What do water, fire and debt have in common? Each has a bright side and a very ugly side. If you are drinking cool water or bathing in warm water, it’s a wonderful thing. If water is gushing out of a burst pipe, or standing three feet deep in your living room, not so wonderful. Fire can cook your food or heat your body, but it can also consume your house. Same with debt. It can make you rich or break you.
First, we’ll talk about productive debt. Say you borrow to buy a machine that makes Barbie dolls. A fully amortizing 7 year loan will pay for a machine with a useful life of 10 years. If you did your projections correctly, you can make and sell enough Barbies to pay the electric bill, service the debt and pay yourself a salary. After 7 years, you are in tall clover. You can amp up your lifestyle, or save to reinvest in your business. Maybe you can buy a new machine for cash, or make a down payment on two machines. You’re in business.
Maybe you save enough to make a down payment on an apartment building. Get a 60% first and a 20% second. You collect rent every month; pay operating expenses; service your debts; and (if you bought right) have something left over as a return on your equity. As inflation drives your rents up, your return increases. After 10 years, you’ve paid off the second. After 30 years, you’ve paid off the first. You now have a nice retirement income.
If you are government, you might float a bond issue to build an airport. You can repay the bonds by collecting landing fees, and you stimulate the local economy, generating more tax revenue. The airlines, the traveling public and your citizens are all better off.
On the dark side, maybe you lead a Little Richard inspired lifestyle. Well, it’s Saturday night and I just got paid. Fool about my money, don’t try to save. My heart says go go, have a time. ’Cause it’s Saturday night and I’m feelin’ fine. Sunday morning, you’re worse for wear. A look in the full length mirror reveals that your once flat belly has acquired additional southern exposure. You take action. You go to the mall to buy Spanks. Since you have no money left, it goes on your credit card. You haven’t added to your consumption; you’ve just advanced the timing, at great cost. At some future time, you have to pay the bill, plus 18% interest. At that point in time, and forever thereafter, the money is not available for your use.
Credit cards are insidious. Shopping for necessities is a humdrum experience. Shopping for luxuries generates a burst of pleasure in most people. I believe research has shown actual brain chemistry response to that effect. In the old days of cash, that sensation was offset by the pain of parting with your hard earned money. At some spot in your reptilian brain, you did a calculation about the number of hours it took to acquire the money to make the purchase. If that number was high enough, you probably passed on the purchase. Credit cards solved that problem for merchants. You get the pleasure of instant gratification without the pain of paying. And you can continue to dodge the pain (at a cost of 18%) by paying the minimum when the bill comes in. You are now, officially, a debt slave.
What about our public debt? Utterly non-productive. We are approaching a national debt of $20,000,000,000,000. Ample research has shown that economic growth is stunted as debt level approaches 100% of GDP. Our rationalization is that something like $3 trillion doesn’t count because it is T-bills in the trust accounts. When payroll deductions were raised in the 80s, the money was supposed to be saved for the baby boom retirement years. It was all spent and IOUs were put in “trust”. Because those Bills haven’t yet been sold, we have about $17 trillion of debt held by the public, against $18 trillion of GDP. All these figures are approximations off the top of my head, but they are close. We don’t count state and local debt (which countries in the comparative studies don’t issue). That number is $4 trillion. In reality, our debt level is over 100% of GDP, and a clear and present threat to our economic well-being. Virtually none of the money was spent on anything that will pay for itself or improve productivity. By far, the biggest line items are transfer payments. We are taking money from one group of citizens and giving it to another group. The Congressional Budget Office says that the deficit will go up every year from here on out, and be back at $1 trillion/year in the near term. Thelma and Louise are approaching the cliff at high speed.
This reality concerns wingnut, libertarian cranks like me. It should also concern you paragons of compassion on the other side of the political spectrum. Compassion is a costly endeavor, and resources are getting thin on the ground. In round numbers, the annual federal budget is a bit above $4 trillion, with collections of $3.4 trillion and a shortfall of $600 billion. If you deduct transfer payments, defense (already cut to a dangerous extent) and debt service ($250 billion a year and sure to increase sharply as rates normalize and the debt gets bigger), what’s left is 17% of the budget. THAT IS 17% FOR ALL THE OTHER FUNCTIONS OF GOVERNMENT. That percentage is slated to get smaller every year as more baby boomers go on the dole.
The obvious solution is to raise taxes. Government at all levels consumes about 35% of GDP. In France, it’s 50% We could ramp it up. The example of France is, however, instructive. The French are trying to cut back on spending and taxes, because their economy has stagnated for years, and their most vibrant export is their talented young people, who have moved to London. There is ample research to indicate that high taxes inhibit economic growth.
Some combination of higher taxes, lower benefits and faster growth will be required to deal with our crushing load of unproductive debt. Time to pay for the Spanks.