Tax cuts, stimulus packages, national debt

I read this Wall Street Journal story last week and thought it'd be a good opportunity to talk about U.S. budget deficits, the national debt, and the political spin that tends to muddle each and every debate about the nation's finances. (Word version, in case the site doesn't work).

First let's define the terms. The deficit is the amount of money the U.S. spends in excess of what it takes in through taxes. Debt is the amount of accumulated deficits. For example, if you make $1000 a month and spend $1200, you have a $200 deficit. If you do that for an entire year, you'll have a debt of $2400 at the end of that year. That debt represents 20% of your annual income.

The U.S. has a long tradition of holding debt. In fact, the only time the U.S. has ever NOT had a national debt was for about a month back in 1836. This sounds kind of bad, but that's a bit of a judgment call. What determines whether a nation's debt level is "good" or "bad" depends on what the money's used for, as well as how long it would take to pay off.

For instance, if a person takes out student loans to pay for school, that's not considered "bad." That's an investment that will pay off in the future. However, if that student borrows money and then fritters it all away on booze and Cracker Jacks, that can hardly be considered "good." But it's not really the debt that's the issue -- it's what the debt is used for.

The second consideration is how long it would take to pay off that debt. A student finishing law school might owe more than $100,000. That sounds pretty bad. But if they're going to make more than $100,000 a year as a lawyer, that's not so rough. If they can cut back on their spending and live frugally, they might be able to pay it off within three, or maybe even two, years. Then they have the rest of their career to benefit.

If, however, a student borrows $100,000 and then goes on to become a street sweeper (non-union), that's a bit different. It might take them decades to pay off that debt, wasting bazillions of dollars on interest.

Now let's apply these concepts to the U.S. on a national level. (For a really good explanation about all things related to the national debt, Zfacts.com is a great site.)



The U.S. currently has a debt level equal to about 65% of the national income (GDP), about half of which is directly attributed to the Reagan years. While it's a far sight better than Japan's 180%¹, there's still the danger that our credit rating could be downgraded. That would mean higher interest rates for the American taxpayer, and therefore more money wasted at a time that we can ill afford it.

The rise in the national debt and the use of Japan as a "role model" brings up the question, "What are we getting for the rise in debt?" Well, if one looks at what people used their tax rebates for in 2002, it's cheap merchandise from China. That's not exactly akin to the long-term investment of a student loan.

There's also the issue of spin, and everyone in Washington spins. As the WSJ article brought up, the issue of Social Security complicates the matter. At the moment, we have more money coming in from contributions than going out through benefits. It makes the deficit appear smaller, and that's make the situation seem better than it really it ... for now.

In the future, however, baby boomers are going to retire en masse, and that's going to cost us. At some point, we'll have to either raise taxes, cut benefits, or start pulling money out of our posteriors. Any way you slice it, we're going to take the hit somewhere. And you can watch the debt pile up, $7000 dollars per second, here.

There's also talk about tax rebate checks taking the form of an "economic stimulus" in the summer. While I welcome a rebate check that'll put more money in my pocket, I don't think it'll work the way it's inteded. Although the idea is to boost consumer confidence that things will be OK (and therefore continue to spend money), in reality people are more likely to either pay off debt or save it, as this article points out. And in either case, it's not going to make people feel better about the housing problem. In the end it will probably just cost us more money than it's worth.

But to sum things up, it's not the deficit that matters, nor the level of debt. It's what we're getting for it. But considering that we're essentially using our credit card to pay for tax cuts, a tax rebate, and a less-than-popular war in Iraq , I can't say those tax cuts in 2002 were really worth it.

I had hoped for better from the first president with an MBA.