of total debt passed onto future generations but more so be lessening the quality of the America that we pass onto them – if, in effect, America as we know it would exist at all.

A Response to the GOP's "Pledge to America" - Part 1

The following is a verbatim copy of the preamble to the GOP's "Pledge to America." I've added my comments/responses bold and in parentheses:

America is more than a country.

(Unfortunately, for the last several decades, American has been an oligarchy – a country controlled by and run for the very wealthy)

America is an idea – an idea that free people can govern themselves, that government’s powers are derived from the consent of the governed, that each of us is endowed by their Creator with the unalienable rights to life, liberty, and the pursuit of happiness. America is the belief that any man or woman can – given economic, political, and religious liberty – advance themselves, their families, and the common good.

(Wonderful in concept. However, government policies, particularly during the Bush administration, have made it harder and harder for the lower and middle class to benefit from the resources and opportunities of our great country:

• The Bush administration passed an unnecessary tax cut for the rich, which only served to increase the ridiculous and unhealthy disparity of wealth and income in our country.
• As a result of the tax cut and an unnecessary war, the Bush Administration ran up record deficits, stifling our economy and, consequently, opportunity.
• Republicans zeal for deregulation allowed Wall St to speculate with housing derivatives, which caused the greatest economic downturn since the great depression with disproportionate negative impact on the lower and middle classes.
• Republicans have allowed the bank industry lobbyists to write their own rules, creating laissez-fair “trick and trap” practices in the credit card industry, enabling them to hide behind small print and charge usurious interest rates on an already suffering middle class for specious, arbitrary reasons.)


America is an inspiration to those who yearn to be free and have the ability and the dignity to determine their own destiny.

Whenever the agenda of government becomes destructive of these ends, it is the right of the people to institute a new governing agenda and set a different course.

(The agenda of the government from 2001-2008 WAS, indeed, destructive of these ends. The Obama administration has done everything in its power to address the destructive policies initiated by Republican policies. We’ve already set a new course and the Republican spin-doctors are – and unfortunately succeeding in – twisting the facts, banking upon the fact that it will take time to reverse the excesses of the Bush administration given the vast damage it afflicted on our country, economy and our society and trying to blame it on Obama. In effect, they are trying to create a “Looking Glass” world where up is down and down is up.)


These first principles were proclaimed in the Declaration of Independence, enshrined in the Constitution, and have endured through hard sacrifice and commitment by generations of Americans.

In a self-governing society, the only bulwark against the power of the state is the consent of the governed, and regarding the policies of the current government, the governed do not consent.

An unchecked executive, a compliant legislature, and an overreaching judiciary have combined to thwart the will of the people and overturn their votes and their values, striking down longstanding laws and institutions and scorning the deepest beliefs of the American people.

(Last time I checked, the Supreme Court had a conservative majority)

An arrogant and out-of-touch government of self-appointed elites makes decisions, issues mandates, and enacts laws without accepting or requesting the input of the many.

(Yes, but thank God, we’ve already voted out Bush and Cheney)


Rising joblessness, crushing debt, and a polarizing political environment are fraying the bonds among our people and blurring our sense of national purpose.

(See comment above)

Like free peoples of the past, our citizens refuse to accommodate a government that believes it can replace the will of the people with its own. The American people are speaking out, demanding that we realign our country’s compass with its founding principles and apply those principles to solve our common problems for the common good.

(Again, see comment above)

The need for urgent action to repair our economy and reclaim our government for the people cannot be overstated.

(The only people that your policies reclaim your government for is the very wealthy; you’re hiding behind specious arguments in a vicious, convoluted attempt to convince everyone else it’s in their best interests as well)

With this document, we pledge to dedicate ourselves to the task of reconnecting our highest aspirations to the permanent truths of our founding by keeping faith with the values our nation was founded on, the principles we stand for, and the priorities of our people. This is our Pledge to America.

(Our nation was founded on the principles of equality of opportunity and equal justice under the law. Tax policies that favor the rich, take health care away from the uninsured and compromise Social Security and Medicare are NOT consistent with these values)

We pledge to honor the Constitution as constructed by its framers and honor the original intent of those precepts that have been consistently ignored – particularly the Tenth Amendment, which grants that all powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

(Okay, that’s reasonable. But why don’t you feel the same way about the Fourteenth Amendment, which you want to repeal – you know, what’s good for the goose is good for the gander)

We pledge to advance policies that promote greater liberty, wider opportunity, a robust defense, and national economic prosperity.

(What has the Obama administration done NOT to promote these goals? They’ve provided much needed stimulus funds to the economy, extended healthcare to the uninsured, and protecting our interests in the middle East.)

We pledge to honor families, traditional marriage, life, and the private and faith-based organizations that form the core of our American values.

(Your economic policies do not honor most American families; it causes their economic destruction – quite the opposite. Most people in “traditional marriages” don’t care about same-sex marriages and, certainly, by the time the younger generation becomes the majority, this issue will become a non-issue. )

We pledge to make government more transparent in its actions, careful in its stewardship, and honest in its dealings.

(Does this mean that the GOP is going to stop conducting most its business in back-office meetings with highly paid lobbyists from the banking and oil industries? If so, bravo!)

We pledge to uphold the purpose and promise of a better America, knowing that to whom much is given, much is expected and that the blessings of our liberty buoy the hopes of mankind.

(The very rich – our “country club Republican “ friends – do virtually nothing to help our society. They hoard their money; they outsource jobs in the workplace, and create economic devastation across our country. They feed off the backs and misery of their fellow citizens with much lower relative wages for those who are still employed, charging them usurious rates when they get behind in credit payments, and they are trying to privatize Social Security which would be disastrous and destroy Medicare – all so that their taxes can be lower!)

We make this pledge bearing true faith and allegiance to the people we represent, and
we invite fellow citizens and patriots to join us in forming a new governing agenda for America.

(There already is a “new” governing agenda for America, but like anything it needs time to work. What this document is espousing is a return to the “old” government agenda that failed big time)