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Sunday, December 20, 2009
When it comes to how much the national public debt grows, size matters. Especially given the national debt that the Obama administration is piling up at an alarming rate for current and future generations of Americans to pay . The national debt, for the first time in American history, has exceeded $12 trillion. It has - at least numerically - exceeded the statutory debt Limit approved by Congress last February as part of President Obama's $787 billion "Stimulus" bill.
Nicola Moore, Assistant Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, enumerates in a recent article the dire effects of the Obama economic runaway train. Ms. Moore cites the implications, risks and proposed solutions facing Americans stemming from the Obama administration’s reckless use of the U.S.’ national credit card.
For perspective, Ms. Moore states that when Congress raises the national debt limits, it ups its ability to issue two kinds of debt which make up the national debt that each have different economic consequences; (1) public debt, which is the total of all past budget deficits plus interest and is owned by individuals, corporations, and foreign governments. and (2) government debt, which represents money that was borrowed by the government from surpluses in the Social Security trust fund and other accounts and spent by other government entities.
National Debt Held by the Public as a % of GDP
Implications to Increasing the Public Debt Portion of the National Debt
The public debt is currently at $7.6 trillion of the $12 trillion plus national debt and it has the greatest economic consequences. According to the above chart, courtesy of the Heritage Foundation, the public debt is currently at 50% of GDP. According to President Obama’s budget projections it is expected to increase to 82% of GDP by 2019 due to his increased spending plans. The government must pay interest expenses on public debt and the larger these interest payments become, the less budgetary flexibility and Congress and the President have to fund other spending priorities.
In addition, publicly held debt has a direct effect on credit markets. Treasury securities must be sold to finance the federal deficit and these securities compete with private securities for buyers and reduce national savings. As the money available for private investment is diminished by government borrowing, private investment decreases, leading to lower productivity, wages, and economic growth.
Implications to Increasing the Governmental Debt Portion of the National Debt
Government debt held by the government, which stands at $4.4 trillion, can be thought of as future debt whose economic consequences will not be felt for some time. However, eventually the government will have to repay debt it has loaned itself. For instance, the Social Security trust fund, which is the largest financier of inter-government debt, contains IOUs that will need to be repaid beginning in 2016.
Unless other spending is cut to fund repayment, new publicly held debt would have to be issued at that time, resulting in a dollar-for-dollar shift from government to public debt. This shifting of government debt to public debt would not, by itself, cause the total stock of debt to change. However, as the new public debt accrues interest, the compounding would cause the public debt to rise significantly.
Risks to Continuing Obama’s Projected Public Debt Spending
Such red ink is unsustainable over the long-term, which is why this increase should compel Congress to control spending. The main drivers of spending now and in the future are Medicare, Medicaid, and Social Security, and Congress ought to recognize that it is time to fundamentally reform these programs.
Publicly held debt must not grow faster than the economy if it is to be sustainable. Otherwise the demand on capital markets would be so severe that private and foreign lenders would stop buying U.S. securities. However, based on recent credit reports, the U.S. is rapidly headed in that direction.
Credit rating agencies have recently signaled that current and projected deficit levels threaten America's AAA credit rating. In a recent Moody's Investors Service report it was stated that, "in the U.S., a "credible fiscal consolidation strategy" is necessary to prevent the debt load and associated interest costs from tipping into the ratings agency's most pessimistic scenario." Such warnings have not gone unnoticed by major U.S. lenders, particularly China, which holds more than $1 trillion of U.S. debt and whose citizens have even laughed at Treasury Secretary Tim Geithner for claiming that their investments in treasury securities are "safe”.
What Needs to be Done to Control the Public Debt?
To avoid perpetual trillion-dollar debt limit increases, Congress should finally address the long-term entitlement-driven budget problem. The Congressional Budget Office estimates that as Social Security IOUs are redeemed and rising health care costs drive up expenditures for Medicare and Medicaid, the publicly held debt will exceed 320% of GDP by 2050.
One way to address this issue would be to establish a commission to address entitlement reform as part of an agreement to increase the debt limit. An effective commission would require that Congress restrain entitlement growth by placing the programs on long-term budgets, which would prevent the national debt from growing on autopilot. Congress should also rethink the entire notion of what debt "matters" and include a measure of the long-term entitlement obligations in the federal budget.
Ms. Moore concludes that today's $12 trillion debt is small compared to the debt that future generations stand to inherit from unchecked entitlement spending. Congress should build budget controls to spare them this crushing and immoral burden. Reforming entitlement programs, which are the main drivers of government spending and borrowing, should be front and center in this effort.
Based on the above Mr. Obama needs to understand that in order to spur private economic growth when it comes to federal spending, less is more.