Evaluating Our Government's Debt

This year Social Security will pay out more than it collects. This is sign of the rising public debt, mostly from entitlement programs (Social Security, Medicare, and Medicaid, etc). This graphic perfectly explains just how large these expenses will be in 2020. They are especially dangerous because their cost varies with who qualifies, a group that has been growing since the Great Depression. I've discussed the danger of looking at gross debt, instead debt as a percentage of national income. Even though US government debt is not at its highest level ever, it is increasing faster than ever. Like the issue of trade deficit, government debt can be both a good and bad signal. Nations with a debt too large, risk defaulting on loans. However, some nations may have a small debt because they are not seen as reliable sources for investment. The European Union's problems with Greece (and Spain and Portugal), show that those two problems can make national bankruptcy is a real concern. So let's look at how the US government debt compares to the rest of the world.

In a list of national debt as a percentage of GDP, the US ranks somewhere in the middle. In 2008 US debt was 39.7%, but in 2009 it rose to 52.9%. This compared to 108.1% by Greece and 75.2% by Portugal. Surprisingly Japan, the third largest economy in the world, also has the high level of debt at 192.1%. Something that not only worries me, but one of the most successful news magazines the Economist is also worried. Italy, Belgium, France, Germany, Canada, United Kingdom, Ireland, Netherlands, Norway, India and a whole host of other nations all have higher debt percentages than the United States. Government spending here is a problem, but less than around the world. In a democracy, the buck stops with the voters. Luckily it seems Americans have less patience for taxing our children.

The other good news is that the real solution to government spending is economic growth. Just like regular borrowers, nations pay back loans with income. Because of the hard work of generations of Americans we are ranked second in global competitiveness by the World Economic Forum. It is for this reason I'm more worried about nations like Japan and Greece than I am about the United States. In a globalized world, we may benefit from the hard work of others, but we also pay for the mistakes of other nations. At least we didn't put ourselves on the hook like the highly interconnected European Union did. If anything this shows how dangerous a global government can be. Small nations making small mistakes and then taking the small punishment is better than having a global structure for supporting failing economies. Just like how the bailout of Fannie Mae didn't solve the problem, it seems that by the reaction of Greek citizens to spending cuts,they haven't learned their lesson either.

I'm not very worried about our debt problem. Neither is Nobel Prize Economist Paul Krugman. Our federal debt has only been zero once, and that was only for a short time. My guess is we'll never see that again. It's too politically tempting for politicians to borrow from non-voters, meaning future generations. And there may even be some rationality for current generations to take from future generations. Since we're richer than our parents, our kids will probably be richer than us. Not saying I like the idea, but at least it's progressive, which counts for something. We also shouldn't worry too much about other nations holding our debt. If one day they decide we aren't a good investment, it just means it will be harder for our government to borrow so much, which is okay by me. I'll close by saying that any spending cuts that don't deal with entitlements is only political pandering. Focus on economic growth (and maybe population growth). These the keys to a better, more stable life. And if you're still worried, feel free to donate.