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.