Why is America in debt and how can we fix it?

[Sean Artiles]

I've been researching and I am somewhat intrigued by the reasons that I have found. But in all honesty I have little to no idea as to why we are in such a debt. I mean most people would say "Cut the spending" but from what many people tell me, you keep your economy stable by continuing with deficit spending... I don't full grasp the concept but I was wondering if anyone could give me insight on why it's hard to get out of our deficit. What type of actions can our government take to improve our economy? Is deficit spending truly a way to keep a stable economy for the most part?

 

[phinds]

If you personally were in debt, do you think you could just spend more and thereby get out of debt?

 

[DrClaude]

If you personally were in debt, do you think you could just spend more and thereby get out of debt?

Personal economy is not the same as the economy of a country.

 

[phinds]

Personal economy is not the same as the economy of a country.

Yes, I agree, and I would even go farther and say that an individual might be able to "spend their way out of debt" if the spending was investment in a business that brought in profits greater than it cost to build. Sadly, government doesn't work that way.

 

[russ_watters]

This is a big topic and I'm not sure what answer you need/want, so here's my take:

Ultimately, it is simply a choice: the government chooses to be in debt. Why? Well, there are some legitimate economic reasons for running a small debt, but we're way beyond that. What it really comes down to is that it isn't fundamentally different from splurging and running-up credit card debt: It feels like free spending if you don't have to pay for it right away. And for politicians, that's great: you can give people the services they want without charging them the taxes it costs to pay for them. So the people are happier with politicians' performance and re-elect them.

That's for basic government debt - the every-day running of the government. There is actually a bigger problem of debt that people pretend doesn't exist. It's the entitlements of Social Security and Medicare, where government collects money today that it intends to distribute back to the same people when they get older. But instead of saving/investing that money, the government just spends it on other things (mostly the people who didn't pay much or anything into the programs, but get substantial benefits). Phase-in periods allowed the programs to build-up a surplus, whereas now they are cash-flow negative -- but they've always been under-funded vs their commitments. Even still, that debt is even better for politicians than basic budget debt because the government doesn't have to pay it back for decades and by then people have forgotten how much it borrowed and are locked-in anyway!

 

[Vanadium 50]

When a government (or a person) has a deficit, they have three ways to get out of it - increase revenues (i.e. taxes), decrease spending, or borrow to make up the difference. In recent years, the most politically acceptable of the three has been to borrow. This works until lenders no longer want to loan you any more money.

 

[phinds]

When a government (or a person) has a deficit, they have three ways to get out of it - increase revenues (i.e. taxes), decrease spending, or borrow to make up the difference. In recent years, the most politically acceptable of the three has been to borrow. This works until lenders no longer want to loan you any more money.

So you don't agree that people (but not governments) have the option I expressed in post #4?

 

[Choppy]

Hmm...
1. First post.
2. Politically loaded question.
3. Involves questions that are (a) answered through part of any high school class covering civics and (b) can easily be looked up on line.
4. The questions are bound to invoke strong opinions.

I give this thread a trollness factor of 7.5/10.

 

[Vanadium 50]

So you don't agree that people (but not governments) have the option I expressed in post #4?

I would say that it is an example of a plan to increase revenue.

 

[jtbell]

When a government (or a person) has a deficit, they have three ways to get out of it - increase revenues (i.e. taxes), decrease spending, or borrow to make up the difference.

A sovereign government has more options: issue more money, and/or devalue the currency.

 

[PeroK]

So you don't agree that people (but not governments) have the option I expressed in post #4?

One example where a government invests to ensure future revenue is education.

Another example is offering grants to start-up companies.

How successful these investments turn out to be is another matter. But, there is at least a possibility that such investments are financially successful in the long run.

This debate is raging in the UK - especially as there is a general election today. It seems to me, however, that very little government spending (apart, of course, from education) is investment. And, the vast majority, is patently not investment.

 

[phinds]

Yes, and the absolute best one I can think of the the Eisenhower Interstate System. Even though Ike did it for military reasons, few people, especially these days when it has long since been fully taken for granted, realize just how overwhelmingly important it was to the massive growth of the USA in the decades following WWII.

Unfortunately, since then government has done what government does best which is blow the increased income on things that get politician elected.

 

[phinds]

I would say that it is an example of a plan to increase revenue.

I see your point but I think you are nitpicking. That's my job here

 

[Vanadium 50]

A sovereign government has more options: issue more money, and/or devalue the currency.

Yes, they have this option. However, it acts like a tax on wealth, and so has the same consequences.

I see also that people seem to think I am arguing that all borrowing is bad. That's nonsense. There are good reasons for people to borrow money, and there are good reasons for governments to borrow money. That said, I think a budget, personal or governmental, that depends on ever-increasing borrowing year after year is eventually going to cause problems. In terms of a business, borrowing money for investments is usually a better idea than borrowing money for operations.

 

[russ_watters]

So you don't agree that people (but not governments) have the option I expressed in post #4?

Are you asking if governments and/or people can "spend their way out of debt"? In principle, either can. But that's a somewhat different question because it is about the long term accumulation of debt, not the short term decision of what to do with a deficit. So that is still option 3: borrow to make up the difference.

Now, if that causes growth that later reduces debt, we can call that 3b. 3a would just be accumulating debt over time. While in the real government, it is tough to prove what individual actions do (and you can have both at the same time), over most the long term, the balance is decidedly toward 3a: we're accumulating more and more debt, not spending our way out of it.

 

[phinds]

Agreed, and that is in fact the POV of my original response to the question.

 

[jackwhirl]

There is an assumption in the thread title that I find interesting. "Why is America in debt and how can we fix it?" This question implies that debt is bad or broken. Is it? Is it preferable to have less debt than more, and why?

 

[phinds]

There is an assumption in the thread title that I find interesting. "Why is America in debt and how can we fix it?" This question implies that debt is bad or broken. Is it? Is it preferable to have less debt than more, and why?

Because (1) someday you HAVE to pay it back and (2) it just keeps getting bigger and bigger and the servicing of the debt gets overwhelming.

As has already been pointed out in this thread, the catastrophic borrowing that America has done is in the entitlement programs. If things keep going the way they are now, the service on that debt will become more than we can possibly pay.

 

[Vanadium 50]

Is it preferable to have less debt than more, and why?

This US currently plays about a quarter of a trillion dollars a year on debt interest. That's money that could go to other areas. That is the entire budget of the State, Education and Labor departments combined. It could fund thirty National Science Foundations or a dozen NASAs.

 

[russ_watters]

And that's with historically low interest rates.

 

[phinds]

And that's with historically low interest rates.

AND we're still some years away from the time when the entitlements totally eat our lunch (OR we let seniors starve and die)

 

[russ_watters]

AND we're still some years away from the time when the entitlements totally eat our lunch (OR we let seniors starve and die)

Well, IMO entitlements are already eating our lunch: because the money collected was not invested, the tax rates have to be unreasonably high in order to keep the programs afloat -- and even then, the programs are still underfunded. Obama dropped the SS tax rate temporarily for economic stimulus during the recession. Well imagine the stimulus if the combied rate had been 6% lower (3% each for employer and employee) for the past 40 years.

Just like the interest on the regular debt is sucking money out of the economy via higher taxes/lower spending, the poorly set-up entitlement programs are doing the same thing.

 

[Tosh5457]

I think there's way more drama in this question than it deserves. First of all, the debt in % of GDP will reduce even if there is a deficit, as long as the economic growth rate + inflation rate, more or less, surpass the deficit rate.
Second, a public debt of 100% GDP is high for sure, and needs to be reduced in order for lessen the burden of interest in the government budget, but it's not at a point that it needs extreme measures like harsh austerity; the US Dollar being a reserve currency further helps reducing the risk of a future default, because there will be always a high demand for dollars, keeping the interest rates low.
Having that said, I agree that having a deficit in the long-run, is unnecessary and harmful. There should be surplus in booms to give room to deficits in recessions, especially hard ones like the 2008's recession. And as to why is deficit the rule, not just in US but in many other developed countries, it's simply because reducing the spending and increasing taxes is unpopular, so they keep the deficit as high as they can to avoid that. The last time US public debt was seriously reduced was in the Clinton's years, but mostly because it was a major economic boom, not because of tough political choices Clinton did.

 

[jackwhirl]

Because (1) someday you HAVE to pay it back and (2) it just keeps getting bigger and bigger and the servicing of the debt gets overwhelming.
As has already been pointed out in this thread, the catastrophic borrowing that America has done is in the entitlement programs. If things keep going the way they are now, the service on that debt will become more than we can possibly pay.

I do not find this answer satisfying. You are presenting these arguments as though they are self-evident. If I learned anything from the housing bubble, it is that not everyone does pay back what they owe. (Please don't interpret this as an argument in favor of default. I am simply pointing out a contradiction.) For point two, please see my reply to Vanadium.

I do also find the phrase "catastrophic borrowing" interesting. Please show that the borrowing is catastrophic, especially in light of my reply to Vanadium, below.

This US currently plays about a quarter of a trillion dollars a year on debt interest. That's money that could go to other areas. That is the entire budget of the State, Education and Labor departments combined. It could fund thirty National Science Foundations or a dozen NASAs.

If I'm reading the information at https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm correctly, your figure is 15 years out of date. That website says payments for 2014 amounted to $430,812,121,372.05. I did not see any indication that the values presented on that page have been adjusted for inflation. Running an inflation calculation (http://www.usinflationcalculator.com/) on the 1989 value of $240,863,231,535.71 gives a present day value of $458,648,269,088.55. Effectively, we are paying less on interest today than in 1989.

Secondly, the money can only go to other areas if it is not being used to service debt. While it is nice to imagine a dozen more NASA-like programs, we chose, as a nation, to borrow 18 trillion dollars and spend that money on something other than NASA-like programs. These are sunk costs and the money cannot be recovered. This debt service money cannot be used to fund a dozen NASAs. The reverse is more realistic. NASA's budget and the money from a dozen (or more) similar programs can be taken and applied to the principle and then someday we won't have debt to service. To pay down that debt we are going to have to take the money out of something else (or raise taxes). And not just a little. Deficit spending has to end before we can even touch it.
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Footnote: I really do believe that it is preferable to have less debt than more. I guess I just feel that the conversation (on the national level, not necessarily here on this forum) is too emotionally charged. I know that politicians have their favorite lines about debt and deficits, but they convince people with the power of their personal charisma, not objective, rational, logical arguments. I'd like to see more of the later here. (Unfortunately text is terrible at conveying tone. I do not want to be acerbic. I do want to know why you believe what you believe.)

 

[Sean Artiles]

From what I am understanding... being in debt is not an issue. It's recoverable, but wouldn't it be reasonable to stop borrowing in order to do so?
Let me explain my logic:
Your business is faltering, so you borrow money to keep it afloat with the potential to have a boom in business. But you soon realize that you are still not doing so well and will potentially go bankrupt soon, so you borrow more money from the same source to keep your business going. You have to pay that person back, and you haven't made any improvements since the first time you borrowed so why continue to borrow more money if there isn't any improvements? I get we have to keep the system going but why not declare bankruptcy and start from scratch?

 

[jackwhirl]

I get we have to keep the system going but why not declare bankruptcy and start from scratch?

This wikipedia article has a list of countries that have done just that. See if you can detect any common themes between them.

One thing to consider is just who it is you're defaulting on. This linked Forbes article indicates that, as of late last year, 65% of that debt is owned domestically. 16% is owned by social security. Think about that. Of our 18 trillion dollars of federal debt, almost 3 trillion is owed to social security. What happens if/when we default on that?

 

[Tosh5457]

From what I am understanding... being in debt is not an issue. It's recoverable, but wouldn't it be reasonable to stop borrowing in order to do so?
Let me explain my logic:
Your business is faltering, so you borrow money to keep it afloat with the potential to have a boom in business. But you soon realize that you are still not doing so well and will potentially go bankrupt soon, so you borrow more money from the same source to keep your business going. You have to pay that person back, and you haven't made any improvements since the first time you borrowed so why continue to borrow more money if there isn't any improvements? I get we have to keep the system going but why not declare bankruptcy and start from scratch?

The economy is always growing in the long-term though, so the right analogy would be a business with more spending than revenues (deficit), but despite that, the company value (assets - debt) continued to increase. In such a case, the debt in % of its value would be decreasing, and so it'd be on the right track as the debt became ever more meaningless.
In any way, declaring bankruptcy would shake-out the confidence in US government and the dollar so bad that it would cause an avalanche of problems in the future, namely causing a financial crisis in the banks (who borrow heavily to US government) and the World economy would fall off all over again like a house of cards. It'd increase the deficit further as a result, and the government wouldn't be able to borrow anymore with low interest rates. There's a strong non-linear effect in declaring bankruptcy, to the negative side.

 

[phinds]

The economy is always growing in the long-term though, so the right analogy would be a business with more spending than revenues (deficit), but despite that, the company value (assets - debt) continued to increase. In such a case, the debt in % of its value would be decreasing, and so it'd be on the right track as the debt became ever more meaningless.

Sure, for a business that is doing that but the US Government is NOWHERE near doing that. You don't seem to understand that the entitlements are going to bankrupt us whether we like it or not if there is no reform. We are growing the debt relative to the economy, NOT growing the economy relative to the debt.

In any way, declaring bankruptcy would shake-out the confidence in US government and the dollar so bad that it would cause an avalanche of problems in the future, namely causing a financial crisis in the banks (who borrow heavily to US government) and the World economy would fall off all over again like a house of cards. It'd increase the deficit further as a result, and the government wouldn't be able to borrow anymore with low interest rates. There's a strong non-linear effect in declaring bankruptcy, to the negative side.

I agree.

 

[BillyT]

Yes, they have this option. {print money} However, it acts like a tax on wealth, and so has the same consequences. ... ...

Yes if your wealth is in liquid form like bank savings account, or fixed income stream, like interest on some bonds, but not so much, if at all, if it is in productive assets, like houses you rent, or farm.

 

[Khatti]

Yes, I agree, and I would even go farther and say that an individual might be able to "spend their way out of debt" if the spending was investment in a business that brought in profits greater than it cost to build

And where are us debtors supposed to get the money to pay for whatever you sell? Our view of business people and entrepreneurs has become so mythic I sometimes wonder if they dress in phone booths and fly from place to place under their own power.