The second fallacy is this: that since families cannot live above their
means, the government can't either; it too must balance its budget. The truth is, however, that families live above their means all the time. We buy homes, cars, home appliances,
education, gasoline, etc. on credit every day. If your annual income is $50,000
and the mortgage on your house is $150,000, it means that your debt is three times
your income. However, as long as you are healthy and can hold down your job, this debt
ratio is no big deal. Today, the federal debt is $16 trillion and the country's Gross Domestic Product (GDP) is $16 trillion,
so the ratio of debt to income is one. This is also no big deal. The rate of growth of the U.S.
economy is about three percent. If the federal debt grows at the same rate as
GDP, the ratio of debt-to-GDP will remain one, which is sustainable long-term.
Third, it matters what the debt pays for. If I use my credit card to pay to see Argo, I get some immediate
satisfaction, after which I am out $10. But when I borrow money to get an
education, I'm making an investment--improving my human capital in a way that I hope will pay off in the future. The return on my education might be such that I can
repay the loan with interest and still have the ability to keep generating
income afterwards. When the government borrows money to build a bomb and then drops it
on some hapless soul (or souls), both the bomb and the souls are gone--pff. But if the debt
is used for education, or to build and maintain the country's infrastructure, it can generate income for a long time to come. Clearly, all debt is
not created equal; some is consumed and some is invested.
Similarly, not all federal debt is equal, and the
ownership of debt is not all the same, either. The public debt is held by
citizens of the country and by foreigners. When an American opens an
account with Treasury, he or she is lending to Uncle Sam. The evidence of the loan
might be a "T" bill, an EE savings bond, or a note. Such domestically held accounts constitute about 54 percent of the federal debt. Foreign governments hold 46 percent
of the federal debt. The Chinese hold about $1.2 trillion, which is 7.5 percent
of U.S. GDP.
It's a Good Time To Borrow and Spend
At first blush, you might think the Chinese have the
better of us. But they don't! They hold about 7.5 percent of our debt. We could
tighten (or not tighten) our belts and pay that debt off in less than one
month. But why would we want to? If we are paying one percent (I speculate
here) on this money, and inflation is 1.6 percent and expected to rise in the
future, then the real interest rate is -0.6 percent and they are in fact paying us to take their money. In that case, you might ask, why do foreigners buy our securities? The reason is simple. Because U.S. government
securities are almost risk-free.
There is yet another important piece to this.
Instead of curtailing spending, the government should go on a spending binge.
Why? Because money is cheap. The fact is, the present low-interest-rate
environment makes this an ideal time for more government spending on the
infrastructure--roads, bridges, rails, canals, dams, etc. It would be asinine to
wait and be forced to borrow and spend later at an inflation premium. This is especially so when such spending would result in the even larger byproducts of increased employment and a speeding
up of the economic recovery.
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