I'm dodging studying for the moment, so let's talk about the national debt. This has kind of turned into a novel of a polemic. There is a lot of parenthetical content and there is no TL;DR. You're forewarned. (The end is funny, though, at least if you've only gotten four hours of sleep in the past 48 and also happened to write it.)

While the debt hasn't gotten a ton of attention since August, the mandatory spending cuts implemented in the debt ceiling compromise are going into effect next year, absent further Congressional action and Obama rolling over like a complete spineless wuss. These cuts - 1.2 trillion dollars over 10 years, split evenly between defense and non-defense spending but exempting Social Security, veterans benefits, and public employee salaries and benefits - were agreed upon in order to avoid default. These cuts could have been overriden by a different package of equal value, but the committee responsible for creating such a package (predictably) deadlocked. Also notable is that the United States debt load - approximately fourteen trillion dollars - surpassed 100% of GDP; this is very unusual for an industrialized nation and is generally the point at which economists start worrying about the long-term feasibility of your fiscal policy. (Monetary, too, but fiscal is easier to adjust.) That last point, it's vital to note, has a extremely important caveat - Debt/GDP ratios are calculated based on the GDP of the most recent year, and GDP is now significantly lower than it will be once we return to full employment barring a complete collapse in labor prices.

Brief clarification: The aforementioned cuts reduce the deficit, not the debt. The deficit is your current-year shortfall (you budgeted $1000 but only made $900, you have a $100 deficit which you borrow from someone). The debt is the aggregate amount of money you owe (if you ran the above deficit for 10 years, you'd have a debt of $1000.) Reducing the debt would involve cuts of at least an order of magnitude greater, roughly one-third of federal expenditures, presuming revenue (ie, taxes) are held constant.

Over the years - really, since Reagan's second term but especially since Perot's abortive Presidential campaign - there's been a lot of focus on the problems spiraling debt could cause. I've seen at least two documentaries, The Day the Dollar Fell (I can't recall the Dutch title, apologies) and I.O.U.S.A., both predicting doomsday scenarios if the United States doesn't get its financial house in order. So, the question is: Do we need to pay down the debt? Do we need to get the deficit under control?

Deficit reduction is important, and something we should get started on once the economy returns to something vaguely resembling full employment. Debt reduction is laughable.

Let's look at the mechanics of what happens when we run a deficit. In order to make up the shortfall, the government sells debt, at a given interest rate. This debt takes various forms, but the most common are ten-year bonds (colloquially referred to - inaccurately; they're actually notes - as T-Bills) backed by the "full faith and credit" of the United States Government - there's no collateral, but the government is required by law to make the necessary payments. Much of this debt remains domestically held, but a hell of a lot is purchased by foreign governments (China is the principle foreign holder of United States debt) and banks as a reserve - that is, the purchasers are holding it more as a collateral asset than a true investment. We then pay interest on these bonds at a fixed rate. When the term of the bond is up, the bondholder can demand the principle, but they typically just roll it over into a new bond at whatever the given interest rate is because they're not really interested in making a profit off of it.

A couple things to take away from this. Firstly, because United States bonds are about as low-risk an investment as you can get outside of hoarding commodities, interest rates on United States debt is extraordinarily low. The real rate of return - the interest rate over the term of the loan minus the inflation rate over the same term - historically hovers around 2%. Over the past two or three years, since the Euro started taking a beating, it's typically been less than 1%. For an (extremely brief) period earlier this year, the projected real rate of return on ten-year bonds was negative - people were actually paying us to hold onto their money for them!

Deficit spending is often compared to running up a balance on a credit card by fiscally conservative politicans. Considering the credit card debt of your average American, that's a pretty visceral metaphor. It's also completely inaccurate - where credit cards often have APRs of 15% or more, over the past ten years, the APR of T-Bills has only rarely been more than 0.2% (peaking just under 0.25%), is usually lower, and - in another huge departure from credit cards - the interest does not compound.

Government debt in industrialized nations functions differently from consumer debt in a number of other important ways, too. Governments operate on far longer timescales than an individual. Governments don't retire - they're constantly producing income - and they very rarely die. Governments can (ignoring Laffer for the moment) arbitrarily set their income through tax policy. Governments can - with the exceptions of debt service and of treaty commitments, and occasionally even the treaties are ignored - arbitrarily set their expenses. And most importantly for industrialized nations, as long as you're not publicly crapping your financial bed and revolution doesn't seem likely, someone's always willing to loan you money, because the risk asymptotically approaches zero. If at the end of a bond's term a German bank decides to cash out their principle rather than rolling it over into a new bond, we can issue a new bond to cover what we owe, and nothing really changes except who we make the interest payments to.

Finally, as a point of reference, the United States Government spends ~5% of its yearly budget on debt service.

So, to return to the initial questions:

Do we need to pay down the debt? No. Interest payments are a colossal sum of money in absolute terms ($164b in 2010) but are not a significant drag on the United States economy ($14.4t, in the worst recession in the post-war period.) Interest payments can be continued indefinitely with no ill effects; if we really need that money to fund something, it's more efficient to just raise additional revenue for that project rather than dumping money into debt reduction in order to eventually reclaim future interest payments. At some point way down the line, if interest rates on US debt drastically rise, it may be worthwhile, but that almost certainly won't happen in our lifetimes.

Do we need to get the deficit under control? Yes. Interest payments are not an issue now but will eventually become one if we continue to expand the debt at our current rate. But not right now. Right now, because the interest rates are so low - within kissing distance of zero - we should be running the biggest deficits possible. Imagine that everyone in the world was offering you (for all practical purposes) loans for as much money as you wanted with a fixed interest rate below 1%; you could take that money, use some of it to train squirrels to pick stock ticker symbols out of a hat, invest it in whatever they drew out, and still make a phenomenal profit.

For a metaphor somewhat closer to life, imagine that you were living in an old Victorian mansion that hadn't been maintained properly. The people who built it did their job well, but it was really only built to last fifty or sixty years, it's been around for eighty, and it certainly wasn't built to modern code. At some point you're going to have to renovate the sucker, and while you could pay for it out of pocket, it's going to cost you a ridiculous amount of money and force you to make some pretty uncomfortable cuts to the rest of your budget, so that's pretty much out of the question. Or you could patch whatever's broken down this week, every week, forever. Or you could borrow the money, pay 0.25% interest, renovate and modernize the whole thing, and end up coming out ahead through energy savings. Much better plan!

In fact, people are offering you so much money at so little interest that you say SCREW IT GOING TO THE MOON, and then you go to THE MOON. And THE MOON is pretty boss, but you end up getting tired of drinking Tang all the time (because something is terribly, terribly wrong with you, seriously, are you even human, Tang is awesome), and you realize that paying for electricity is stupid, so you take out even more money at 0.25%, become a nuclear physicist, and develop a thorium-based nuclear power plant in your basement. So now the whole neighborhood just tosses rocks in your basement and they get free electricity. Then you remember that fission is for sissy fops and build a fusion power plant because "fusion" has F U right there in the name. Later that night, drunk on extremely fine single-malt Scotch, you're thinking back on your time on THE MOON and how awesome the company of young ladies was in low gravity, and you say to yourself, "Self, this Victorian mansion ain't bad, but it's not in the same ballpark as an orbital bachelor pad. Not the same league, not even the same friggin' sport. I'mma build me an orbital bachelor pad." So then you take out more money at 0.25% interest, get like five degrees, and design and build yourself an orbital bachelor pad. You pay the interest off with all the patents you've developed from getting six doctorates and building three world-altering monuments to science, and since in the meantime you've become too awesome to die, you just never bother to repay the principle because who cares, you can afford the interest and you're living in space. The (Former) Most Interesting Man in the World begs attendance, but you ignore his calls. (You still drink Dos Equis, though, 'cause it's a pretty decent beer for the price.) You have become King Badass of the Universe through the power of Borrowing Money Cheaply When The Opportunity Arises; Grayskull ain't got shit on this.

Or you could keep living in your busted-up house, halfway fixing each thing as it breaks, because you think debt is scary and bad.

That metaphor might have gotten away from me a bit. Tang is pretty awesome, though.

Break time is over; sleep dep continues. Back to studying.
Shared publiclyView activity