Four Big Fibs About National Debt

In August of 2011 I wrote a post called “The Pity Party” which discussed the political cost of our battle over the National Debt.  Well, they are at it again.  Now that the debt ceiling has once again reached its maximum, the conservative wing has decided to leverage this opportunity to force cuts in government spending.  In order to achieve this goal, conservatives need to bend the truth just a bit. 

Fib #1 – The debt is caused by increased spending.

Conservatives have created the illusion that the Obama administration has somehow increased spending by trillions of dollars.  This is simply not true.  There are three primary reasons for our growing deficit:  1) Economic changes resulting in lower tax revenue.  2) Tax cuts and economic stimulus.  And 3) Increased military spending, primarily due to war.  Of these, the largest factor is sharp reduction in tax revenue.  The Bush era tax rates were the lowest in 60 years, and were designed to spur the economy, but the Bush administration took no action to reduce spending.  Instead they chose to apply it toward debt.  Much of the continuing deficit during the Obama administration is due to continuance of Bush policy, not new spending instated by Obama.

Fib #2 – The debt is the highest ever.

As a reader of statistical data, you must be very wary of the words highest ever when it comes to dollar amounts.  Because the American economy is intentionally geared to be in constant inflation, the dollar cost of everything, if held at the same value, will always be the highest ever due to inflation.  Because of inflation, the national debt must be measured in ratio to the Gross Domestic Product.  In this case the debt is high.  In fact, it is currently running at about twice the historical norm, but still not the highest ever.  The highest national debt occurred at the end of World War II and nobody suffered as a result of the payback.  The WWII debt was easily paid down and the economy continued at a moderate and healthy pace throughout the 1950’s and 1960’s.  After WWII, war expenses were covered by increased taxation therefore war costs were not applied directly toward debt until after 2001.

Fib #3 – Our kids will be paying it back.

In fact, we have rarely paid the national debt back at all.  When we did, it was done through increased taxes levied during economically stable times.  More often, the debt remained unpaid as inflation and population growth continued to spur the GDP.  Consequently, the debt would shrink in relation to GDP without any pay back.  The hard truth is that the national debt is growing primarily due to our intolerance toward taxation and our current enjoyment of historically low tax rates.  Fortunately, as our economy stabilizes and inflation continues to rise, tax income will also rise due to higher incomes.  The debt therefore shrinks in relation to GDP without placing a greater burden on our kids.

Fib #4 – Federal interest is unmanageable.

In fact, interest rates are at an all-time low, consequently Federal interest expenses are also at an all-time low.  According to the Congressional Budget Office, despite the sharp rise in the Federal Debt from 2007 to 2012, the Federal outlay for interest is actually lower today than it was in 2007.  Of course, this extremely low rate will not last forever, which raises concern over whether we will be able to pay interest in the future.  But then again, interest will only rise if inflation rises, GDP rises, and tax income rises.  In this case, the debt will self-correct as it always has.

So, as you hear that we are racing toward a fiscal cliff while holding a ticking time bomb that will cause a government shutdown, try not to panic.  These are just scare tactics designed to move you to one side of the debate.  Ultimately our leaders in Washington will find ways to increase taxes and decrease ineffective spending as needed to keep us out of hot water.  In truth, as we continue to pay lower taxes than our forefathers, we are to blame for the rising national debt.

Tony F.  2013