Vijay K. Mathur
Published in Standard-Examiner, February 10, 2013, Ogden,
Utah
Many Americans,
including politicians and media pundits, are not well informed about federal
budget deficits and debt and their role in fiscal policy. Most equate it with
consumer debt. They also believe that state and local governments and consumers
balance their budgets, and hence by implication have no debts. They assume that
debt is burdensome on our children, without realizing that children also
inherit substantial federal assets. However, the view that federal government
should follow the example of states and consumers to balance its budget and
reduce debt is not based on sound economic reasoning.
Budget deficit occurs
when consumers’ spending exceeds income received in any given year. Borrowing,
on credit cards or from other sources, must finance budget deficits. Debt in
any given year is accumulated deficits over a period of time. Data shows that
consumers in general are not debt-free in any given year, as many tend to
assume. For example, New York Fed reports that in September 2012, total
consumer debt, including mortgage debt, was $11.31 trillion, almost the same as
federal debt held by the public in 2012. Consumers willingly tolerate debt if
they have enough disposable income to service their debt. However, as opposed
to governments at all levels, consumers do not have the power to tax or issue
securities to finance their obligations. Individually, they also do not have
the power to regulate business cycles or promote economic growth and
development.
State and local
governments also have debts in any given year. According to state government
finances, total debt (excluding pension obligations) across all states was
$1.132 trillion in 2011, and Utah was no exception. Federal government, as
opposed to state and local governments, uses deficits and debt as a tool of
fiscal policy to fine-tune the economy and build and accumulate national
assets. In addition, the federal government has the constitutional obligation
to provide national security against enemies and may have to incur deficits and
debt to finance those obligations.
In recessions,
private consumption spending and private investment tend to decline. If exports
are not increasing to offset imports, as is the case for the U.S. since 1976,
the only component that can increase gross domestic product (GDP), a measure of
a nation’s income, is to increase federal spending and hence deficits. In
recessions tax revenues also decline. However increasing taxes, on all
Americans at all income levels, in recessions is counter productive. Therefore,
the only option to finance budget deficits is to issue Treasury securities
(debt obligations). In 2011 the deficit was $1.3 trillion (8.7 percent of the
GDP), decreasing 0.11 trillion from its recessionary peak in 2009.
No one is forced to
buy Treasury securities. Individuals, businesses, foreign governments, pension
funds and other investors and institutions buy these securities as a safe
investment. As long as the federal government is able to service its debt and
meet its obligations given its capacity to pay, the problem of default does not
arise. Note, there is a distinction between “total debt” ($14.7 trillion in
2011) and “debt held by the public” ($10.1 trillion in 2011). In addition to
“debt held by the public,” “total debt” includes obligations for entitlements
such as Social Security, Medicare and other intra-government debt obligations.
However, a significant part of “total debt” burden can be ameliorated, while at
the same time assuring future benefits, by increasing income limit for Social
Security and Medicare tax on higher income people.
“Debt held by the
public” includes debt to domestic and international investors, state and local
governments and the Federal Reserve. The Congressional Budget Office (CBO)
estimates that this debt was 77.8 percent with net interest cost of only 1.4
percent of the GDP in 2012; it is expected to decline to 58.5 percent of the
GDP in 2022 with slight increase in interest cost. Federal debt poses no threat
to inflation and crowding out private investment, since interest rates and
inflation rates have been so low for quite some time.
Americans should also
know that total foreign debt is close to 48 percent of the “debt held by the
public” and mainland China holds only 10 percent of our debt obligations in
2012-Q3. Moreover, no one is forcing China to buy U.S. Treasury securities.
Given the economic conditions elsewhere in the world and China’s stake in the
U.S. as an export market, it considers our securities a safe investment.
Moreover, debt to foreigners should be viewed in terms of their substantial
debt to us.
It should be
understood that we cannot keep on piling up debt beyond our capacity to service
and meet other debt obligations, but recessions are not the time for spending
cuts.
Taxes and spending
should be tailored to stimulate investment in research and development, private
and public physical capital, and human capital. All eyes should be focused on
policies that stimulate growth now, and on deficit and debt reductions when the
economy picks up robust growth.
Mathur
is former chair and professor of economics and now professor emeritus,
Department of Economics, Cleveland State University, Cleveland, Ohio. He also
writes blogs for the Standard-Examiner at http://blogs.standard.net/economics,etc.
