Seven Things You Should Know About the National Debt

from the introduction:

There are seven key points about the national debt, budget and trade
 deficits, and the dollar, that the public needs to understand in 
order to be well-informed and prepared to choose among various policy
1) The national debt is not literally a generational transfer. This 
is easy to see because everyone who holds the debt (government bonds)
 today will eventually be dead, leaving the possession of the bonds 
to their children and grandchildren. In other words, the interest on 
the debt will be paid from some members of future generations to 
other members of future generations. (We will deal with issues 
created by foreign ownership below.) The debt can involve a 
generational transfer only insofar as it slows the economy’s growth, 
so that it produces less in the future.
2) The high dollar (not the budget deficit) is what causes the trade
deficit and therefore leads the United States to borrow from 
foreigners. No one buys foreign made goods at Wal-Mart because the 
government is running a budget deficit. They buy foreign made goods 
because a high dollar has made foreign goods cheaper than comparable 
U.S.-made goods. The high dollar also makes U.S. exports more 
expensive for people living in other countries.
3) A large trade deficit requires that we either have a very large 
budget deficit or extremely low private savings or some combination. 
This is an accounting identity. If we are borrowers internationally 
then we must have very low domestic savings. And we are borrowers 
internationally because we have an over-valued dollar. In other 
words, the high dollar requires us to either have large budget 
deficits or to have low private savings.
4) The stock and housing bubbles led to an enormous reduction in 
private saving through the wealth effect. Research shows that $100 in 
additional stock wealth will lead to $3 to $4 of additional 
consumption, meaning that saving drops by this amount. The housing 
wealth effect is estimated to be $5 to $7 of additional consumption 
for every $100 of housing wealth. This means that a $10 trillion 
stock bubble would be expected to reduce annual saving by $300 
billion to $400 billion. An $8 trillion housing bubble would be 
expected to reduce annual saving by between $400 billion and $560 
billion. These bubbles have been the main cause of the low savings 
rate in the United States over the last 15 years. 
5)  During times of economic  weakness (like  now), deficit spending 
actually helps the economy to  grow. In such times deficit spending 
is also likely to increase  investment. In this case, deficit 
spending makes our children and grandchildren richer than if we did 
not have deficit spending.  
6) High and rising private sector health care costs in the United 
States are responsible for the bulk of the federal budget deficit 
problem. (Government health care programs like Medicare and Medicaid 
pay for health care provided by the private sector.) If health care 
costs are not contained, then the economy will be  devastated  
regardless  of  what  we  do with the federal budget. If they are 
contained, then there is no budget problem. 
7)  Social Security has a dedicated stream of financing that keeps 
it fully funded until 2036 according to the most recent projections. 
Given this stream of funding, it would be no more justifiable to cut 
back benefits in the near future than to default on the federal debt.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s