The 6 Biggest Lies About the U.S. Debt

[marmar]

AlterNet / By Arun Gupta

The 6 Biggest Lies About the U.S. Debt
As Congress nears a vote on the various debt ceiling deals, let's look at the lies and misinformation that got us into this mess.

July 28, 2011 |


There is one simple truth about the discussion of the looming U.S. debt crisis: it is largely a compendium of half-truths, distortions, myths and outright lies.

For example, is it true that the U.S. debt is unsustainable, which is spurring the budget-cutting fever? Far from it. While U.S. debt is at one of its highest levels ever in terms of gross domestic product, the interest payments in 2011 on the $14.3 trillion public debt will be a mere $386 billion. This is barely more than the $364 billion paid way back in 1998. In real terms, the U.S. economy has grown nearly 30 percent since then. Rock-bottom interest rates on U.S. government debt account for the low payments today, but the practical effect is that servicing the debt as a percentage of GDP is the lowest it’s been in decades.

Or what about hysterical headlines like “U.S. Debt Default Looms” (courtesy of NPR) unless Democrats and Republicans agree to raise the debt ceiling? They are completely untrue. Richard Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, says, if there is no agreement by Aug. 2 to allow the U.S. Treasury to borrow more funds, then “the government instead would choose among cutbacks on various expenditures such as state and local aid, medical aid, for war, for infrastructure. It would extraordinarily unusual for a government in such a situation to attack its creditors.”

If no deal on the debt ceiling is reached this sucks for the rest of us, such as the millions depending on their portion of the $23 billion in Social Security payments scheduled for Aug. 3. A short delay would do no serious harm, but a longer delay, perhaps just a week or two, would be devastating. .............(more)

The complete piece is at: http://www.alternet.org/story/151827/the_6_biggest_lies_about_the_u.s._debt/

[Igel]

1. Mostly agree.

Which is rare for me to say about much of anything.

Point 1. Low interest rates are a trap. If my credit card interest rate is 4% I'd be tempted to charge a lot. Then, if it goes to 14%, I'm so screwed.

Now, government debt is in bonds. If the interest rate skyrockets, the actual money paid in interest on already-issued debt doesn't change. *But* we're always rolling over debt obligations--we pay off one and issue another to take its place. The longer interest rates are low, the more debt is at the low interest rate. If the interest rates go up, new debt will be at that rate, and "new debt" isn't just the amount added to the national debt. It's also debt that was retired and reissued almost at once.

Point 2. No real problem, except that Obama makes it sound like the Treasury's spent all the available cash so that there is no money to prioritize for interest payments. If so, they've shown a lot of irresponsibility and acted in a very imprudent manner.

point 3--the repercussions, agreed.

Point 4: I agree that nobody wants to reduce the deficit. Government discretionary spending is up nearly 20% since *'s last budget submission but we only hear about the $20 billion in cuts not the $700 billion in increases. The (R) don't because they all have pet projects and goals that trump their ideology. The (D) sometimes seem to decry spending as a kind of virtue, making vice into virtue. Obama doesn't. His last proposal, under some readings, cut something like $1 billion from a $1.5 trillion budget. (Okay, you all--time to bite the bullet. You make $10k a year and you're in some huge austerity cuts--$7 next year. How *will* you survive?)

Point 5: Tax increases vs budget cuts. There are many ways to bring a budget into line. Growth is sucky. There's scant evidence increasing taxes will suddenly jump start growth; there's scant evidence reduced taxes will jump start growth. The increased discretionary spending hasn't obviously helped; reducing it back to 2009 levels won't obviously hurt.

Point 6: Depression. It resembles more the aftermath of a financial crisis than the Great Depression. If not for the fact that the Great Depression is the only depression that anybody's heard of, it's a fine term. It's like "recession." Economic and historical usage is one thing, contemporary popular usage quite another. We get irate when we're told we've been out of recession for a couple of years because of the mismatch between meanings, we like the definition that suits a political goal but intend for it to describe a general economic state. It can't do both. When using "depression" serves a political goal, we get the same mismatch.

The problem with comparisons with the Great Depression is that the amount of stimulus in various ways was much greater in 2009. Not as a percentage of GDP for any given category, of course. It also didn't target unskilled or barely skilled male laborers. However, the downturn wasn't nearly as bad--and I'm sure somebody will cite the rate that the downturn affected some sector and confuse rate of change with extent of change. (I can quickly accelerate to 70 mph and slow down, covering only part of a mile in a minute; during that same time I can do 61 mph consistently and cover over a mile. Top speed is not more important than distance covered.)

One accurate comparison is that when there's a financial downturn, until the system gets back in shape and works out all of the problems the individual bits in it--in this case, the workers and companies--don't play their usual roles. TARP was intended to get them all playing together; TARP was subverted and in so doing kept the crap that was fouling the cogs in place.

Enforcing austerity during the Great Depression is deemed to have resunk the economy while Hoover's deficit spending didn't help it. The problem was that the spending in the years before the debacle in 1937 hadn't actually strengthened the economy. Remove the crutch, and the economy's legs were discovered to be still broken and unknit. Consider it to probably have unknowable causes because of a kind of governmental observer's paradox: The government played with the economy and altered things, lots of them, constantly. We don't have a good model for depressions--we have lots of them, but few ways to actually test whether their core assumptions and analyses hold true because most of the things called depressions are rather poorly documented and the term's poorly defined. The models work for the Great Depression, which is what they were developed to work for (surprise!). They haven't worked for this--and the assumption is that it's because we didn't follow their later remedies, even if the mechanism of the depression was different and the early steps taken were different. That assumes the model is true--a reasonable hypothesis for further investigation--but doesn't entail that the model is true. Having the initial conditions be different and early steps taken diverge, some say, makes no difference. In other words, the model could still be false or, if true, be inapplicable, but belief in the assumptions drives the debate. (With a strong undercurrent of, "And we must drive anybody who has different assumptions out of the debate"--and we must never question our assumptions. Dismal science, indeed. Despair-inducing is more like it.)

Point 7: (Yes, I get more "points" because he's not clear exactly where each new point begins.) Long-term budgeting. Spot on. The way it was done in the '90s was a tax increase, some spending cuts, and a spending cap. In a period of high growth--okay, a bubble--the economy grew to wipe out the deficit, and since the recovery was well underway before the tax increase it could be absorbed. I don't see those things happening today. But 10-year-budget projections are actually rather less believable than taking Star Wars as a historical documentary.

Addendum: The credit ratings agencies did crappy in 2006-2008. Does the past predict the future? Only if nothing's changed, if (a) the agencies continue to have lousy practices and (b) there's no new information. I can't speak to (a). As for (b), the new information is Europe, and brings us back to Point 1, ourobouros-like. It's why the administration is very clear that the credit-rating threats are *not* related to the debt ceiling, at least not directly; they're related to the deficit and where the debt ceiling will be in several years.

I've seen simpletons say they'd welcom a $300 trillion increase to the debt ceiling because, well, no debt is too great. I can only imagine the state of their credit cards, the amount they can borrow in a pinch, and the interest rates they're paying. I keep mine paid off. If anything happens, I have a lot of debt reserve I can draw on; I pay zero for interest; and my credit rating makes sure that my interest rates are as low as commercially available retail. Somehow they believe that while other countries are subject to constraints not dissimilar to the ones that he and I live under, the US is truly exceptional. Delusional.