Why is the National Debt so bad?

[HendrixFan]

You make a good point about deficit spending. I think the biggest reason to push for abolishing the debt is the impending Social Security shortfall, when we will need every dollar we can spare (as a government).

Debt is important in times of national emergency, but our budget surplus in 2000 was the first time in about 40 years that we had a surplus. It has been used (by both parties) for too long, and for too much. On a microeconomic scale, having 1/3 of your income going to pay *interest* on debts is a horrible position to be in. Especially given the impending SS shortfall.

 

[HendrixFan]

If we ran a surplus each year, it would be quite easy to send out "rebate checks". Or the govt could propose a sort of emergency spending to decide where to put the money. Either way (spend or give back), it wouldnt take long for the government to use it.

Besides, saving the surplus to pay for the Social Security shortfall would be a VERY good thing to do.

 

[Michael]

If you can't grasp matching longer term financing with longer term assets/projects, then you'll never get why the national debt in and of itself is not a bad thing. I mean, heck, everyone just plops down cash to buy a house, right?

Michael

 

[HOWITIS]

from abc.com



It sounds good, but bringing the number on this national debt clock down to zero has far-reaching consequences, beginning with individual investors.
For them, it means the end of the U.S. savings bond, a favorite investment of Americans, often from the time they?re born.
?Those 55 million people will not be disappointed that they do not have a place to park their money,? says bond market strategist Tony Crescenzi, ?so those who hold savings bonds will have to look for another alternative.?
It?s not just individual Americans who will be looking for alternatives. If the national debt is eliminated, foreign investors who have relied on the security of U.S. treasuries, particularly in times of war or financial crisis, will have to go somewhere less safe.
?There?s no investments, other than U.S. Treasuries right now,? says Crescenzi, ?that has the comparable safety of U.S. Treasury Bonds simply because there?s no instrument available that has the backing of the full faith and credit of the U.S. government.?
Investors could decide to put their money in the bonds of large, established U.S. corporations. Or they could choose to go outside the United States and put their money in Japanese or European government bonds. And that has consequences for the strength of the U.S. economy.
If dollar investments decline, so could the value of the dollar. And that, in turn, could lead to higher inflation, higher interest rates, and an overall slowdown of the U.S. economy.
And here?s the final irony: If the government actually succeeds in paying down the debt and stays committed to keeping it at zero, it gives up one of the best weapons it has for managing the economy.
One of Washington?s most effective ways to fight recession is to spend its way out of it, using government programs financed by government debt to rouse the economy. Thus, eliminating the debt could backfire.
?Everything is good in moderation,? says economist David Jones, ?but if we take this to an extreme, it puts a strait jacket on government fiscal policy.?
Paying down the debt is not a bad idea, economists say. But paying it down to zero is.



all you gotta do is look there are a hundred different peeps with diff reasons for not paying it down.

 

[HOWITIS]

most people wanna pay off a fourth of the debt, or even a 1/3rd. you'll be hard pressed to find anyone who wants to lower it much more.

 

[HendrixFan]

There are subtle differences and not so subtle differences between micro and macro economics. A long term investment into a house isnt a good analogy to the national debt. The house cannot be purchased (for most people) up front, at once. Going into debt with a mortgage is the ONLY possible way for these people to have a house. It is a long term commitment, usually 30 years.

It would be fair, on the other hand, to compare a home mortgage with defense spending. You arent just going to lay down the money at once for the military/defense. ITs a long term commitment, in which you are constantly feeding money into it. We as a nation wouldnt be able to pay for the military for the next 30 years this year, nor would we want to if we could.

National debt isnt bad, and debt in general isnt bad, but you have to look at it relative to income and you have to look at interest relative to income. When the *interest* alone on your debt makes up a 1/3 of your income, you are put in a position where it is extremely difficult to pull yourself out of debt. Our national debt (even as large as it is now) isnt too big for us to pull ourselves out of it. Based on the budget projections for the next 10 years, it would have been possible to pay off the debt in full.

 

[Mister T]

<<

<< So, if anyone can explain this, why not pay off as much debt as possible before lowering taxes? On the other hand, why should we pay off the debt? If you can try to phrase these in terms I can understand that would be appreciated. >>



The idea behind "good debt" is that by incurring costs now, it will lead to a higher payoff in adjusted terms later on, or that the need is great enough to justify the deficit spending in the here and now. Let me give you a couple of examples to demonstrate the principle to you.

Example 1: You're 22 years old, and have a choice to make. You've finished your undergraduate program, and are working a so-so job which pays the bills, but you want to go to medical school to become a doctor, but can't afford tuition. As a doctor, you'd make a significantly higher salary than you do now, but you have to go to school first before you can become a doctor. You are trying to decide whether to stay in your current job and pay off your current college loans, or take the plunge into medical school (knowing that you'll have to borrow more money to do so).

This would be an example of deficit spending, with the intent being to spend a bit more now, to earn a lot more later.

Example 2: You're 23, and medical school didn't work out. You have no job, and no cash in the bank as you spent what you had on medical school tuition. You have no food in the 'fridge, but you do have a credit card. You are trying to decide whether to borrow money by buying groceries with your credit card (deficit spending) or starve to death.

This would be an example of emergency/contigiency deficit spending. >>



Nice post. You really brought it down to the 3rd grade level good examples.

 

[HendrixFan]

The problem with the national debt as an "investor's haven" is that it is really a form of regressive taxation. People who make between $40,000-80,000 a year as a household income pay the largest percentage of their income to taxes. The beneficiaries of most government bonds are in the richest 2%, who make over $130,000 a year. Therefore, the money is being distributed upwards to the wealthiest americans.

 

[HOWITIS]

55 million people own US bonds, at least that is what it said in this article

 

[HendrixFan]

Sure, there is a widespread number of people who have a bond or two, but the concentration of US bonds exists in the hands of the wealthiest americans. The ones who recieve the most "benefit" from the interest on the bonds.

A simple way to look at it, is to take the amount of taxes you pay each year. If you dont "earn" a 1/3 of that amount of interest from government bonds, then you are paying in more than you are getting out, which is the case for most Americans. Very few Americans can say they earned more off of government bonds each year than equal to 1/3 of taxes paid to the federal government.

 

[SuperTool]

Guess what's the collateral for the national debt? That's right, we have mortgaged the US to pay for this so called "economic simulus". I guess if I had a house, mortgaged it, bought a Ferrari and went on a spending spree, some would call it time of prosperity, but most would call it economic suicide.

 

[charrison]

supertool

and if the money stayed in DC it would have been spent. The spending spree does not stop..

 

[SuperTool]

And your solution is to let the government spend you into debt. Remember, the government is counting on your taxes to pay the interest on their deficit spending for years to come. The government will pay national debt and spend on top of that, so in the not so distant future, you will be paying 30% taxes to just service the national debt, and another 30% on top of that to cover government spending. It's like credit card, after you reach a certain debt, you will be working just to pay the minimum payment,and never get out of debt.

 

[Mister T]

<< The problem with the national debt as an "investor's haven" is that it is really a form of regressive taxation. People who make between $40,000-80,000 a year as a household income pay the largest percentage of their income to taxes. The beneficiaries of most government bonds are in the richest 2%, who make over $130,000 a year. Therefore, the money is being distributed upwards to the wealthiest americans. >>



You are wrong. Government bonds are held mainly by institutional investors and corporations, not high net worth individuals.
Also, how do you conclude that people who make 40-80K pay the largest percentage in taxes... last I checked we had a tax system that takes a greater percentage of your income as you income increases.

 

[charrison]

SuperTool,

And you are hoping they will not spend the money if they keep it? Given the track record over the past 20 years of congress, you are being quite optimistic.

 

[thomsbrain]

<< but by creating a national debt, Reagan saved the economy (especially from that disaster of a president Carter). Clinton just rode Reagans economy and received credit for it. >>



Oh yeah, he did a great job of saving the economy. Except a little thing called a MARKET CRASH in 1987, in his second term, long long after Carter. And look at the mess he left poor Bush Sr. with.

Regan DOUBLED the national debt in 8 years. That's right, what took all other presidents 204 years to accumulate, Regan doubled in just 8. Gotta love Republican economics.

 

[HendrixFan]

Mister T

I was talking about the people who benefit from investing in government bonds. Again, you will find that the people who invest in government bonds are the most wealthy of Americans. Even if that means the money is "channeled" through "Institutional Investors", which I assume to mean companies that sell mutual funds, the money is still going to Americans. I do understand your point about companies that invest in government bonds. Id have to check on the limitations the government would impose on such actions, as they would seem to conflict with most "incentives" the government lays down for corporate investments.

Though the tax system we have is progressive, exemptions largely help those at the very bottom, and those at the very top. If you check out the Congressional Budget Office's website http://www.cbo.gov you will see that after exemptions are claimed, the people who pay the most taxes relative to income fall into the group that I mentioned.

 

[SuperTool]

<< SuperTool,

And you are hoping they will not spend the money if they keep it? Given the track record over the past 20 years of congress, you are being quite optimistic. >>


I am saying the government will spend the money anyways. The only question is, do you want them to take more taxes from you now to pay for it, or do you want them to take out a debt, and then tax you overtime to pay down the debt with interest?

 

[etech]

"why we should lower taxes, and when someone asked my why not pay all of the debt instead of lowering taxes, I couldn't give them an answer. "

google search on Kudlow national debt
Larry Kudlow

It's late and I need to get to bed but for some reasons not to cut the debt read a few of Kudlow's articles on the subject. I'm not sure I agree with all of his reasons but he makes a good argument.

 

[charrison]

SuperTool,
I want them to live within a budget, you give them more they will spend more. Surely they must at some point come to grips with their spending problem and when they show they are serious, I will glady not complain about paying more in taxes to cover the debt.

 

[Saul]

Actor Ronald Reagen

 

[SuperTool]

<< SuperTool,
I want them to live within a budget, you give them more they will spend more. Surely they must at some point come to grips with their spending problem and when they show they are serious, I will glady not complain about paying more in taxes to cover the debt. >>


I agree with this 100%, but we are going to go bankrupt before this happens. For this to happen, citizenry will have to tell politicians not to bring pork back from Washington. We will need majority of people to say, no, "don't bring us anymore government projects or cash, Senator Byrd, we don't want the government to come here and create jobs in W.Va" Since most people expect to get as much as they can from the government for the taxes they pay, the politicians will do their best to please.
Notice that Bush wants to congress to raise the debt limit. He is not talking to the people asking them to sacrifice some pork projects to free up money for the military, because he knows it's politically dangerous. Instead, he is postponing the hard decisions by getting us more into debt. It's not just him, it's all these politicians. They are afraid of saying no to the voters. That's why the way it comes out is that they increase spending and cut taxes at the same time.

 

[HendrixFan]

charrison, I think Super Tool agrees with you in a way. I think its possible to pay off the debt without raising taxes. Looking at the Congressional Budget Office's revised numbers (post recession), we still can work towards paying off the debt considerably over the next 10 years WHILE Bush's tax cut is in effect.

 

[SuperTool]

Not a chance. We will be lucky if we get a balanced budget and the debt doesn't grow as much, but paying it off, forget it. If I had to guess, by end of decade our debt will be around 8-10 T

 

[HendrixFan]

Im saying its technically possible, given the revised $2 trillion surplus over the next 10 years, we can cut into the national debt considerably. Not that I think it will happen, I was just stating that as a response to someone who thought it couldnt happen without raising taxes.