Debt Drag

On Monday, August 13, the national debt will reach $16 trillion.  Obama, the same leader who in 2009 promised to cut the deficit in half by the end of his first term, is responsible for more than $5 trillion of that debt.  And the deficit has not been cut in half.  The deficit for 2012 is projected to be $1.15 trillion, not much less than the $1.3-trillion deficit he inherited. Even by FY2013, the deficit is projected to be $901 billion, and this on the most hopeful of assumptions.  The plain truth is that the president has not kept his promise on cutting the deficit.

Strangely enough, Obama continues to talk about deficit-cutting as if he were proud of his record.  As part of his short-lived "Win the Future" campaign early in 2011, he spoke again of slashing the deficit, just before submitting a budget calling for another trillion-dollar deficit.  In September of that year, he rolled out his "Living Within Our Means and Investing in the Future" campaign  -- again, a short-lived embrace of fiscal responsibility which came to nothing.  For Obama, "Living Within Our Means" meant $1.5 trillion in new taxes but no real reduction in spending.  One point one trillion dollars in "spending reduction" was credited to military drawdowns in Iraq and Afghanistan already scheduled to occur, while an additional $1.2 trillion was achieved from discretionary cuts that would never have been implemented.

Obama's deficit-cutting smoke and mirrors continue in the current presidential campaign.  Yet in March 2012, when the House of Representatives passed a bill that actually would have cut the deficit, the White House blasted the legislation: it would end "Medicare as we know it" and make "extremely deep cuts to critical programs."  So much for deficit reduction.

As I write, every American owes $50,759 on the national debt.  More important, those households that actually pay taxes net of benefits owe over $320,000.  By the time Obama completes a second term, if he is re-elected, that figure will have risen to $400,000.  At that point, the national debt would be $9.34 trillion more than when he took office.

Only a very cynical politician could repeatedly promise to slash the federal deficit while opposing all genuine attempts to do so.  Even as the nation's debt is on track to nearly double by 2016 from when Obama took office, the president insists that he is "the adult in the room."  For this president, words have no definite meanings.  Every budget he has submitted since taking office projects a deficit of over one trillion dollars, and yet he boasts of "living with our means."  When simple words lose their meanings, as they have for Obama, nothing remains to anchor policy to reality.  

The reality is that the national debt has put the nation's future at risk, and Obama's reaction is to pile on more debt.  Even at today's record low interest rates, the national debt is a drag on the economy.  In an eloquent op-ed piece in the Wall Street Journal, Arthur Laffer demonstrated that the reckless stimulus spending of the last four years has not produced economic growth; it has only removed capital from the private sector, thus reducing growth there, and shifted it to less productive government programs while adding to the national debt.  There is no evidence that the so-called "multiplier effect," the theoretical basis for increased spending during the economic slowdown, has ever worked.

Nonetheless, Obama continues to call for more spending.  He insists that if Congress had passed his American Jobs Bill, the unemployment rate would be lower.  In a June 1 speech in Minnesota, Obama repeated this excuse for why things are not working.  If Congress had passed this single piece of legislation, putting the country another half-trillion dollars in debt, the unemployment rate would not be 8.3%.  Anyone who believes this claim resides in the fantasy world of Keynesian economics.

The truth is that increased debt destroys economic growth and adds to unemployment over the long term.  Americans are now paying interest on $16 trillion in debt, but they are fortunate in that interest rates are unusually low.  When interest rates rise, as they inevitably will, the economic consequences will resemble what's taking place in Europe.

Historically, 10-year Treasury rates have averaged 6.68%.  When they return to 6.68% from the current 1.50%, interest on the current debt of $16 trillion will amount to $1.069 trillion per year.  That is considerably more than the total projected defense spending for FY2013.  It is more than is spent on education and health care combined.  It is more than is spent on Social Security.

For the average tax-paying family (those paying taxes net of benefits), the per capita cost of the national debt would rise to $26,720 per year by 2016, were rates to rise to 6.68%.  This does not include any amount toward paying down the national debt, nor does it account for future spending increases under ObamaCare and other programs that are ballooning out of control.

When was the last time Treasury rates were anywhere near 6.68%?  Not so long ago, as it turns out.  On January 1, 2000, the 10-year Treasury rate stood at 6.66%.  A long-term chart demonstrates just how volatile borrowing rates can be.  Ten-year rates peaked in the early 1980s at just under 15% and have declined steadily since.  At some point rates will begin to rise, and increases can be rapid.

It is a fundamental responsibility of any president to defend the country against all enemies, including that of fiscal ruin.  Obama's failure to cut the deficit raises the question of whether he is serious about fulfilling this responsibility.  Once the national debt reaches a decisive tipping point -- and many would say it has already -- future prosperity will be placed in jeopardy.

Borrowing always reduces future living standards.  The great prosperity that America enjoyed following World War II occurred as federal spending returned to peacetime standards and private-sector investment increased.  With an explosion of capital formation in the private sector following the war, the U.S. economy grew rapidly from 1950 to 2000.  But the economy will not continue to expand if it is saddled with a national debt estimated to reach $26 trillion, or 91% of GDP, by 2025.  The average household would see its living standard reduced by at least 6% (6.68% interest on 91% of GDP), with a much higher burden falling on affluent households.  New taxes set to take effect in 2013 under ObamaCare are only a foretaste of what lies ahead.

Instinctively, Americans realize that the nation is not on the right course.  What they may not realize is just how far off course the country is in terms of the national debt.  Just 13 years from now, if interest rates normalize, interest on the national debt will consume $1.737 trillion per year -- perilously close to the total amount that the federal government now collects in taxes.

As the nation approaches the tipping point where interest on the debt consumes all tax revenues, only two "remedies" will remain: hyperinflation or default.  The re-election of Obama will only ensure that this tipping point will be reached as the country endures four more years of trillion-dollar deficits.

Jeffrey Folks is the author of many books and article on American culture, including Heartland of the Imagination (2011).

On Monday, August 13, the national debt will reach $16 trillion.  Obama, the same leader who in 2009 promised to cut the deficit in half by the end of his first term, is responsible for more than $5 trillion of that debt.  And the deficit has not been cut in half.  The deficit for 2012 is projected to be $1.15 trillion, not much less than the $1.3-trillion deficit he inherited. Even by FY2013, the deficit is projected to be $901 billion, and this on the most hopeful of assumptions.  The plain truth is that the president has not kept his promise on cutting the deficit.

Strangely enough, Obama continues to talk about deficit-cutting as if he were proud of his record.  As part of his short-lived "Win the Future" campaign early in 2011, he spoke again of slashing the deficit, just before submitting a budget calling for another trillion-dollar deficit.  In September of that year, he rolled out his "Living Within Our Means and Investing in the Future" campaign  -- again, a short-lived embrace of fiscal responsibility which came to nothing.  For Obama, "Living Within Our Means" meant $1.5 trillion in new taxes but no real reduction in spending.  One point one trillion dollars in "spending reduction" was credited to military drawdowns in Iraq and Afghanistan already scheduled to occur, while an additional $1.2 trillion was achieved from discretionary cuts that would never have been implemented.

Obama's deficit-cutting smoke and mirrors continue in the current presidential campaign.  Yet in March 2012, when the House of Representatives passed a bill that actually would have cut the deficit, the White House blasted the legislation: it would end "Medicare as we know it" and make "extremely deep cuts to critical programs."  So much for deficit reduction.

As I write, every American owes $50,759 on the national debt.  More important, those households that actually pay taxes net of benefits owe over $320,000.  By the time Obama completes a second term, if he is re-elected, that figure will have risen to $400,000.  At that point, the national debt would be $9.34 trillion more than when he took office.

Only a very cynical politician could repeatedly promise to slash the federal deficit while opposing all genuine attempts to do so.  Even as the nation's debt is on track to nearly double by 2016 from when Obama took office, the president insists that he is "the adult in the room."  For this president, words have no definite meanings.  Every budget he has submitted since taking office projects a deficit of over one trillion dollars, and yet he boasts of "living with our means."  When simple words lose their meanings, as they have for Obama, nothing remains to anchor policy to reality.  

The reality is that the national debt has put the nation's future at risk, and Obama's reaction is to pile on more debt.  Even at today's record low interest rates, the national debt is a drag on the economy.  In an eloquent op-ed piece in the Wall Street Journal, Arthur Laffer demonstrated that the reckless stimulus spending of the last four years has not produced economic growth; it has only removed capital from the private sector, thus reducing growth there, and shifted it to less productive government programs while adding to the national debt.  There is no evidence that the so-called "multiplier effect," the theoretical basis for increased spending during the economic slowdown, has ever worked.

Nonetheless, Obama continues to call for more spending.  He insists that if Congress had passed his American Jobs Bill, the unemployment rate would be lower.  In a June 1 speech in Minnesota, Obama repeated this excuse for why things are not working.  If Congress had passed this single piece of legislation, putting the country another half-trillion dollars in debt, the unemployment rate would not be 8.3%.  Anyone who believes this claim resides in the fantasy world of Keynesian economics.

The truth is that increased debt destroys economic growth and adds to unemployment over the long term.  Americans are now paying interest on $16 trillion in debt, but they are fortunate in that interest rates are unusually low.  When interest rates rise, as they inevitably will, the economic consequences will resemble what's taking place in Europe.

Historically, 10-year Treasury rates have averaged 6.68%.  When they return to 6.68% from the current 1.50%, interest on the current debt of $16 trillion will amount to $1.069 trillion per year.  That is considerably more than the total projected defense spending for FY2013.  It is more than is spent on education and health care combined.  It is more than is spent on Social Security.

For the average tax-paying family (those paying taxes net of benefits), the per capita cost of the national debt would rise to $26,720 per year by 2016, were rates to rise to 6.68%.  This does not include any amount toward paying down the national debt, nor does it account for future spending increases under ObamaCare and other programs that are ballooning out of control.

When was the last time Treasury rates were anywhere near 6.68%?  Not so long ago, as it turns out.  On January 1, 2000, the 10-year Treasury rate stood at 6.66%.  A long-term chart demonstrates just how volatile borrowing rates can be.  Ten-year rates peaked in the early 1980s at just under 15% and have declined steadily since.  At some point rates will begin to rise, and increases can be rapid.

It is a fundamental responsibility of any president to defend the country against all enemies, including that of fiscal ruin.  Obama's failure to cut the deficit raises the question of whether he is serious about fulfilling this responsibility.  Once the national debt reaches a decisive tipping point -- and many would say it has already -- future prosperity will be placed in jeopardy.

Borrowing always reduces future living standards.  The great prosperity that America enjoyed following World War II occurred as federal spending returned to peacetime standards and private-sector investment increased.  With an explosion of capital formation in the private sector following the war, the U.S. economy grew rapidly from 1950 to 2000.  But the economy will not continue to expand if it is saddled with a national debt estimated to reach $26 trillion, or 91% of GDP, by 2025.  The average household would see its living standard reduced by at least 6% (6.68% interest on 91% of GDP), with a much higher burden falling on affluent households.  New taxes set to take effect in 2013 under ObamaCare are only a foretaste of what lies ahead.

Instinctively, Americans realize that the nation is not on the right course.  What they may not realize is just how far off course the country is in terms of the national debt.  Just 13 years from now, if interest rates normalize, interest on the national debt will consume $1.737 trillion per year -- perilously close to the total amount that the federal government now collects in taxes.

As the nation approaches the tipping point where interest on the debt consumes all tax revenues, only two "remedies" will remain: hyperinflation or default.  The re-election of Obama will only ensure that this tipping point will be reached as the country endures four more years of trillion-dollar deficits.

Jeffrey Folks is the author of many books and article on American culture, including Heartland of the Imagination (2011).