The National Debt -- My Opinion

by Dan Heller

The National Debt
The National Debt is the total amount of money owed by the government; the federal budget deficit is the yearly amount by which spending exceeds revenue. You can't necessarily tie the two together -- that is, the government doesn't provide the excess money overspent by exceeding the deficit with more debt. This would be analogous to your spending more money than you have in your checking account. You don't take out a loan to cover the overdraft; most people typically just stop spending money and let their income (paycheck) refill the checking account.

What's a "national debt?"

The national debt is the money owed by the government to people who loan it money to operate. The government typically issues bonds (T-Bills, or treasury bills), which pay the bondholders interest on their money. Why does it borrow money? To pay for things it needs or wants, but they don't have the money. (We'll get back to this.)

How big is the debt?

The national debt is getting bigger, and the numbers look scary: $5,359,751,371,000 -- over $5 TRILLION. The estimated population of the United States is 266,886,352, so each citizen's share of this debt is $20,082.50.

Most people look at these numbers and say, "WOW" and get really upset. But, there's another side to this, and it's not talked about very much because the issue gets complicated. The question is, "why is it bad?" Big numbers and the notion that the US has debt seems bad, but why? How bad is it? And what does all this moeny we're borrowing pay for?

Is the concept of owing money bad?

First, let's look at the debt itself. Most people carry some kind of debt. Consider buying a home. What kind of mortgage can you afford? Ultimately, it comes down to how much income you have and the amount of the monthly payments for a mortgage. We can't assume people can buy homes for all cash-- if so, no one would ever buy homes (and our entire economy would probably fall apart completely). While we want people to be able to buy homes, we also want to make sure the homes are worth it. (Otherwise, the assets behind the debt aren't worth it.) So, the debt should be evaluated on two things: 1) our ability to pay the debt, and 2) what we're buying with the money.

What's an acceptable amount of debt?

Most banks out here in California (where I live) won't give you a loan on a house unless your mortage payment is 1/3 your take-home income -- about 30% of your income goes to the mortgage payment of your home. For those who qualify, they can leverage their "buying power", by using their job income to make the mortgage payments. Here, they own assets they would not otherwise be able to have. This not only makes the quality of living better for most Americans, but also is a great part of our economy.

Now let's look at the government. How much is an appropriate amount of debt to carry in order for it to invest in our own standard of living, which improves our economy? That's the question. Currently, as high as our debt is, it's only 3.5% of our gross national product (GNP). In terms of "house-hold income," this would be your take-home pay. So, our national debt's ratio to our gross national product is like taking a loan for a house that costs $100K, and your income is $200K. (This formula assumes your loan is at 7%, or $7K, and that $7K in mortgage payments is 3.5% of your total annual income.)

Is the debt affordable?

What the American people have to think about is whether having debt be 3.5% of GNP is a comfortable number. My personal opinion is that anyone with a $200K annual income is in an extremely "safe" position to make payments of $7K/year. What's more, if the benefit of having purchased the home is a better economy through more jobs, production of materials, and other side effects, I think we're in great shape. But, here's the real issue: if I'm going to loan someone money, even if they can afford it, I want to make sure they're spending it wisely.

What's the debt paying for?

As I mentioned before, if you were going to loan money to someone to buy a house, you want to make sure it's a good house -- not a shack. In general, what is money our debt being used to do?

The government spends a good deal of money on varous things from research, health, education, the military, agencies, and public entitlements. These include welfare, social security, medicare, and other benefits that Americans can qualify for under certain conditions. There are those that think this is a bad idea -- they call them handouts. There are others that think these benefits are what improves our standard of living, and helps improve our society and culture. (There are even sociologists who argue that such programs are less costly than not having them, since we would otherwise spend more money increasing police forces and other programs to deal with crime, drug abuse, etc. These arguments have advocates on both sides of the issue.)

Before the government had any debt at all -- in fact, it used to have a surplus -- the government had no social programs at all. Nor did it have education programs, like student loans or public higher education itself (universities); it had no agencies, such as the FBI, FCC, FAA, or CIA; we gave no aid to foreign countries, through which we can benefit from their economies buying our products from our country. There's a lot going on here, and there's a lot to think about. You may or may not want entitlements, foreign aid, health or education programs ... but those are the issues we need to consider strongly, not the simple fact that we have a national debt that's $5 trillon.

So, in closing, my feeling is that concern about the national debt in and of itself is misdirected. The ratio of debt to the GNP is not unreasonable. Most economists believe that it has not adversely affected interest rates, the dollar, or our position in the gloabl economy, which are more important in the big picture. Tax rates are affected by the debt, but how much taxes we should pay is a different issue and should be addressed separately: taxes are directly related to the second point of the national debt: What do we want to spend money on?

My opnion

I feel we need social security, medicare, and welfare. However, I feel we should provide incentives for people to get off welfare (and for businesses to help in that area), that we should improve on the processes and procedures employed by the medical community to reduce the cost of medicare, and that the social security program be "economically optimized" to make it more affordable to provide financial assitence to those who need it. (For example, the money in the program is not earning what it could, which would decrease the rate at which it needs to be filled.)

Some say that if you're not an economist, chances are your opinions on whether the debt is too high or not are unfounded. For that matter, experts who do understand economics are still in dispute about the issue. There are solutions to these problems, but over-simplistic doctrines pontificated by both the republican and demoncratic parties will never contribute to those solutions. Only bi-partisan ideas will move us in the right direction.