Friday, October 1, 2010

A Long View on US Debt

Too many people seem to be concerned about the US debt. Personally, I think the US debt is a self-correcting problem. Too many people keep saying the US debt is "uncontrolled" but they're wrong. Current interest on total debt is at 5% of the annual federal budget. If it was 25% then I might agree.

It's really a question of priorities. Right now is not the time to focus on debt reduction, especially when we are facing serious challenges to our future competitiveness in global markets. We need to spend money on infrastructure modernization and research and development to invent the next generation of technologies to secure our dominance for the next 25 years. You can't do that AND provide Social Security, Medicare, Defense and every other program without incurring debt.

Once the Baby Boomers die, Social Security and Medicare costs will drop dramatically. Then we can enjoy budget surpluses again. That's why I say the debt crisis is a short term problem -- it will solve itself in 20 years. And yes, 20 years is short term for a 200 year old nation.

I know the debt doesn't matter because it is a short-term problem. Pundits guess it will never be solved because RIGHT NOW no one is working on it. I submit they are worrying about the wrong problem right now.

Eventually the debt will reach a tipping point. Only we aren't anywhere near it. Remember, 60% of annual GDP is only a terrible debt problem if our GDP drops drastically (i.e. 10-15%) because then we will default on interest payments. Realistically, we can probably absorb debt up to 100-150% of annual GDP before it becomes a serious problem. I'm not recommending this under any circumstances!

Anyway, that's my position on the public debt. It's a problem but not as terrible as everyone wants to make it out to be. I encourage all learned and wise economists to argue or agree.

R-Squared Computing | Lou RG | Nearly Free IT | Firm Wisdom

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  1. Hey Lou,

    I'm curious to know your stance on this point now? Considering that 80% of Republicans and 64% of Americans in general are now reporting that the budget deficit is the number one priority for the 2012 election?

    Obama has spent much of his legislative career injecting government money into programs that do just what you recommended: modernize infrastructure and endorse/promote American innovation.

    What is your stance on this issue now, and how does this reflect in your personal stance on politics?

  2. Thanks for your comments! After re-reading the article I say my position hasn't changed.

    In my experience, 90% of Americans can't comprehend numbers on the scale of the US budget and debt. The fact that 64% believe the deficit to be the #1 priority only proves that polling can be a dangerous science.

    The deficit is the annual budget shortage. This amount gets added to the debt every year. My article is about total debt, not the deficit. Regardless, my point still remains. Both are short term problems.

    Ask any homeowner with a mortgage how much more money they would have if they only had to pay 5% of their total income towards their debts. Not one would tell you they would be worse off.

    It used to be when banks calculated your credit worthiness for something like a house they would base it on 60% of your salary! 60%!!!! I have no idea what Byzantine calculations they use now.

    If the USA is only paying out 5% of income to pay our debt, then I say we are in good shape.

    Americans love to live under the fear that we, as a nation, are in decline. We've been whispering it since the Korean War. But the numbers don't point in that direction at all.

    We are still the richest nation on Earth, by far. Our GDP is only beaten by the entire combined GDP of the European Union! In 2010, our GDP was $14.5 trillion! During the depths of the Great Recession (2009) it was only $14 trillion. (

    Meanwhile, big scary China earned $5.8 trillion in 2010. It's nonsense. We love to be afraid of the boogey man called debt. (More on China

    Why all the doom and gloom? Because it's great political red meat. It makes all the silly partisans gnash their teeth and pull their hair out. And it gets people into the voting booth.

    As for Obama, he has spent his presidency financing boondoogle local construction projects. Too many of the so-called "shovel ready" projects were nothing more than neighborhood beautification schemes. So much for infrastructure re-development.

    As for innovation, I can't fault him. Obama has done well financing new innovations and scientific exploration. Only the partisan idiots scream about Solyndra. Anyone with half a brain understands that most cutting-edge projects will fail. That is the nature of a free market. But you need the failures to find the successes. Google would not be what they are today without Yahoo!.

    As for my personal politics, that's none of your business.

    Thanks again. I love your blog!