Debt Approaches Historic High


A recent report went virtually unnoticed, given the uprisings of oppressed peoples from Libya and Egypt to Wisconsin and Indiana. (In the last two cases I refer to the uprisings of the taxpayers against the tax eaters.) It turns out that the government debt of this fabulously progressive nation now exceeds its GDP.

Yes, if you add what the federal, state, and local governments owe to creditors, the sum exceeds what the country produces in a year, which is about $15.1 trillion. This includes the $2.4 trillion in debt owed by states and municipalities, and the debt owned by the fraudulently named Social Security Trust Fund, not to mention the now $14.17 trillion owed by the federal government.

We are approaching the all-time high mark in US debt to GDP ratio, which hit 122% in 1946, just after World War II. We were able to pay down that debt fairly rapidly, but prospects for rapidly paying down our current debt are dim.

In the years after WWII, we had a young labor force, high personal savings rates, and a population that had deferred buying consumer goods during the war. Also, defense budgets were cut dramatically in the face of peace.

But now we have the most rapidly aging population in our history, a low personal savings rate, and consumers who are pretty well tapped out. Under Obama’s policies, we face high unemployment and tepid growth for the indefinite future, along with the specter of unleashed inflation.

From the late ’40s through the ’60s, entitlement programs were much more limited than they are now. They expanded dramatically under Lyndon Johnson, then exploded with Obamacare, which has the potential of giving “free” healthcare to as many as forty million more people (if illegal aliens get covered).

Social Security is now in the red and likely to stay there. And the first of the 78 million Boomers became eligible for Medicare this year. Moreover, we are only now learning about the trillions of dollars in unfunded pension and healthcare entitlements of government employees.

Until recent times, the US was the preferred place of worldwide investment, because of our relatively free economy. But now, with massive new regulations here — from Sarbanes-Oxley (the law that was passed after the Enron debacle to regulate corporate accounting) to the Dodds-Frank finreg monster (the Wall Street Reform and Consumer Protection Act) — and ever freer economies in Asia and elsewhere, more investment money is flowing abroad.

After WWII, there was broad bipartisan support for free trade; people had seen the role that protectionism played in extending the Depression and helping to bring about a cataclysmic world war. But over the past few years, we have turned our back on that consensus.

Finally, we have at the helm the most radically leftist and the most economically illiterate president ever elected – and also the most profoundly incompetent president, managerially.

It will take a long time to dig out of this mess.

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Warren Gibson

Good article. It will indeed take a long time to dig out of this mess. Three comments, none of which challenge that conclusion:

(1) The Social Security Trust fund holdings are part of the $14 trillion gross federal debt. You're double counting them. It's conventional to net out Trust Fund holdings, leaving "debt in public hands."

(2) Social Security did indeed pass into the red last year. This was partly because so many people have recently taken the option to begin benefits at age 62. Those people's benefits are permanently reduced below the level they would have been had they waited until full retirement age. This will reduce future Social Security liabilities somewhat relative to estimates based on more people waiting longer to start benefits.

(3) The personal savings rate has inched back up, and state/local governments are halting facing up to their budget problems.


In second paragraph "county" should be "country."

Gary Jason

Thanks for catching the typo, Brizz.

Mark F.

"Finally, we have at the helm the most radically leftist and the most economically illiterate president ever elected – and also the most profoundly incompetent president, managerially."

Oh please. I'm no Obama fan, but this "radical leftist" has refused to end Bush's wars in Iraq and Afghanistan, favors increasing the military budget, has signed a significant tax decrease and has refused to budge on the war on drugs. Some "left-wing radical."

Gary Jason

Mark,maybe I'm missing something here. You seem to think that the mark of a leftist is opposition to war and favorability towards the free use of drugs. Where around the world through history have leftists in power been averse to using military power? Would that have been in Stalin's Russia, perhaps? And when have they favored drugs? Would that have been in Mao's Red China? In our own history, were Woodrow Wilson, FDR, Truman, JFK, LBJ, and Clinton averse to using military power? Or favored legalizing drugs?

Gary Jason

With Obama's attack--pardon me, his Kinetic Military Action--against Libya, we need to add him to the list of "liberal" Democrats not averse to military power.

Jon Harrison

The hyperbole of the second to last paragraph almost spoils this excellent essay, but the perfect exposition of the differences between 1946 and today is undeniable.

I don't like Dodd-Frank and I can no longer recall precisely the particulars of Sarbanes-Oxley, but I wonder what Jason's remedy is for the proclivity of corporate America (or portions thereof) to rape the citizenry. Thousands of people had their retirement savings wiped out by Enron, and there was simply no way for them to know they were being ripped off until it was too late. Wall Street (together with Washington, D.C.) brought the U.S. economy to its knees in 2008. Shouldn't we be be trying to police these rogue capitalists? I don't understand why some libertarians denounce government oppression on the one hand, but think it's okay for the individual to be sliced and diced by corporate forces than he can neither control nor often even comprehend.

Gary Jason

I cannot agree with Jon Harrison’s comments on my piece.

Let us start by taking up the only substantive point he raises, to wit, that the massive new regulations that Sarbanes-Oxley and Dodd-Frank are necessary to protect innocent investors from “rogue capitalists.” He insinuates that I, like “some libertarians,” hypocritically denounce government oppression while approving of hapless individuals being “sliced and diced by corporate forces.”

Since “libertarian” seems to have connotations to him that it doesn’t to me, suffice it to say that I am classically liberal. From the earliest classical liberals such as Adam Smith on, the fact that business people are all self-interested — hence open to greedy actions that harm consumers, workers or other people — is explicitly recognized, indeed, even highlighted in explaining economic activity. So classical liberals support enacting reasonable laws to constrain and regulate business activity, as well as other activity, for that matter. Classical liberals are not anarchists.

However, what classical liberals understand (that statists from Hegel on don’t) is that people in government, as well as voters and everyone else, are equally self-interested and susceptible to greedy dealings. Understanding the universality of self-interest, we classical liberals try to keep the government to a minimum, and rely on the market to provide protection as well.

So consider Sarbanes-Oxley, which Harrison admits he no longer remembers. He remembers the corporate scandal, but not the alleged cure. He might want to read Barbara Hunter’s excellent critique of it. In sum, yes, the crooks who ran Enron engaged in fraud — they hid liabilities/debts from investors by creating “special purpose entities” to make those liabilities invisible. When that fraud was uncovered — by Fortune magazine, please note, not the government — Enron collapsed.

Now, investors were burned, and those employees who hadn’t diversified their 401ks lost their assets. In that regard, they were ignorant or careless investors, as Mr. Coulter points out, and it is hard to watch out for the fortunes of such people in a free society. But that isn’t why Social Security? The victims won’t starve.

And what happened to the perps? They were all rightly nailed under then existing laws and given massive fines and jail time. The two top execs — Jeffrey Skilling and Ken Lay — were about alone indicted on 65 counts of various crimes, including bank fraud, false statements to auditors, securities fraud, money laundering, conspiracy, and insider trading. Skilling got 24 years in jail and $2 million in fines, Lay a similar amount.

So the criminals got punished on the then existing laws. That’s all you can do with criminals — punish them.

Sarbanes-Oxley was then passed with the promise it would stop any more such fraud in the future. But it didn’t. (Ever heard of Bernie Madoff?) It stiffened penalties for perps — which could have been done by tweaking existing laws — but at a cost of a massive new regulatory expansion. It has also tilted the playing field toward big business, added many more billions of dollars in compliance burdens on all business, made a lot of private companies looking to go public go abroad, and discouraged foreign listings on our stock markets — to the great benefit of the Chinese, Japanese, and German markets.

Ironically, as I have noted elsewhere, the federal government didn’t elect to include itself under this law, even though federal officials routinely commit the same offenses all the time. What is the so-called Social Security Trust Fund but a special purpose entity set up to hide debt? And we passed Obamacare based on Obama’s contention that it would lower medical costs and the federal deficit, a clear case of fraud.

In short, I would have stuck with the old laws and enforced them quicker and better. Smaller but better government, get it?

Next, consider the mortgage meltdown. According to Jon, again, corporate greed brought it on an innocent public, and Barney Frank and Chris Dodd have come to the rescue.

Where to begin? In the classical liberal perspective, the absurdity of Jon’s view is brought home by a simple question: if corporate greed caused the mortgage meltdown, why did it never happen before in our long history as a nation, and why didn’t it occur in countries that are economically, politically, and culturally similar to ours, such as Australia and Canada? Did corporate greed never exist in America before, and does it not exist in those other countries?

No, invoking greed to explain the meltdown is as silly as invoking gravity to explain a plane crash.

Under my view, the mortgage mess was at base a governmental failure. Bit by bit, over a 30- year period, the federal government pushed private home ownership as a public good, nay, as a positive right. It piled up bad policy upon bad policy, creating a toxic, unstable pile of policies bound to result in a collapse.

This was indeed a bipartisan policy, though in truth the party that made most of the bad policies and resisted most the idea of reining in the excesses was the Democratic Party — led most of all by Barney Frank and Chris Dodd. These crazy policies included: prohibiting banks from charging more for mortgages in areas of high mortgage default rates; making Freddie Mac and Fannie Mae into privately owned companies to suck in more money to expand their loan purchases free from political scrutiny; massive Fed pump-priming in the form of easy money over an extended period; Clinton’s Community Reinvestment Act; the Boston Fed’s letter to the banks essentially telling them that looking at a person’s credit score (in order to determine whether to give him a loan and at what rate) was passé and discriminatory; and the deliberate fraud by Fannie and Freddie in misleading investors as to the grade of the paper they were buying (exactly like Enron, please note).

Looking at grains of sand creating an unstable pile, you can’t predict ahead of time exactly which new grain will cause the pile to collapse, but you can predict it will eventually give way. So nobody could have predicted exactly which stupid policy would be the proximate cause of the meltdown, but see it coming you could. What the federal government did over three decades was create a vast climate of moral hazard: it made it irresistible for normally prudent, self-interested banks and mortgage brokers to make dicey loans because the government would help buy that dicey paper, and it corrupted ordinarily prudent, self-interested citizens by tempting them to speculate on homes they couldn’t afford — because of a bubble it was entirely responsible for creating.

In short, the federal government caused the greed to emerge. The potential for greed (inherent in self-interest) is a constant, like gravity, not just on Wall Street but also on Main Street and in the halls of Congress and in the White House.

What would I have done (or do)? We should not have (or ever had) the FHA, Freddie Mac, or Fannie Mae. Privatize them. Then you would check self-interest by self-interest: the tendency of a buyer to gamble on a loan would be checked by the fact that the bank — which would not have the government there to bail it out or buy that bad paper — wouldn’t want to run the risk of getting burned by the borrower. You could bet that just as in Australia and Canada, banks would return to the idea that to get a home, the buyer would need to put 20% down and have good credit and a job.

As to whether my description of Obama was hyperbolic, well, it certainly wasn’t intended to be. Some writers have favored hyperbole as a trope, and a few — such as Nietzsche and Rand — have done much with it, but I don’t favor it myself.

No, I really do think that Obama is the most left-wing president ever elected. Not the most left-wing ever nominated, please note — Gus Hall, former head of the American Communist Party, was rather to the left of Obama — but he never won.

Which president was more to the left of Obama? FDR might be the closest candidate — FDR liked bashing business, and certainly created stimulus programs (that also failed to stimulate jobs). But FDR’s spending was vastly lower than Obama’s, and even FDR opposed public employees having unions.

Again, I really think that Obama is the most economically illiterate president we’ve ever had. Since to this day he refuses to release his college transcripts (and test scores, for that matter) — unlike the Evil Bush, who had the integrity and stones to do so, and see them used as fodder for political attacks — we can only judge by his actions. His handling of free trade is illustrative here.

Obama ran for office bashing free trade, unlike most politicians of both parties since the Smoot-Hawley debacle. In office he refused to ratify the free trade agreements outstanding, and started a trade war with Mexico. But within the last six months, he has reversed course. This indicates to me that he never grasped the benefits of free trade — which any student who has read Bastiat would grasp — and had to learn by witnessing the persistently high unemployment in part caused by that trade war.

Jon Harrison

Actually, Gary, you've misrepresented what I said. I never said I thought Sarbanes-Oxley or Dodd-Frank were the answer. Indeed, I specifically said I didn't like the latter law. I'm not at all certain what can be done to police rogue capitalists, but they do present a major problem for our society. Recall the havoc Enron caused in the Western energy market, a situation that clearly arose because regulation was lacking. Regarding the housing bubble, you're on firmer ground, but falling back on Ubiquity theory and blaming the Feds alone for the problem is a bit simplistic. This is why most libertarians are not taken seriously by most of the rest of society. They have a fixed notion that what they dislike is the root of ALL evil, and that if only their ideological proclivities became the norm, society would be in fine shape. However, life isn't played out in theories, or in a classroom. No ideology yet devised by man (including -- gasp! -- libertarianism) can deliver paradise on earth. Human beings are flawed, and so too are the blueprints they create for human happiness. No doubt you know this, but one would never guess as much from your writings.

If your description of Obama wasn't meant to be hyperbolic, so be it. I don't intend to defend the man. I'd re-read Nietzsche, though. He was in fact not at all given to hyperbole, though the casual reader might think so.

Fredrik Coulter

Jon stated that "Thousands of people had their retirement savings wiped out by Enron." First, I'd love to see an enumeration of the thousands of people who were wiped out.

Yes, some people were wiped out by Enron, but I doubt it was thousands. To have your retirement savings wiped out by Enron, you had to be massively overweighted in Enron stock. If you invested in a mutual fund, Enron would have only depressed a small portion of your retirement savings.

But the big difference between the private sector's effects and the public sector's is in magnitude. Private enterprise cons and screw-ups affect thousands of people, most of whom will not be "wiped out." That's because people have choices with private enterprise, and not everyone will do the same things.

Public enterprise cons and screw-ups affect everyone. You can't opt out of the government; they hold a monopoly. So when they screw up, they can affect millions and hundreds of millions. And pretending the government doesn't screw up is to be blindingly ignorant.

Yes, we should police rogue capitalists who hurt people on an individual basis. But we should much more police rogue statists who hurt people on a mass basis.

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