More Debt Debate

Reader Horatio asked some good questions following yesterday's post about national debt. In short, he asked this: “That $414.3 Trillion is arbitrary. Doesn’t the government derive that number by using the annual debt and arbitrarily taking it out ten years? i.e., 10x1.4 = 14 trillion.” And he points out that, when we have debt, like a mortgage, we must include the entire 30 years (or however long) the mortgage continues, so why doesn’t the government have to do the same? 

There is always a good chance that, when it comes to economics and government, there will be things I just don’t understand. As I’ve heard accountants say, “What do you want the number to be?” which is not very comforting. But I had assumed that, when we refer to national debt, we are referring to the accumulation of debt since the country began—anything that hasn’t been repaid. Whereas the budget deficit is the difference between this year’s revenue and this year’s budget outlays. 

So, I looked it up to see if my assumptions were right. I found this site on the national debt clock. (The up-to-date debt clock itself can be seen here.) This site about the national debt was last updated in 2008, so proportions and numbers can be significantly worse now. But the principles, I believe, still hold. Ed Hall, who wrote this info, says: 

The National Debt is the total amount of money owed by the government; the federal budget deficit is the yearly amount by which spending exceeds revenue. Add up all the deficits (and subtract those few budget surpluses we’ve had) for the past 200+ years and you’ll get the current National Debt [which is what I had assumed]. 

Politicians love to crow “The deficit is down! The deficit is down!” like it’s a great accomplishment. Don’t be fooled. Reducing the deficit just means we’re adding less to the Debt this year than we did last year. Big deal—we’re still adding to the Debt.  

Hall includes this graphic of national debt up to 2008, which he made from government-provided data. Notice that in the three years since, national debt has climbed from $9 Trillion to $14.3 Trillion (which Obama is saying is simply not enough to get by). So you need to imagine a few painful sharply higher lines at the right of the graph. 

Horatio’s question, I think, refers to an accounting practice that government is probably employing in how they budget for the current year and, in part, subsequent years, based on their legislation. If you recall the story of accounting for Obamacare, the new costs were spread out over 10 years, with much revenue being applied to it starting immediately, but with no outlays prior to 2014. So only six years of outlays would be accounted for, matched against 10 years of revenue—to make the outlays look less scary. 

When the government enacts an expectation that costs the public, they may not put the total cost in that year’s budget, or even the total perpetual cost; they may just estimate it out in a way that makes it look less painful—and coincidentally might not show up in public view until after a reelection has taken place. 

I’d like to see transparency, and accounting practices for government that are required for businesses. I don’t know how we get there from here. 

Last night I was on my way home from listening to Susan Combs, Texas State Comptroller (I plan to share some of what she said in a later post), and had the radio on the Mark Levin Show. He was talking with one of my favorite economists, Walter Williams. I am paraphrasing, since I couldn’t write while driving, but Williams said that revenue has gone up 20 times since 1960 (in other words, revenue is 20 times higher now, in constant dollars). But spending has gone up more than 40 times. When your spending outpaces your income by that much, you’re going to have debt.  

I like economics when it’s clear like that. You know what to do then: cut back spending to the levels of revenue to stop debt growth. And cut back spending to under levels of revenue to make a dent in the debt itself. (You can see how ridiculous stimulus spending really is.) 

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I know we’re focused on this national debt ceiling debate, but there’s a local debt problem I’d like an answer to as well. Bond elections come up every year or two, at least where I live. These are to fund schools, mainly. We all know that paying for capital growth through debt is more expensive than paying outright, because you must repay the capital plus interest. But I seem to be alone in thinking saving up ahead might be an option (it may even be illegal to collect revenue for something not already budgeted). So, let’s grant that debt is necessary for capital investment in local education, for building and improving school buildings.  

But every time a new bond comes up, the only information we can get is how few cents per whatever unit related to our real estate values that we will be paying. Example: “the average household will pay just $116 dollars more per year.” But we had a bond that said that a year or so ago. And a year or so before that. And before that. If I understand correctly, each of these bonds is for usually 20 years, like a 20-year mortgage. But we never hear about a bond being paid off—even though the ones on the ballot 20 years ago must be retiring now, with a new one retiring nearly every year. 

And we never get to see just how many bonds there are, and what our accumulated debt is for the sum total of them (until of course we pay our property tax). It is very much like taking out a second, then third, then fourth (and so on) mortgage every year or two, and only talking about what the new debt payment will be, without even taking a look at what the payments on the existing mortgages already are. 

Bonds almost always pass on the ballot—because it’s for the children! But, really, is it too much to ask for full disclosure about what our debt already is?

Budget Strategy

I think I’ve mentioned that I’m not an expert at strategy. I like to deal with principles. When people like Dick Morris and Karl Rove relish in the game of playing for power, I roll my eyes and think, “Why can’t we just do what is right and let the chips fall where they may?” But I recognize that there is a need for political strategy—as a process of getting the principled message out and persuading people to adhere to the principles. When the opposition controls much of the media, just putting out the message isn’t enough. It must be put out where it can be heard in a context that will allow open minds to hear and consider it.

So I’m thinking about the current budget debate and wondering whether strategists do indeed know more than I do. With control of both houses of Congress and the White House prior to the November 2010 election, democrats failed to do their basic duty and put forth a budget for 2011. So the recent near government shutdown was about only what is left of the 2011 fiscal year. The Republican-led House passed the budget a couple of months ago, I believe with about $61 billion in cuts—a tiny fraction of what I think the cuts should be. Democrats in the Senate were refusing to budge beyond a miniscule (by comparison) $6 billion or so. They countered with unbelievable whining like, “They want to kill women.” Seriously. (See it here.) 

I personally would have enjoyed a government shutdown. We could use a holiday from government intrusion. Government shuts down 10 holidays a year, and no one much notices. There have been many shutdowns over the years; Carter presided over several. Essential services continue. But our ridiculous commander-in-chief threatened to refuse to pay military personnel—who have always been considered essential and have never been included in a government shutdown. I think that was blustery posturing, and we could have fought it. Do Americans really think that the Republicans want to shut down pay for the military? Obama is not Clinton—his lies are clumsy. Thirty-nine percent of the population already strongly disapproves of his job as president (while only around 16% strongly approve). Even the fawning media couldn’t sugarcoat the president’s threat to servicemen and their families. So I wanted everyone on the side of fiscal conservatism to stand firm.

The result was a compromise of around $39 billion in cuts, with no government shutdown. Really, did we need to compromise?

On the other hand, strategists will say that the bigger battles loom ahead: refusing to raise the debt ceiling once again, putting forth a more reasonable 2012 budget, and pressing for Ryan’s plan to cut $5.8 trillion in spending by 2021.

I like what I’ve seen of Ryan’s plan. In Charles Krauthammer’s piece this week, he debunks the demagoguery; it’s worth a read: here. Ryan’s plan has essentially no chance of passing with a Democratic-led Senate, which literally equates any cut in spending to a cut in their power. Putting this plan out there now makes it part of the debate going into the 2012 election. With nothing to counter it but a promise to print more money no matter how it affects the economy, it is at least something solid Republicans can stand strong with.

I like things simple: we need to cut the budget—drastically—so why not cut it to what is actually allowed by the Constitution? Then the only question is, do we do it incrementally or suddenly? As drastic as Ryan’s plan is said to be, it looks incremental to me. But with a better Senate and White House, at least it might be a step in the right direction that we can actually take. I would feel better about it if someone who actually understands strategy can convince me we’re making progress.

You Keep Using That Word...

One of those words you hear people use that you’re pretty sure they don’t really understand: draconian. Basically we understand it to mean harsh or cruel (like the aptly named Draco Malfoy in Harry Potter’s world). But when I heard it on the radio today, it struck me as inappropriately used. So I googled the word and the derivation.

Draco was an Athenian statesman more than 600 BC, who wrote laws down, apparently for the purpose of making them less arbitrary, so redress of grievances would be available to any literate citizen. That doesn’t seem harsh or cruel. He also identified the difference between homicide and involuntary manslaughter, which is a good thing for the law to consider. But then he decided slavery was a good punishment for defaulting on a debt, and many minor crimes merited the death penalty. I didn’t come across examples of these minor crimes, so I’m guessing petty theft. So it was cruel punishment beyond the heinousness of the crime that the word draconian applies to.

So when you hear someone debating the budget battle in Congress, and they accuse the Republicans—who suggest a $61 billion cut in a $3.8 trillion budget that is nearly $1.7 trillion out of balance just this year—of wanting draconian cuts, you need to do your best Inigo Montoya impression and say: “You keep using that word; I do not think it means what you think it means.”