The Federal Debt & A New Way to Control It
Thursday, 26. January 2012
Borrowing from Peter to Pay Paul Can Work Only for a While
Debt owed by the United States federal government has risen sharply in recent years. The worst recession since the Great Depression played a role in that increase, to be sure. But the federal debt has been growing considerably faster than the U.S. economy since 1980. The total debt now comes to closely $15 trillion – about $50,000 for every person in the U.S. of A.
The chart below depicts the gross Federal debt since 1966:
Back in 1966, the federal debt came to 40% of nominal annualized GDP. Today, the total federal debt is about equal to GDP. In a sense, of course, we are comparing apples and oranges; the total debt is an amount owing at a point in time, while GDP attempts to measure the value of goods and services produced in an economy over a period of time. Nonetheless, the ratio of federal government debt to GDP helps capture the fact the debt has been growing rapidly, relative to the ability of a taxed economy to support the debt. And the growth rate in debt has accelerated since 2000, particularly in recent years. Here is a look at the ratio of federal debt to annualized GDP since 1966:
One way or another, this debt will need to be serviced. Interest payments on the debt are a source of burden for a taxed society, while substantial and growing principal obligations also require attention. And unfunded obligations growing in federal entitlements programs can lead measures like bonded indebtedness to understate the extent of the problem.
The earnings capacity and growth potential supporting these obligations remains significant, but for a growing number of alarmed Americans, the national debt is becoming a national fear. Borrowing from Peter to pay Paul can work for a while, but recent fiscal crises facing countries in Europe highlight risks in this regard. Where we are in the US today, relative to the kinds of limits now evident in Europe, remains a matter of debate. But for many of us, the use of government spending to support private gain at broader public expense has become a more fundamental matter.
Even when a budget is balanced, government spending often enriches a few well-connected Pauls at the expense of many Peters. Special interest groups can feast on the common good. The proven incentives and ability for government to enrich the few at the expense of the many can be enhanced when borrowing gets involved. Spending for a few Pauls may come at the expense of younger and unborn Peters as well, many of whom now face the prospect of paying down debt owed to a growing number of Wangs. Down the road, many of our youngest and unborn Peters, Pauls, and Marys face harder, longer hours to pay for spending they never agreed to.
Constitutional Amendments – In General, and as a Solution
In 1787, visionary leaders drafted a new United States Constitution. It became a matter of considerable debate and compromise, but by June 1788 nine states had ratified it, and it became the supreme law of the land. In the preamble, the Constitution articulated its mission statement. Consider these goals as perspective for the implications that government spending and borrowing can pose for the common good:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
To this end, the constitution also included a means for altering itself. In Article V, the new Constitution included amendment provisions. The Constitution did not make amendments easy, but it did make them possible.
There are four main routes for an amendment to become part of the Constitution. They arise from two methods to propose an amendment, and two ways to ratify one. The first way to propose an Amendment is through a joint resolution approved by two-thirds of members of both Houses of Congress. Proposed amendments can then become actual amendments in one of two ways – they may be ratified by three-fourths of the state legislatures, or they may be ratified through conventions in three-fourths of the states. The state ratifying conventions route has only been used to ratify one amendment — the 21st Amendment. (This amendment was also the only one to overturn a previous amendment — the 18th Amendment, which first established federal alcohol prohibition.)
As noted above, there is another way to originate and propose an Amendment, in addition to the joint resolution passed by two-thirds majorities in both Houses of Congress. The other way to originate an amendment is through the state legislatures. An amendment can be proposed if two-thirds of state legislatures agree to direct Congress to call a convention of the states, and this convention then proposes the amendment. An amendment proposed in this way can then be ratified through either three-fourths of the state legislatures, or ratifying conventions in three-fourths of the states.
So, to summarize, there are two ways to propose a Constitutional amendment. There are also two ways to ratify a proposed amendment. An amendment can be proposed through action originating in the Congress, or in the state legislatures. In turn, an amendment can be ratified through state legislatures, or state ratifying conventions. Either way, at the end of the day, ratification of a proposed amendment goes through the States of the United States.
And a state-based effort is now underway to do to direct Congress to establish a convention among the states for the purpose of a new constitutional amendment limiting the federal debt. This amendment could provide a simple, effective tool that strengthens the original document as a tool for promoting the general welfare.
The National Debt Relief Amendment
A few years ago, two Arizona businessmen (Glenn Hughes and James Booth) founded RestoringFreedom.org. They approached Charles Gray, a former Arizona state senator and earned his support for their idea. In turn, Gray discussed the idea with leaders at Arizona’s Goldwater Institute (one of the original beneficiaries of the Liberty Markets Fund for Freedom). After some research, Goldwater signed on enthusiastically.
Nick Dranias, director of the Center for Constitutional Government at Goldwater, has called the National Debt Relief Amendment “the single most powerful amendment idea that has come through the Goldwater Institute.” The amendment reads, simply:
“An increase in the federal debt requires approval from a majority of the legislatures of the separate States.”
The leaders in this effort were originally focused on the second method for proposing an amendment – through a convention among the states. The other path – through two-thirds majorities in both houses of the Congress— requires a principal source of federal spending and debt growth to discipline itself. But our state and local governments aren’t necessarily shining beacons of financial responsibility, and a convention among the states to propose this amendment risks sparking some questions whether the pot is calling the kettle black. Last week, another leader in this effort, Rep. David Schweikert of Arizona, introduced a joint Congressional resolution proposing this amendment, with exactly the same language as the state-based proposal effort.
*Further information about the National Debt Relief Amendment can be seen at RestoringFreedom.org, while educational resources about the amendment that were prepared by the Goldwater Institute are available here.
Government spending can be abused when special interest groups establish and ride a gravy train funded by the Average Joe, particularly if debt financing is available and serves to cushion the cost for current taxpayers at the expense of taxpayers down the road.
Entitlements aren’t the only programs susceptible to corruption. In light of some of Andrew Gavin Marshall’s work here at Boiling Frogs and elsewhere, the costs of ‘globalization’ (a nicer word for ‘empire’?) include those directly incurred by parties participating in overseas markets, as well as their subsidies like government-guaranteed financing from the Export-Import Bank and even our extensive worldwide military presence. Hopefully, we aren’t at a stage like the latter days of the Roman Empire, after decades of supporting the few at the expense of the many — with untenable long-run financial consequences.
Bill Bergman has 10 years of experience as a stock market analyst sandwiched around 13 years as an economist and financial markets policy analyst at the Federal Reserve Bank of Chicago. He earned an M.B.A. as well as an M.A. in Public Policy from the University of Chicago in 1990. Mr. Bergman is currently working with Social Movement Sciences LLC, a new enterprise developing evaluation and funding services for not-for-profit organizations.
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Bill Bergman Says:
Here’s a relevant quote from Thomas Jefferson that The Independent Institute posted at its Facebook page today. “If we run into such debts, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people in England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mis-managers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow sufferers.” — Thomas Jefferson
Hal 9000 Says:
“One way or another, this debt will need to be serviced.”
I don’t think so. One way or another, the US will default on this debt.
To get a true picture of the situation, shouldn’t you look at total public and private debt vs. GDP? We have federal, state, local and private debt. Last time I looked, the total debt burden was almost four times GDP. The growth in debt is accelerating while income is nearly stagnant, and this is with the interest burden being kept artificially low. Such a debt can never be paid down in a nation like ours, in a resource-rich totalitarian state, maybe, but not ours. Americans will not accept the pain voluntarily, it will have to be forced upon them by an economic collapse. The outcome of this game is no longer in doubt, we are just waiting for the final minutes on the clock to run out.
Bill Bergman Says:
Here’s another old-school quote:
“Every new tax is immediately felt more or less by the people. It occasions always some murmur, and meets with some opposition. . . . [D]ebt is not immediately felt by the people, and occasions neither murmur nor complaint.” — Adam Smith—An Inquiry into the Nature And Causes of the Wealth of Nations, 1776
cdithaca Says:
The problem isn’t really debt but what use the borrowed funds are put to. To use the example of the household budget that is so loved by politicians, what should a family do if they find themselves deep in debt? Should they make equal cuts in their budget for entertainment and food? Should they ask their children to go without decent clothing so they can make the payments on their Hummer? That’s the family equivalent of the program being proposed here.
Placing America on a forced austerity program will not result in massive cuts in military spending, or an end to covert and overt intervention in the affairs of other nations, or a scaling back of the national security state and its spying on Americans and potential for repression of dissent. No, all those programs are backed by powerful interests who also control the political game in Washington. What will be cut: programs that directly or indirectly put money in the pockets of ordinary Americans. I recommend the recent interview with Webster Tarpley on Ron Paul’s economic program on KPFA’s Guns and Butter podcast for details (http://www.kpfa.org/archive/id/76422)
There is no secret back-door method of forcing fiscal (or another kind of) sanity on the government. Even if the people were united in support of one political/economic ideology, which they obviously are not, they could not force it upon a government that is completely controlled by powerful interest groups. A Constitutional Convention, were one to be called, would end either in chaos or be bought off by the same interests that have corrupted the government already. Perhaps it would be better to dissolve the United States and have states form smaller unions that simply wouldn’t have the resources to become imperial powers.
Bill Bergman Says:
Thanks for the ideas, HAL 9000 and cdithaca. I hope I’m not overoptimistic.
Open the pod bay doors, please, HAL.
Hal 9000 Says:
I’m sorry, Bill, I’m afraid I can’t do that.
I hope I’m overly pessimistic. But is there a precedent for a nation saddled with so much debt ever paying it down without defaulting, whether by inflation, restructuring, or repudiation?
Bill Bergman Says:
Well, it looks like back near the end of World War II, federal debt as a share of GDP was a little higher than it is now, so that could be one precedent, but only if a spike in debt financing during a World War is valid precedent.
Bill Bergman Says:
Probably raises more questions than it answers, but see also http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
Hal 9000 Says:
I see your wiki debt chart, and I raise you four more
Here’s a scary one, note the relative size of the Great Depression peak to our current peak
http://comstockfunds.com/files/NLPP00000/530.pdf
Here we see how the Fed policy sealed our fate with easy credit following the dot.com bubble. This is the capitalist version of central planning failure.
http://benbittrolff.blogspot.com/2008/06/public-and-private-debt-vs-gdp-illusion.html
This one is old, but still informative if you recognize remember the trend (total debt rising faster than GDP since 2009)
http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html#axzz1kxTUmZ6I
The Fed is not your friend. It created the over-investment, excess demand, excess debt and excess capacity leading to the current mess.
http://comstockfunds.com/files/NLPP00000/538.pdf
Read ‘em and weep
http://comstockfunds.com/default.aspx?act=Newsletter.aspx&category=SpecialReport&newsletterid=1504&menugroup=Home
Bill Bergman Says:
Thanks, HAL, will reflect.
Re: Fed policy, and easy credit, consider as well the fact that the Fed and other regulators effectively outsourced capital regulation to the rating ‘agencies,’ a longer story.
Hal 9000 Says:
Bill,
Re post-WWII
This is my point. What happened as a result of the high debt to GDP post WWII? There was a default by inflation:
a dollar in 1949 had only 74% of the purchasing power of a dollar in 1945 (and 58% of a dollar in 1939
http://www.dollartimes.com/calculators/inflation.htm)
Note the spike in inflation from 1946 – 1948 after the price controls were lifted. This kind of rapid erosion of the dollar is a form of default in my opinion, since creditors are repaid in substantially depreciated paper.
Here’s an excerpt from A Monetary History of the U.S. by Friedman & Schwartz:
Monetary inflation was used in part to finance WW-II – just as in the Civil War and WW-I. The war ended in August, 1945, but wartime price inflation didn’t peak until August, 1948. Wartime price controls delayed the price inflation – but couldn’t delay the loss of purchasing power. (Indeed, price controls undoubtedly made both worse.
In the 9 years from August, 1939, to August, 1948, high-powered money increased 9% per year, the stock of money increased 12.3% per year, wholesale prices increased 8.2% per year, the implicit price deflator rose 6.5% per year. Money income rose 10.5% per year and real income rose 4.2% per year.
Most of the increase in high-powered money and the money stock after December 7, 1941, was accounted for by the increase in Federal Reserve credit outstanding rather than gold – again similar to WW-I experience. The System sold the government’s bonds – some of which it bought itself in exchange for fiat money.
Between November, 1941, and January, 1946, government debt outstanding grew by $178 billion, System credit outstanding rose $22 billion, commercial banks acquired $69 billion of this debt, and currency held by the public increased $17 billion.
The FOMC fixed the yield on Treasury bills at 3/8 of one percent in 1942 – which had a stabilizing effect on all government securities. These price supports turned government securities into a form of money. These income yielding securities were now liquid and reliable enough so that banks could substitute them for reserve holdings in excess of minimum requirements.
The result was that the System surrendered its ability to control money. It had to create whatever fiat money was needed to maintain the fixed yield for government bills. If yields had been permitted to rise, the authors assert, the public would have purchased more of them, less fiat money would have been created, and less price inflation would have been experienced. (Of course, this impact would have been somewhat modified by the increase in the government’s debt servicing costs.)
Bill Bergman Says:
Well, regarding this notion of default by inflation, consider what has happened since the Federal Reserve Reform Act of 1977 first explicitly directed the Fed to pursue ‘stable prices’ (along with ‘maximum employment’ and ‘moderate long-term interest rates’)while conducting monetary policy. Long-term interest rates spiked sharply higher in the late 1970s/early 1980s, but the Fed (and the law) emphasize the longer-term nature of those goals. If the long-term perspective is what matters, tho, consider that the CPI has nearly quadrupled since 1977.
Many thanks for the informed, thought-provoking comments.