Understanding the Phony Debt Crisis: Inter-generational Myths and Economic Realities
David Green (firstname.lastname@example.org)lives in Urbana. He regularly contributes to News from Neptune, both on UPTV and WEFT-FM.
Before discussing the inter-generational mythology that pertains to the phony debt crisis, three sets of preliminary comments are helpful, all gleaned from standard liberal-left economic discourse.
First, as nations develop technologically and become more productive and richer on a per capita basis, governments (if provoked by popular movements) can afford to assume more social welfare functions. That’s one way that common people benefit from living in rich countries. That also means that governments in developed countries spend increasingly larger shares of GDP on things like infrastructure, education, health care, and pensions. Insofar as this is the case, Western European citizens in countries that spend a larger percentage of their GDP on government are publicly reaping the personal rewards of living in highly productive and rich countries. Insofar as the U.S. lags in this area, we remain a relatively backward—albeit also productive and rich—country. Given that other developed nations spend more on government but also less per capita on (efficient, socialized) health care and the (wasteful, destructive) military, the U.S. becomes even more backwards in relation to much of Europe.
Second, governments can go into debt for generally good or bad reasons. Good reasons are to create jobs during cyclical economic downturns, and to invest in infrastructure and thus increased productivity. Bad reasons are to fight wars and bail out financial speculators. Clearly, given current wars and bailouts, and the lack of a New Deal-type stimulus in the face of intractable unemployment, we are now experiencing the worst sort of deficit spending.
Third, even in light of “bad” annual deficits, the debt crisis is phony and politically manufactured. The measure of the overall size of the debt is the percentage of GDP that is spent on servicing that debt. According to Mark Weisbrot, the government is paying net interest of just 1.4 percent of GDP on its public debt—“this is not much by any historical or international comparison.”
To summarize these preliminary points, it is clear that the federal government should use “good debt” to stimulate the economy with all kinds of social spending to a much greater extent than the first (2009-11) stimulus package. If it does so, both annual deficits and overall debt will gradually decrease as a percentage GDP, and interest payments will reflect that.
In the midst of the current phony debt crisis, a conventional theme of the mainstream media has been that of inter-generational conflict. First, the current generation of senior citizens, as recipients of Social Security and Medicare, is charged with consuming resources that should be spent on the young. Second, baby boomers are charged with squandering the ample resources bequeathed to them by their parents, and passing our national debt to their children and grandchildren.
But from a perspective that emphasizes the ever-increasing wealth of this country and its dispensation over time, these claims prove to be clearly baseless. Given this enormous wealth, fundamental problems including the national debt can be understood in terms of the distribution of that wealth and income, and the shortfall of taxes that are currently being paid, especially by corporations and the wealthy. The grain of truth that remains from debunking generational critiques reflects an expensive profit-driven health care system, not Medicare spending per se.
The United States Gets Richer, but Americans Don’t
The federal Bureau of Economic Analysis currently uses 2005 “chained” dollars to generate apples-to-apples comparisons of our national and individual wealth over time. In these equivalent terms, our per capita gross domestic product (GDP) has increased from less than $16,000 in 1960 to over $25,000 in 1980 to over $43,000 in 2010. These are steady and real increases in goods and services produced per every resident by all American workers. One can think of each individual’s $43,000+ as divided into portions that represent collective expenditures, from personal consumption to all types and levels of public spending. During the past half-century, the percentage of GDP spent on allforms of public education (including college) at all levels of government increased from 3.9% in 1960 to 6.7% in 2010, according to the website usgovernmentspending.com. During that same period, according to the Congressional Budget Office, combined spending on Social Security and Medicare increased from 2.1% to 8.3% of GDP. Thus total public expenditures on the old and the young in these significant areas increased from 6% to 15% of GDP over 50 years.
In light of increased real per capita GDP, it’s clear that these increases on fundamental services have been well affordable. In 1960, $934 of per capita GDP (in 2005 dollars) was spent on public education and Social Security (Medicare did not yet exist). After this expense, $14,710 per capita was left for everything else. In 1980, $2940 was spent on education, Social Security, and Medicare, with $22,690 remaining. Last year, the analogous figures were $6,369 and $36,148.
Thus while over the past 50 years the percentage of GDP publicly spent on “dependents” in these major ways has nearly tripled, to 15%, the amount of gains in real wealth left over per individual increased by over $21,000, or 150%. That is primarily due, of course, to technological innovation and steady increases in the productivity of the labor force. The problem is that for four decades, this increase has accrued disproportionately to the top 20% of earners, and even more disproportionately to the top 10%, 1%, and .1%, many who respond by poor mouthing the country as a whole while demanding lower taxes.
This unjust appropriation of wealth contributes to the perception of a debt crisis, and to the exploitation of that phony crisis in order to further defund vital social spending while maintaining low tax rates on the wealthy and a large military. Meanwhile, “good debt” is not on the table, and sustained economic recovery is not in the immediate future.
Thus three well-documented economic realities contribute to the current deficit, providing the opportunity for a phony “debt crisis.” First, long-term stagnant incomes for the vast majority of the population have decreased their contribution to federal income. Second, lowered and evaded taxes on the (increasingly) wealthy and corporations have decreased tax progressivity and halved the corporate contribution to federal income. Finally, the recession resulting from the housing bubble delivered an acute blow to both GDP growth and tax collection at all levels.
None of this has anything to do with inter-generational expenditure issues, the health problems of the elderly, or the profligate character of the baby boomers. If government spending raises issues other than costs driven by a private healthcare system, then these issues relate to our trillion-dollar military and wars, and to the myriad social costs of the increased and desperate poverty that is generated by this unequal distribution of wealth.
A more equitable, fairly-taxed, and compassionate society can well afford the public costs of fundamental generational needs. Again, the very existence of these needs is characteristic of economic and technological progress; to fail to address them is both inhumane and pragmatically foolish.