A new perspective on the debt

October 17, 2013
By: Eric Lundin

The good news is that Congress finally drafted a spending bill that a majority agreed to (but not too enthusiastically); the bad news is twofold. First, some in government seem even more out-of-touch than ever.

  • To quote Senate Majority Leader Harry Reid, D-Nev: "This is not a time for pointing fingers and blame. This is a time of reconciliation. I look forward to working with my colleagues on both sides of this great Capitol to pass this remarkable agreement that will protect the long-term health of our economy and avert a default on our nation's debt, and allow us to set a foundation for economic expansion."

  • House Appropriations Committee Chairman Hal Rogers (R-Ky.): "I'm optimistic that once this resolution has passed, the House and the Senate will come together in a budget conference to work out our broad fiscal and budgetary challenges."

  • President Obama: "Hopefully, next time, it will not be in the 11th hour."

Why these three think that the bipartisan stonewalling is finished is beyond me. Anyway, the other bad news is that next time is right around the corner. This bill authorized spending through January 15 and the debt ceiling through February 7. It won’t be long before we have to endure a similar charade.

The vote itself was hardly a landslide at 284-144. Blaine Luetkemeyer, R-Mo., summed up the reservations of many: "After weeks of discussions and trying to reach a conclusion to get the government up and running, the bill that was on the House floor today did nothing to address the nation’s out-of-control spending." Likewise Randy Hultgren, R-Ill., cited the “massive debt” as his reason for holding out.

Just how massive is our debt? Somewhere around $11 trillion. That’s an awfully large number, too large to grasp, so economists usually equate debt to gross domestic product (GDP). That makes sense, doesn’t it? That’s quite a bit like measuring personal debt against personal income. Personal debt to the tune of $750,000 would be far too much for a average wage-earner, but it would be manageable for a neurosurgeon. More income makes more debt palatable; likewise less income goes well with less debt.

Moving along, the U.S. has a gross domestic product (GDP) of 15.9 trillion. That sounds bad—the debt is more than 70 percent of GPD—so it’s customary to compare our debt with Japan’s ($10 trillion, which is 200 percent of the country’s $4.7 trillion GDP). In other words, ours isn't so bad. Or is it?

Well, if you ask me, it is.

Forgive me for upsetting the world of economics, but it seems that comparing the federal debt to the GDP is screwy. On the surface it makes sense, because the government gets its revenue by taxing economic activity—as the economy grows, and people earn more income, they pay more in taxes, and government revenue grows—but two countries could have wildly different tax structures, and this is where the notion falls apart.

Comparing the government debt to its revenue seems to make a whole lot more sense. Let’s start with economists’ favorite basket case, Japan. It takes in $2 trillion in revenue every year, and the debt is $10 trillion. That’s a ratio of 5:1 (in other words, if the government were to stop paying all expenditures and continue to take in $2 trillion per year, Japan would pay off its debts in five years). Where does the U.S. rank? Right behind Japan, as a matter of fact: the U.S. ratio is 4.7:1.

How bad is that, exactly? Greece, the country at the focal point of the sovereign debt crisis that engulfed the European Union in 2009, has a ratio of 3.9:1. That’s right—Greece is in better shape than the U.S.

The members of the European Monetary Union were supposed to comply with deficit limits, and their revenue-to-debt ratios tend to be 1:1 and 1.75:1. Like Greece, Ireland is significantly outside this band, at 3.2:1. At the other end of the scale is frugal Denmark, which could pay off its debts in less than six months.

The crux of this is taxation. Nobody wants to hear that his taxes are too low, but depending on your point of view, this is a big problem in the structure of the U.S. economy. In many industrialized countries, the taxes are substantial (40 to 50 percent of GDP), and the government delivers a host of modern services. In the U.S., the tax revenue amounts to less than 16 percent of GDP, and the government delivers more than it can pay for, so the debt grows and grows and grows.

Of course, discussing the debt is easy. Discussing the solutions, which amounts to finding volunteers willing to pay higher taxes or get by with fewer public services, is much more difficult.
Eric Lundin

Eric Lundin

FMA Communications Inc.
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