Government deficits have to be covered - somehow - either by increasing revenue sufficient to cover the deficit, cutting spending back into line with revenue expectations, or increasing the government debt.
The chart to the right shows the Federal debt going back to 1929. The estimates for 2009-2019 come from the proposed budget released 2/26 by President Obama. Prior to 1980, debt wasn't much of an issue and the Clinton administration did a reasonable job containing the debt, though some credit is due to Congress during this period. However, the Bush Presidency, even with a Republican controlled Congress and Senate, continued the increased use of debt to support government spending. Eight years of "good times." However, even more worrisome is the expected jump this year to cover the stimulus packages and expected deficits for the next decade in support of the Obama agenda.
As with the Deficit charts, the Debt needs to be put in some perspective with an adjustment for inflation.
The chart to the right adjusts the past to current (2009) dollar value. As with the deficit chart posted a couple days ago, you can now see the impact of WW2. But the FDR spending during the Depression really doesn't register to any extent. Even after the war, there were sufficient surpluses to bring the debt down to where it remained steady into the early 80's. Since then the increase has been dramatic, living the good life with borrowed money that will have to be shouldered by our children and grandchildren. Much of the rationale used in the increased spending during this period is to "do it for the children." Technically, this isn't quite right. What we have done is "do it TO the children."
One argument to support the use of debt is that we are lending money to ourselves. However, increasingly the money being borrowed comes from OPEC (failed energy policy) and China (extreme trade imbalance). Both of these sources create a national security risk through dependency on others to support our debt.
- What is the level of debt that is appropriate for our Country? This is a policy issue that is lost in the political debate.
- Where is the borrowing going to come from to support the spending now being proposed?
- What would happen if foreign countries fail to continue purchasing our debt? Even worse, what if they start to sell the debt they already hold? Most likely they will continue to hold the debt they have because they have few alternatives. They also don't want to incur even more damage on the global economy on which they are dependent. But do they have sufficient cash to keep buying US debt since their economies are also being impacted by the recession?
This brings the discussion to the next issue - US Government borrowing competes with others also seeking to borrow, other countries and businesses around the world.
- To what extent will the increase in US borrowing push interest rates higher? This impact is not reflected in the Whitehouse budget, but it could easily become a concern as borrowing exceeds funds available for investment.
- To what extent will businesses be locked out of the investment market as they have to compete with the US Government for funds to expand their businesses? To what extent will curtailed economic expansion eventually start to impact the revenue side as GDP growth stagnates?
These are not easy questions. They are also questions that I do not hear being asked in Washington as politicians rush to spend money as quick as they can believing that spending is the answer. However, if deficit spending were sufficient to spur a robust economy, we should be riding high right now given the spending over the last 20 years, goosed by the most recent eight years of deficits.