March 2005: National Debt

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Opinion:
The question of our national debt

By Gordon Johnson
Washington Window
Vol. 73, No. 4, March 2005

Our nation's debt is an important economic and political issue with serious moral dimensions.
On Dec. 31, that debt totaled $7.6 trillion. About 60 percent ($4.4 trillion) is public debt held by domestic and foreign investors, and 40 percent ($3.2 trillion) is in trust fund bonds held by the Treasury Department. Every man, woman and child now living in the United States owes $14,928 to the public investors, and owes another $10,853 to the Treasury Department, payable when the time comes for the Treasury Department to cash in those trust fund bonds.

No problem
Those who say our debt is no problem point out that we have a powerful economic engine at work in the U.S. The debt, therefore, should be viewed not in absolute numbers, but in relation to our steadily increasing Gross Domestic Product, which represents our nation's ability to repay the debt. Since the end of World War II, when it was over 100 percent, publicly held debt has averaged 42.7 percent of GDP. It is currently only 37.2 percent, and is projected to stay under 40 percent for at least the coming decade.

Furthermore, our total government debt is not out of line with other industrialized countries. At 44.4 percent of GDP (now including state and local debt for comparability), our total debt is midway between Germany (48 percent), Japan (72 percent) and Italy (94 percent) on the one side, and France (40 percent), Canada (38 percent) and the UK (32 percent) on the other.

Some ask why today we face continuing deficits when in 2001 surpluses were forecast far into the future. The House Budget Committee concluded that the economy, which was hit hard by the stock market decline and the severe economic after-shock from 9/11, was the largest cause of deficits in fiscal years 2002-2005, while tax cuts, the economic stimulus program and the war in Afghanistan and Iraq played secondary roles.

Just as the economy accounted for much of past shifts from deficit to surplus, and from surplus to deficit, and assuming the dollar continues to be the world's principal reserve currency, a rebounding U.S. economy should be able to accommodate and eventually reduce our current level of national debt.

A looming disaster
On the other side, the pessimists observe that today's economy is not like past economies. With fewer children, who will make the economy grow? Protection from terrorists will create many new costs and hurt productivity. China, India and other developing countries will be bigger players in global markets and may take business from American firms. High deficits and an increasing national debt will cause interest rates to rise, increasing our federal debt service costs. Furthermore, huge debts incurred by Fannie Mae and Freddie Mac in the housing market have created new debt risks and our citizens have assumed high individual personal debts.
The problem of $4.4 trillion in publicly held debt may be manageable, but what about the $3.2 trillion in "trust" funds held by the Treasury Department? Those trust funds represent money paid by wage earners who expect to be repaid in future benefits. Past Congresses have already spent that money for unrelated purposes, and when it comes time to convert the trust fund bonds to cash, the government must borrow new money, raise taxes or print more money to raise the cash to pay them off.

Worse yet is the fact that $3.2 trillion is woefully inadequate to cover future payments owed under currently authorized social programs - primarily Social Security and Medicare. The federal government has an archaic cash accounting system, which legally hides these massive off-the-books future liabilities. The Comptroller General of the United States says that "If you include promised but unfunded Social Security and Medicare benefits along with explicit benefit and other commitments, the federal government's obligations, current liabilities and unfunded fiscal commitments are over $43 trillion and rising...The current burden for every American works out to more than $145,000."

The problem will develop gradually, year by year, and those who hold public debt will increasingly fear inflation and increasingly hold back on buying new bonds. This will cause interest rates to go up even faster, further increasing our debt service costs and slowing our economy. Home mortgage rates will increase. New car financing will become more costly. Borrowers, already stretched thin by credit card debt, could face bankruptcy.

As foreigners reduce their holdings of U.S. bonds, the dollar will drop on foreign exchange markets. Our goods will be more competitive, but higher priced imports will increase inflationary pressures. Foreign economies will be hurt if they sell less to the U.S. and this will weaken the markets for our exports. The downward spiral initiated by a loss of confidence in the U.S. dollar and U.S. government bonds could send the global economy into deep depression from which it could take decades to recover.

To avoid loss of confidence and a run on the dollar, debt holders, both domestic and foreign, must be assured that our government has a valid plan to restructure our nation's looming future obligations. Debt holders have good reason to worry that future workers will not be willing to pay drastically increased taxes to pay benefits to more and more older people. If taxes cannot be increased enough, and the benefits are not restructured, then government may simply print more money to inflate the problem away. The resulting hyperinflation would destroy the people's savings and further drive away foreign investors.

Whatever course is adopted, it should recognize that, because of our pay-as-you-go accounting system, Congress is allowed to spend the trust fund money as soon as it comes in. Thus an increase in payroll taxes will only postpone and exacerbate the real deficit problem when it finally surfaces. Debt holders would feel more confident if Congress could find a way to restructure benefits rather than increase the payroll tax.

Politicians will not face up to these future problems unless there is real pressure from fearful constituents, which could come from updating the federal accounting system to surface the true facts.

Debt as a moral problem
Beyond seeing the debt as an economic and political problem, there is a fundamental question of how to deal with the debt in terms of the common good and social justice. Questions include: What is bought with money spent in excess of revenues, causing deficits and increased debt, and does it promote the general welfare? Do these programs deal appropriately with the neediest people? Do the priorities in the annual budget accurately reflect the needs of the most vulnerable people? Does the government have the right to hide the financial reality of the debt from the people? Is fiscal accountability important morally? Is permitting an enormous, growing and apparently unpayable debt similar to damaging the environment, to the detriment of our grandchildren's welfare? What is the moral responsibility of citizens, through education, to become good judges of the morality of public policy? Are we carrying out God's will when we promote economic expansion as the solution to all our problems?

This paper was drafted by Gordon Johnson of the International Economics Committee of the Diocesan Peace Commission and revised by members of the committee. It does not represent exactly the views of any individual member.

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