One Salient Oversight Looks at the US Government’s Debt… and the US Economy

A topic that comes up a lot here at AB is the national debt. So its always interesting to see other people’s contributions. Here’s One Salient Oversight:

When governments go into debt, they are essentially borrowing money from the marketplace to cover their costs. Governments, like businesses and households, often spend more than they gain in revenue. In order to the cash flowing, money has to be borrowed.

Keynesian fiscal policy worked out that government fiscal policy should be completely neutral over the course of the business cycle. In practice, this meant that government could (and should) run fiscal deficits during times of economic hardship, while also running fiscal surpluses when things are good. Overall, though, governments should balance their books.

The problem with this sort of activity is that governments have found it easy to run long term deficits. It is easy for governments to cut taxes and/or increase spending. It is harder for them to increase taxes and/or reduce spending. The reason for this is political – those in power want to please the electorate rather than being fiscally responsible.

And, of course, when those deficits grow and grow, the debt grows and grows.

One Salient Oversight then notes that according to the US Treasury, interest payments in 2007 were $430 billion.

He goes on:

Now I don’t know about you, but when NASA gets $15 billion and education gets $61 billion, that interest bill looks big, and it is.

Think about what might have happened had the US Federal government been fiscally responsible for the past 25 years. Imagine if net debt was negligible or even zero. It would mean that that $430 billion could have gone in tax cuts or spending increases over time.

US GDP in 2007 was $13.75 Trillion. The amount of money the US government is paying back in interest represents 3.13% of GDP. US Agriculture represents 1% of GDP. Debt repayment is over three times the size of the Agricultural sector!

And here’s the last paragraph of his post:

In 2005 I predicted very hard times ahead for the US economy. I predicted that a combination of Peak Oil, a housing market downturn, a large current account deficit and increasing US Federal debt will produce a “perfect storm” that is likely to damage the US economy for years to come. The housing market has definitely imploded, Peak Oil is driving oil prices back up above $100 per barrel again and the large current account deficit has helped the US Dollar scrape the bottom of its historical value. But when you also consider that one of the US government’s largest expenses, after health and defence, is paying back interest equivalent to over 3% of GDP, you have to wonder how bad things are going to get.