The National Debt: Digging deeper into why we’re digging deeper

The US national debt is now at 100% of Gross National Product, in other words equal to what we produce in a year. Forty cents of every dollar the US government spends is borrowed. Horrible, cry the pundits! The government should behave more like a family with a budget, should know when to stop spending!

Let’s consider, though, that the average home-owning family takes on a mortgage equal to two or three times its annual earnings. (Before the crash, this number was five, not two or three.) In the US, it’s common for this family to spend 40% of its monthly income servicing the mortgage debt. So far, then, the government is acting exactly like a family – and a fairly responsible family at that, as we’re not even talking about families that abuse credit cards.

The bank lends to the family because the banker thinks the family will increase its productivity (and thus its income) over time, or at least remain as productive as it is currently. And just in case that turns out not to be true, the banker has built a risk premium into the interest rate on the mortgage.

Someone who panics about the US national debt, then, does not believe in America, does not believe our country will continue its historical trend of ever-increasing productivity. The people who yammer loudest about the national debt are those on the political right – usually the most flag-waving of patriots. What? When push comes to shove, these people do not believe in America after all?

Mysterious. Let’s see what’s behind it.

First, we’ll tie the loose thread I left when I mentioned interest rates. Are lenders gouging the US? If yes, it might be cause for panic. But interest rates are low worldwide following the crash, and lenders know that that if pushed to the wall the US could print more dollars, which are the world reserve currency. So no, interest rates are not the worry. Growth in debt is a legitimate worry, though.

Last night James Baker was on CNN with Fareed Zakariah. Baker said the US is broke, and debtors will colonize us like some banana republic if we don’t reform fiscally. He is wrong. Debtors will colonize us like some banana republic if we don’t get more productive.

In the 1980s Australia was in an economic mess, and the Australian Prime Minister trotted out the banana republic argument. Did Australia go the way of Nicaragua? No, Australia became more productive. Australians innovated and diversified their industries. They became less protectionist about the import and export of goods and people. They created an Oz that is a prosperous magnet for immigration and investment.

Anyway, why would Baker care? He and his – I don’t really want to be inflammatory, but OK, I will use the word fatcat – fatcat cohorts wanted NAFTA, the WTO, and more and more free trade agreements, and they got them. Why did they want them? It wasn’t because economic theory says protectionism (the opposite of free trade) is inefficient. It was so rich corporations and individuals could move (and invest) capital more freely around the world.

This enables them to hedge on taxes and hedge against the risk of the US becoming a banana republic offering low investment returns. That is to say, the fatcat cohorts do not care about America’s future. They don’t have to believe in it. They’ll make money regardless. They have no cause to worry about the US national debt.

I could say, “So much for patriotism,” but that’d be ranting. The right’s rage against national debt appears to be a smoke screen, perhaps a cover for further tax reductions for their super-rich overseers. It also conveniently obfuscates that we had a balanced budget under the Democrat Bill Clinton and that it was blown away by Republican President Shrub. Successful obfuscation might help a Republican presidential candidate in 2012.

In any case, the US does have a budget problem, and it’s more constructive to speak of what can be done about it. Baker told Zakariah it may no longer be in our “national interest” to have troops in Afghanistan. That’s marvelous, a Republican suggesting, however obliquely, a reduction in military spending. It would make a greater contribution to a balanced budget than anything Congress came up with this week.

My progressive friends advocate increasing taxes on the super-rich. Again, this makes a certain amount of sense. However, it does not get to the root of the problem, which is productivity.

The route to increased productivity – which lets us pay down debt – is innovation. We must find a way to induce the super-rich, and even the simply rich, to invest heavily in innovative ventures. Not in gold, not in real estate, but in inventor-entrepreneurs who will bring productivity-enhancing products and services to market. And the best place to make such investments is still the United States.

What form can such inducements take? Not an easy question. Tax credits mean nothing to people and companies that pay zero taxes to begin with. And the super-rich are traditionally more interested in conserving their wealth than in risking it. I invite your bright ideas.

I write from Peru, where we await the outcome of a momentous presidential election. The candidate with the greatest support among the rural and poor, Ollanta Humala, is great friends with Chávez of Venezuela. My educated Peruvian friends, many of whom came from poor families, understand Chávez’ Venezuelan model would be disastrous for Peru. They also understand that when the advantaged class in a highly unequal society does not produce, popular sentiment can propel a far-left candidate to the fore. There’s a lesson here for the United States.