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

1. May 7, 2015

### phinds

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

2. May 8, 2015

### Staff: Mentor

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.

3. May 8, 2015

### 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.

4. May 8, 2015

### jackwhirl

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.
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.)

5. May 8, 2015

### 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?

6. May 8, 2015

### jackwhirl

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?

7. May 8, 2015

### Tosh5457

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.

8. May 8, 2015

### phinds

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.

I agree.

9. May 11, 2015

### BillyT

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.

10. May 12, 2015

### Khatti

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.

11. May 12, 2015

### phinds

You are simply using my comment as a springboard to make your own point without really paying any attention to the validity of my point.

Would you prefer that you be in debt AND that people not create new businesses?

12. May 13, 2015

### Khatti

Yeah I get the investment thing. But governments are not businesses; they have a different responsibility. People start businesses to make money in a way they find agreeable for one reason or another. Governments are responsible for the people--or at least should be. I went through a lengthy bout of unemployment back in 2008. I hadn't bought a house that I couldn't afford, I didn't make a loan to someone for a house they couldn't afford, but I was out of a job anyway. I was on the dole for quite a while; it as not a good time--but, selfish person that I am, I preferred it to going hungry.

13. May 13, 2015

### phinds

You are simply remaking the point I already made in post #28.

14. May 13, 2015

### SteamKing

Staff Emeritus
The debt today is being financed at historically low interest rates, which cushions the blow somewhat. If interest rates should rise in the future, the pain will come back quick and come back hard. Does your wayback machine opine on the interest rates prevalent in 1989 for government debt?

15. May 13, 2015

### phinds

Again, the problem is not so much the interest rate on the debt (not saying it doesn't matter), it's that the AMOUNT of debt added each year by the entitlements programs is eventually going to be impossible to sustain at almost ANY interest rate.

16. May 14, 2015

### BobG

Ironically, part of the reason for that is better communications.

There was a time when Congressmen accepted a basic responsibility to keep the government running. Yeah, during wars or national crises, we might run a debt, but the long term mode was you decided how much money you could bring in and the amount of money you brought in was how much you had to spend.

Congressmen made deals to do as well for their districts as they could, but there were usually no serious consequences if they didn't succeed. Regardless of success or failure, they'd go back and tell their voters whatever they wanted to and how were voters to know if they were telling the truth or lying.

Nowadays, voters know what their Congressmen have done or not done and hold them accountable. It's important to people in Congress that everyone in Congress win because losing half the time could get them all fired by their voters. Hence, these agreements where "I'll let you win lower taxes if you let me win higher earned income credit" type agreements.

Of course, that's changing, too, as special interest groups start holding Congressmen an even stricter level of accountability. It's getting to the point where Congressmen aren't being held accountable for losing - they're being held accountable for not burning down the houses of their enemies. Don't know whether things are changing for better or worse, but they are changing.

In some ways, I feel like we're moving from a representative republic run by professionals (even if some of those professionals are corrupt) to a direct democracy of amateurs.

Which isn't saying voters are stupid. It's asking how many voters have the ability to hold down a full time job, plus become an expert on how to run the government of the world's major superpower. I'm wondering if we weren't a little better off when we knew a little less and the professionals had the freedom to do what they pleased.

Last edited: May 14, 2015
17. May 14, 2015

### jackwhirl

http://observationsandnotes.blogspot.com/2010/11/100-years-of-bond-interest-rate-history.html shows 1989 interest rate on US treasury bonds of 8-9%, compared to rates today of about 2%. It also shows that today's rates, though low, are not historically unprecedented.
So, if we come around to the second theme in the thread topic, how can we fix this?

18. May 14, 2015

### phinds

Although the workings of the government are a bit afield from the original thrust of this thread, I was to follow up on BogG's comment:

Another thing that has been at least partially responsible for poor government (gridlock) is the relatively new rules (/laws / whatever) that prevent pork projects. In the past, the first step in a politicians learning to compromise with the other side was in getting help bringing home the bacon for his district/state and in return helping others do the same for theirs. This level of deal-making wasted a lot of money, which of course is why it has been banned, but it did get the lawmakers accustomed to working with each other. Now, it seems, there is no motivation whatsoever for any compromise of any kind.

19. May 14, 2015

### phinds

It seems very clear that with our current form of government (government by opposing groups that totally demonize each other and cannot / will not work together) it cannot and will not be fixed until the crisis is upon us. Government by brinksmanship seems to be the name of the game, somewhat more for Republicans than Democrats but neither side is blameless.

I weep for my children's future.

20. May 14, 2015

### jackwhirl

Exploring this theme a little further, is there a form of government that can and has resolved a similar difficulty that we could emulate?
Is there a well defined difference in the form of government between Greece and Germany for example, or are financial fates a matter of luck?
Would you recommend a career in politics to them?

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