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What If We Could Eliminate All Our Debt Today?

May 30th, 2010 . by economistmom

magician-poof-disappearing-act

OK.  In my last post I did not mean to suggest that the US doesn’t have a problem with our federal debt–in fact, just the opposite.  I was trying to say that the reason we do indeed have a big and very serious and very real problem has little to do with the particular level of debt to GDP (whether gross or net) that we are at today.  And while having a goal of staying under a particular level of debt to GDP at a certain date in the future would serve as a useful “checkpoint” or “weigh station” (as I have suggested the 3 percent of GDP deficit by 2015, which happens to be the fiscal commission’s short-term goal, would be), it would certainly not be sufficient to say “phew!  well, I guess we dodged that bullet.”  It might not even be necessary, actually, but without those shorter-term “checkpoints,” the rest of the necessary fiscal path to sustainability would be much tougher.

The day before my last post, I had been interviewed by NPR’s David Kestenbaum, who asked me to comment on the phenomenon of the few thousand private citizens who voluntarily make donations to the federal government to reduce the national debt.  My first reaction was “who are these very generous people who are doing something so contrary to their own self interest?”  The problem of fiscal irresponsibility has a lot to do with the “free rider” problem when it comes to the actual or perceived disconnect between any one individual’s government services received and the taxes they pay, after all.  My second reaction was that the few million dollars collected through such donations is such a small drop in the bucket when the debt is trillions of dollars, and if these people really wanted to make a donation that would effectively be “mega matched” and thus make more of a difference, they should give to organizations that promote fiscal responsibility as a “movement” from the grassroots up–organizations like, well, the Concord Coalition, for example.  (The one person who donated $1.5 million could have sustained the entirety of the Concord Coalition’s payroll for a year, by the way.)  But I digress into my own self-serving thoughts…

One of the first questions David asked me was (something like):  well, couldn’t we just pay off all of the national debt today, by (somehow) collecting an average of about $40,000 per person?  (David’s $40,000 figure signaled what he was proposing to do was to pay off the $13 trillion in gross debt, not just the net–in other words, repaying the trust funds and not just our creditors.)  To which I responded that it might be theoretically possible to do that, but economically it would be stupid; unless it were done very progressively such that only old and idle wealth were confiscated (rather than income), it would cripple the economy.  (Note that the $13 trillion in gross debt is about 90 percent of GDP.)  And not only would it be economically unwise, it would be grossly unfair to current taxpayers, because the debt is something we’ve been accumulating since the start of our nation, so why should it all be paid back by only those currently alive–no matter how rich some of them may be?

But let’s assume we could do it without destroying our nation; let’s assume we could go “poof” and wipe the debt slate clean.  What would paying off the debt entirely today accomplish in terms of fiscal sustainability?  Not nearly as much as it would seem.  Unfortunately, reaching even zero debt does not eliminate what’s “unsustainable” about our fiscal outlook.  We would start with a clean slate, but right away our debt would start accumulating again–because the dynamics of the fiscal outlook would still be all wrong:  promised entitlement benefits would still be growing too fast for the economy and revenues to keep up.  While without any debt we’d eliminate about $200 billion in net interest this year, the rest of mandatory spending alone–without counting any discretionary spending–would still use up nearly all of our revenue.  So even having “zeroed out the debt clock” we would still have a large deficit right away this year, immediately starting the debt clock back up again, and that new debt would be immediately projected to keep growing faster than GDP–the definition of an “unsustainable” fiscal outlook.

So even a magical zero debt to GDP situation is not “sustainable” if the unsustainable paths in the fiscal outlook are not changed.

Conversely, a high debt to GDP situation, while not ideal (because of the interest burden), might still be “sustainable” if the economy is on a growth path that manages to keep pace with the gap between spending (including interest) and revenues.  That’s a big “if” though.  Which is why when I said that there’s no such thing as an unsustainable level of debt to GDP (at any one particular point in time) I didn’t mean to imply that a high level of debt to GDP couldn’t be consistent with a completely unsustainable path of debt to GDP over time.  What I’m trying to say is what defines that unsustainability isn’t where we are right now but what we’re doing (or not) to change where we’re headed.

So, yes, we should talk about checkpoint/weigh station goals like getting net debt to GDP stabilized at some level not too far from where we are now–which is 60 percent of GDP–but not because that level of debt is anything that special or significant or sufficient for fiscal sustainability, but because to stabilize at the level of debt where we’re at now, we’ll have to start changing policy paths now–emphasis on policy and paths and now.  And the sooner we start the better, or else we’ll be perpetually counting on the economically foolish and grossly unfair idea that future generations will have to eliminate all our debt “tomorrow.”

6 Responses to “What If We Could Eliminate All Our Debt Today?”

  1. comment number 1 by: TheInterest

    This is a confusing choice. To pay back the debt or not. What to do after the debt is paid back.

    As for debt payback, we could do that today. All we need to do is move the money from people’s/country’s savings accounts at the Fed to their checking account at the Fed. The debt is gone.

    For those that think we have to “pay” for the debt via taxes or charity to the US Treasury then I ask what happens to the money that is used to “pay” for this debt? Once that money is paid back to the US Treasury that money is gone for good. You don’t quite say that above, but somewhat imply that. If one understands that all the money used in our system is backed by debt, if we remove that debt via tax dollars taken from the pockets of people, then the pockets of people are empty and our economy halts. Thus, can we ever pay off the debt using taxes? No, we’d be stuck in a deflationary death spiral.

    As for what to do once the debt were to be paid back, if one believes that debt is bad (and thus having any money is too) then sure, we haven’t truly fixed anything since the debt will just be back once we start buying more guns and butter.

    Although if our money system is built on the back of debt, don’t we need more debt to continue growing? After all, doesn’t a growing economy need more money? So yes, it would appear we do need more guns and butter to help our economy even if we were to pay off the debt.

    Maybe there’s yet another point after the fix of correcting our budget deficit issue. Maybe that is to get away from money backed by debt. Maybe if we understood that government, a limited government, can print and spend the necessary money it needs and thus wouldn’t have to tax or borrow from its citizens we could start focusing on real problems instead of worrying about a debt that now is obvious will never get “paid” back. That would require a repeal of the Commerce Clause and the General Welfare Clause of Article 1, Section 8 and a belief in the 9th and 10th amendment.

  2. comment number 2 by: AMTbuff

    Paying off the debt without making other changes would be like getting liposuction without reducing one’s calorie intake and expenditure.

  3. comment number 3 by: BNCorcoran

    In your interesting post, you write.. thep debt is something we’ve been accumulating since the start of our nation,..”

    Although, it may seem that way to most people, the debt was actually paid off during the Andrew Jackson Administration. The current public debt has thus been accumlalted since about 1836.

  4. comment number 4 by: Jason Seligman

    Those that choose to donate the federal govt… this group seems to get attention in days like these, I recall focus on this group in the late80s-early90s defict period too. I think it is encouraged by the news and those ads in magazines put out by corporate citizens that show a swaddled newborn and a bill for 10s of thosands in taxes (never mind the physical and institional capital endowment that child is simultaneously born into)

    But I digress. There are two points I’d like to make

    -1- what has the United Way got that the federal government does not? Why is money given to the government more “gone forever” than money given to the NRDC? (how effective would NRDC be without the EPA?)

    -What could be more efficient than volunarily paid taxes? I’m not always the biggest revealed preference fan, but the arguement does have it’s place…

  5. comment number 5 by: carnut

    technically, Andrew Jackson had the debt down to 33K during his term in the 1800s before the recession during that period of history, so I wouldnt say its from the beginning of our country.

    And IIRC, the debt has more than double in the last 10 yrs. In fact, the presidential nominee who said he would reduce the annual debt has more than tripled the average of the last president.

    what has been a small problem for years has ballooned as Congress has decided in the last 10 yrs that since they cant get away from it, they might as well do away with any goals to minimize it.

  6. comment number 6 by: PotomacOracle

    The Post by “TheInterest” is so right.

    I would go even further. Let’s say we have two hundred trillion in debt and unfunded liabilities held by the rest of the world in bonds, notes, etc, as a claim on our resources.

    As you suggest we either make ledger entries for savings and checking accounts or better yet print money to pay off this debt. However, what we print will not be Federal Reserve Notes which are interest bearing dollars, but a new interest free currency, the New U.S. Dollar. A la JFK’s Silver Certificates, without the silver, issued under E.O. 11110 on 6/4/’63.

    We pay all creditors and restore trust funds with this New Dollar. Creditors in turn send us the bonds, bills, notes, etc. which bear the amount we owe them.

    Now, they have the 200 trillion in cash, we have the 200 trillion in Treasury paper. There are now 400 trillion dollars in the global economy, surely a recipe for rampant hyperinflation.

    BUT WAIT!! There’s more.

    All we have to do is liquidate rather than REISSUE the 200 trillion in Treasury paper. (THE purposely inflationary practice of the Fed.)

    Voila…We are back to where we were before we issued the New U.S. Dollars. We still only have $200 trillion in the global money supply. No inflation and no U.S. debt.

    Now, what could be better than that????

    As for fiscal policy reform! We don’t have to borrow to finance goods and services for the commons.The Commons are not for profit organizations. why charge or pay interest for the use of money created by and for the Commons?

    Lincoln wouldn’t pay bankers 26-35% and instead, he won the Civil War and launched the American IndustrialRevolution with debt free Greenbacks.(Yes, I know there was rampant inflation, but that was due to banks and states issuing their own currency and the fact that Greenbacks competed with gold and those who speculated in gold. However, there was no debt associated with Greenbacks.)

    If the government issues currency there will be corruption ‘run wild’. Wait a minute! We have private sector interest based funding for the Commons now but that does not eliminate rampant waste, fraud and abuse. The government, rather than the privately owned for profit Federal Reserve Banking system, can issue an interest free new dollar as a medium of exchange rather than as a commodity. Voters can register they’re disapproval and remove elected officials. There is nothing they can do to anyone in charge of the Fed. Hell we can’t even get an audit.

    After paying off the debt, money supply can be determined by GDP growth rates or equivalents.

    Importantly, because currency will be issued by the public and not the privately owned Federal Reserve, there are no bondholders to demand or siphon off profits, because there are no interest gains, therefore, Federal income tax rates can be lowered or even phased out.

    Commercial bank lending would not be affected by these monetary and fiscal policy reforms. Individuals and businesses would determine demand/supply for investment/savings/loans and therefore, market interest rates.