We're less than two weeks into 2012 and already we've hit a new low. And I'm not just talking about Snoop Dogg's recent appearance on The Price is Right. It's our national debt which, at $15 trillion, is now officially equal to our Gross Domestic Product.
But is this really a new low? Has our economy hit bottom, like Snoop's career? Does the national debt really affect my small business? Up until recently I thought it did.
I thought that as the debt got bigger and more unwieldy it would affect the value of our currency. Which means that the price for anything that I purchased overseas would go up. And that it would affect interest and inflation rates, as investors demand more in return for purchasing U.S. securities. And that it would affect our overall economic growth, as confidence in our government's ability to pay its bills diminishes. This is what I thought. Until I read this piece by Paul Krugman.
Krugman says that "nobody understands debt." Small business owners need to read it.
Krugman is an economics hall of famer. A Nobel laureate. He writes for the New York Times and pretty much everyone in the economics community reads him. Of course, economics being more of an art than a science, many academics (and people who think they're academics) disagree with some of his positions. But no one questions his knowledge or his passion as a "liberal conscience." This year Krugman was the most searched economist on Google. Not as much as Rebecca Black, but still pretty darned impressive.
Do I agree with everything he writes? No. But I enjoy reading him. I learn something almost every time. The economy affects us. The national debt affects us. My business is exposed to changes in interest and inflation, the value of our dollar and consumer confidence. These things affect my pricing, buying, investments, sales, employment and expansion decisions.
Krugman's recent blog was, in my opinion, one of his best. It made me think. Please know that I was an economics major in college but most of my education happened at fraternity parties, not in the classroom. I'm nowhere in the same league as he is. My intelligence is closer to this guy's. But over the past ten years I've become much more of a student of economics. And I frequently write and speak about how the economy affects the management of a small business.
And here's what I learned: Krugman is 100% right: no one really understands our national debt. I don't. I don't understand $15 trillion of anything. I don't understand its true effects. I don't understand how much (or little) of a problem it may (or may not) be. I don't understand how it can be managed or if that's even necessary. And I know something else: I'm not alone. Krugman's right because no one really understand debt. If we did, then there would be no debate about it. Just ways to manage it that everyone would agree.
I'm pretty sure Paul Krugman has other things to worry about than how the economy affects my small business. But I'd love to drag him into a Starbucks for a few minutes and ask him just five questions about what he wrote I believe that the answers to my questions would better help me explain our national debt to my clients, readers and people who have to suffer through my presentations. Here's what I'd ask.
1. How much of this debt do we really just owe to ourselves?
You say : "...this is the point almost nobody seems to get -- an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe ourselves." This is a significant thing for small business owners to understand. Most of the CEOs I talk to say they would never run their business like the government runs its business. We would never carry those kinds of liabilities or incur those kinds of deficits But you're saying we're making the wrong analogy. Because businesses like mine owe money to banks and vendors. But the government essentially owes it to...ourselves. And look -- we may not be very proud of what we do (especially given how many of us watch Keeping Up With The Kardashians) but we're not going to default on ourselves. Just to be sure I'd want to know how much debt we're talking about. What does "to a large extent" mean? Is it really mostly things like future obligations for social security and Medicare? If the government defaults on social security will little old ladies start occupying Washington and throw their wheelchairs and false teeth through the windows of the White House?
2. What is the right proportion of debt to the tax base?
You say that as long as there's enough income from taxation then we don't have to worry so much about debt. "The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation." To better understand this concept I would need to better understand how you define our tax base. Is that meant to be revenues from taxes or a certain number of businesses and people that are taxpayers? Is Tom Cruise included in this number -- I heard he earned $75 million for Mission Impossible 3. If there is a proportion of debt to the tax base that you think would be sustainable over the long term, what would that ratio be? If people understood this then couldn't our government target this ratio every year instead of setting limits on debt?
3. What is the right proportion of debt to GDP?
Our debt is officially now 100% of GDP. But you say that "...to win World War II taxpayers were on the hook for a debt that was significantly bigger, as a percentage of GDP, than debt today." But "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history." My question here is similar to the one above Is there a proportion of debt to GDP that you think would be sustainable over the long term? What would that ratio be? Can't we also use this ratio to measure our national debt rather than the absolute numbers we're using today? If there's wiggle room can we just invade Canada already?
4. How does America earn more from the debt we hold abroad?
This is comforting because everywhere I turn small business owners tell scary stories about how other countries (yes, we know who they are) are our biggest creditors and how this potentially threatens not only our economy but our national security. But you say that "every dollar's worth of foreign claims on America is matched by 90 cents worth of U.S. claims on foreigners" and that we're actually earning more on our foreign debt than they're earning on our debt. Does the U.S. government hold all of these foreign investments or is this shared with the private sector? Are overseas rates higher because those investments are riskier? Am I able to start running a tab at the Chinese restaurant down the street? Because our debt to foreign countries is almost equal to the debt they hold with us does this pretty much eliminate any risk of those countries demanding repayment? Your position seems like the amounts owed to each other almost offset, so it's not a significant issue.
5. What's P. Diddy really like?
OK, I couldn't resist this one. You did a cameo in Get Him To The Greek. Did you meet him? Was he cool? Did you call him Diddy? P? Or just Puff? Was he intimidating? This whole national debt thing must have seemed kind of trivial after meeting him, right?
All kidding aside, the points that Krugman makes are thought provoking and important to small business owners. Maybe the size of our national debt needs to be considered in relation to our tax base and GDP. If Krugman's right about this, then the debate could be more focused on not how big our debt is, but how the government is spending our money (ie. Less entitlements, more military, etc.) If we understood that relationship better it may ease many of our concerns about the economy and give us greater motivation to take more risks, make more investments and hire more people. At the very least, it would help some of us explain why we spent $.99 on that Rebecca Black song, particularly during these difficult economic times.
Another version of this post appears on The Philly Post.
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The sensationalistic media over the last year or so really did an excellent job of blowing the debt situation out of proportion. There was even Fareed Zakaria with his CNN blogs about how badly we need to put a damper on social program spending. Fareed's rants really had no basis in reality as Krugman now has illustrated.
But the correct question is, given a weak economy, can we choose to attack the debt now with austerity? If the economy enters deep depression, tax revenue will drop more, and our efforts will have been counter-productive.
If we enter a depression, the government might be forced to stimulate the economy to an even greater magnitude, again driving debt.
If we were a business, Romney would just file chapter 11, and move on to the next project. That doesn't work as easily for a country.
How does spending more and more money and going more into debt help brings us out of the recession?
1. How much of our debt is for capital improvements? It is always cheaper to go into debt to repair a bridge than to save up the money, wait till it collapses and then rebuild it. If you are a small business owner, you don't want to borrow 20K to redecorate your office, but you might if there were a tool or device that would more than make back its cost over a couple of years.
2. How much of our debt could be reduced by switching to zero based budgeting? Very few businesses simply add x% to whatever they spent last year and call it "a budget." They look at what they spent, why they spent and whether there might be a better alternative.
(1) Federal Deficits – Net Imports = Net Private Savings
(20 Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports
Modern Monetary Theory is clearly explained in
http://pragcap.com/resources/understanding-modern-monetary-system
with numerical proof of (1) using actual data for the last 60 years. Prof. Bill Mitchell blogs extensively on economics. Debriefing 101 is a sample at
http://bilbo.economicoutlook.net/blog/?cat=11
What is the right proportion of debt to GDP? Japan has no problem at 230%. Extensive data is shown by Koo at
http://www.paecon.net/PAEReview/issue58/Koo58.pdf
The quantity cumulative debt/GDP(in years) has the dimension year. 100% of GDP means 1 year. If this means anything, it may indicate the debt is too large to be paid off in one year. Bur govt debt is basically from itself and can be paid off by fiat any time. Bond financing is basically Kabuki. It was required in the Gold Standard days which were eliminated in 1971. Debt and GDP show no dependence on taxation. GDP is related to only govt spending, as seen in http://pshakkottai.wordpress.com/2011/10/16/us-gdp-vs-govt-spending-2/
http://pshakkottai.wordpress.com/2011/12/31/debt-and-gdp
http://viableopposition.blogspot.com/2011/12/government-accountability-office-and.html
That is where the debt problem will come home to roost. It is simply unserviceable at that point and all of a sudden, investors will awaken to the notion that the USD and Treasuries are no longer a safe haven.
And who is the #1 bad element in this debt debate and our society as a whole? It's the Republicans of course. By a mile.
to get payers to give theirt money to WallSt. Instead. Requirng borrowing additional $5Trillion to
pay the over 55s.
MeanWhile administrative Costs ARE TINY Privatization(WallSt Fees) would add significant Cost
According to reports on Financial networks over 40% of current Annual Deficits are result of the EconomicMeltdown. Therefore, investing in future Growth should be job 1.
But since significant part of problem is STRUCTURAL i.e Result of lack of investment in our future by the BushAdministration --coupled w/current low Interest Rates -- Makes it Both Imperative Timly
for us to invest in our future Now!
Furthermore, Big difference between the impact on accumulated debt from annual deficits
versus One-Time-Stimuli (MINIMAL)
W/future Nursing Shortages (400,000min) How about paying older nurses w/liftime accumulated knowledge to train younger ones-- Before the older continue choosing retirement.
How about Incentives to get people into Primary Care -- Which was part of Obama's vision in Health Care Reform -- Versus high prices Minutia Specilizations slated to be our undoing. And as in
Cleaveland Clinc -- Pay doctors high salaries to work in Teams (versus as per dium contractors)
This model has half the cost while rendering faster more effective diagnosies and treatment.
Glad Obama's Export push, Smaller companies assistance in navigating it, &ecouragement of companies to return to the US are now showing great results!
US currency is based on US debt including private bank notes. This is BIG, so paying down the debt has to have unforeseen consequences. And, paying down the debt is not impossible, but the Jackson administration did it and the Clinton administration projected that its policies would have paid off the debt by now. When Jackson did it, the country had a recession -- though the exact connection is not clear. While it is clear we can have debt and recession, our wealthy are doing well though the rest of us are in recession.
The fundamental basis of our currency is our trust and habits. Perhaps, other rationals are incidental.