December 15, 2009
$2,000,000,000,000 More in Debt? You Bet.By Andrew Foy and Brenton Stransky
On Thursday, December 10th, congressional Democrats led by Speaker Pelosi put forth legislation to raise the treasury's debt ceiling by nearly $2T to $13.9T. Pelosi is hastily lining up a vote before the end of the year because the treasury expects the Congress to hit their existing debt ceiling later this month, essentially "maxing" their available credit.
In the midst of a $1.1T spending bill voted on this past weekend, a $700B stimulus bill passed earlier this year, and the expectation of a $9T federal budget deficit over the next ten years, it would have been easy to miss this news among other colossal numbers. But increases to our public debt burden might be the greatest threat to our country.
A minority of representatives recognize this danger and stand opposed to it. During a Bloomberg radio interview on Thursday morning, Senator Kent Conrad (D-ND) talked about his opposition to increasing the deficit, citing that for the first time, Moody's rating agency is considering a downgrade to the U.S. sovereign debt. He also quipped that a country running a deficit-to-GDP ratio as high as ours is now wouldn't even be considered for entrance into the European Union.
We should be deeply concerned, but perhaps not surprised, that more of our representatives aren't opposed to a 15% increase in the debt. Most of the 535 members of Congress who steer the economy have negligible business or economic experience, which might explain why the Houses of Congress lack even the most basic understanding of finance and the consequences of their actions.
What happens if we can't find buyers for this new debt? After all, we have increased our debt significantly over the last two years. China's and the rest of the world's appetite for our debt is finite. Earlier this year, the United Kingdom (with the same AAA sovereign debt rating as the U.S.) failed in a debt offering, meaning people (or foreign governments) did not fund the debt needed.
This fundamental problem of no access to debt would plague business executives because they know it would inevitably force them into bankruptcy. We must wonder if our representatives even grasp the significance of the problem. If our representatives had a stronger business background, they would probably not increase our debt by this magnitude, which puts our debt rating at risk (not to mention the chance that the government can pay its loans).
In the first week of this month, the cutting of Greece's credit rating rocked the world debt markets. The turmoil was caused because lower ratings mean a higher probability of default on Greece's debt, threatening inflation, government bankruptcy, and worse. Of note, the downgrade resulted because Greece has a government budget deficit of 13% of GDP (according to Business Week, 12/21/09), and a total debt that amounts to 113% of total economic production for one year. The United States' budget deficit for fiscal year 2009 (which ended in September) is 10% of GDP, and total debt will amount to 100% of GDP if the ceiling is increased.
The dangers of increased spending are perhaps closer than we care to admit.
The United States government is the largest economic entity in the world -- a "business" of sorts. Total government spending in 2009 is expected to be $6,143 billion, or an estimated 230% more than China (the world's next largest economy) spends.
But who is at the helm of this financial juggernaut? As is indicated above, the preponderance of our senators are attorneys (58) or career government employees (13) who have little or no direct business experience. Is it any wonder that our elected officials display a lack of understanding of the most basic laws of economics and business?
Based on data that we compiled from the Senate's website, only fourteen of our hundred senators have any experience in the world of private business, and far fewer (only six) have an MBA. It's sadly ironic that only one senator (Tom Carper, D-DE) was an economist before being elected to office, which is the same occupational representation as comedians (Al Franken, D-MN) before being elected to office.
Perhaps it is our congressmen's lack of fundamental business knowledge and the corresponding ignorance of their overreaching fiscal policies that have landed us in our current situation.
Over the last several decades, our representatives have expanded the welfare state while promising us that we would never feel the pain of these government handouts. It might be fair to say that these easy spenders bought the votes of yesterday's elections at the expense of tomorrow's generations. Under the surface, the debt to which they have regimentally added year after year is sinking the ship.
The total debt that the federal government has taken out in our names now amounts to $12.1 T (or $87K per worker), and the interest owed each year on the debt by each and every working man and woman alone amounts to $1,820. In perspective, the 2008 median household income in the United States was $61,521, so this $1,820 owed solely to service the debt is 2.96% of that average family's pay. While seemingly small compared to the multitude of sales, income, state, local, property, and other taxes we pay today, the federal government's historic level of taxation (as a percentage of GDP) did not permanently move above the 3% level until our entrance into World War I, or for the first 143 years of our history.
The problem with using revenue to service old debt is that this debt does not add to the overall expansion of a country's wealth. While it might be argued that this debt was needed to avert some previous catastrophe, these assertions can never be proven. However, what is unmistakable is that the cost to service the debt acts as a constricting tax, and if we've learned from the mistakes made during the Great Depression, raising taxes in a time of economic instability only widens the instability. Simply speaking, more deficit spending permanently reduces economic growth.
Yet everywhere we turn and from every media outlet we hear more news of higher spending and deeper deficits, a more intrusive government, and more handouts.
How about Medicare for people over 55 instead of 65? Sure, as if the program already isn't running a massive deficit.
How about we hand out free cell phones for everyone? Why not?
How about we pay voters $8,000 to buy a house? Sounds about right!
And they'll need a car, so how about $4,500? Of course!
Beyond any reasonable doubt, the greatest threat to our republic is the lust for spending by our government -- and the resulting debt that peers above the waterline like an iceberg. Those with business experience would be fearful of the future of a company in a similar situation; a student of political philosophy would be likewise wary of a country that spends exponentially greater sums, as is the case in Greece. Still, our representatives assure us that their spending is righting the ship, that we might be better suited to brace for impact.
Andrew Foy, M.D. and Brent Stransky are authors of The Young Conservative's Field Guide, which is scheduled for release by Nimble Books on January 20, 2010. The authors can be contacted through their website at www.aHardRight.com.