Stop Doing Stupid
The debt crisis is worse than you know. Our vibrant economy is subsidized by a global trust fund of cheap labor and natural resources which is nearly depleted. Democracy stands at the crossroads.
Debt, in moderation, is a good thing- as long as the debt pays for itself. Consider a baker¹ taking out a loan to purchase a new oven. If that loan adds 5% in costs, but generates more than 5% in additional profits, the baker made a smart business decision. And their customers will be equally delighted- perhaps the baker dropped the price of cupcakes. Or the store no longer runs out of baguettes by noon.
A financial and culinary win-win.
As Mr Micawber in Dicken’s David Copperfield sagely advised:
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
So how are we doing as a country? The line between federal, state and private debt is fungible, easily shifted by adjusting taxes or incentives. In some respects, balancing the federal budget is a game of Three Card Monte. Reducing federal medical coverage? It’s picked up by the states, or left to your own nickel. The debt remains the same.
The real question is, can we afford to pay our nation’s total debts by increasing total productivity² and profits?
We’re not even close.
Total US debt, both public⁴ and private, is around 90 trillion dollars. The average interest rate blends 0% promotional car loans, 3% T-bills and 20% credit cards, to around 4%. Or $3.6T.
By comparison, the US economy is $27T (2022). So debt service is around 13% of the economy!
No wonder bankers live in such nice homes…
Remember debt is good. Necessary, in fact, to invest in R&D and raise productivity. Expanding the pie, rather than fighting over the crumbs.
But unlike our prudent baker, America’s productivity balance sheet (e.g. “profit” at the national level) is abysmal. US GDP³ is barely growing at 2.5% annually (down from 6% in the go go 60’s). Insufficient return to justify the 13% loan.
Just how are we pulling off this bit of financial legerdemain?
The answer is morally and fiscally troublesome.
Turns out GDP is a distorted benchmark. Conventionally,
Gross Domestic Product (GDP) is the total market value of the goods and services produced by a country’s economy during a specified period of time. It includes all final goods and services (to avoid double counting) — that is, those that are produced by the economic agents located in that country regardless of their ownership and that are not resold in any form.
Critically, by focusing on economic output, GDP glosses over economic inputs. Imagine if the baker didn’t have to pay for their sugar. They could take on 13% debt and still sell cupcakes for a profit. But who subsidizes our national economy? Who is Uncle Sam’s sugar daddy?
Mother Earth! You know, burning nearly free oil and coal, patiently accumulated over hundreds of millions of years, in a matter of a few centuries. Cheap fresh water from aquifers that are no longer being recharged. Poisoning one ecosystem after another. Paying the interest on society’s debt by raiding the earth’s savings account. Basically living off Mommy’s trust fund.
And that’s just half the story. Like all empires we have “enslaved” the world to our benefit. Not merely African slaves from our early days as a British colony. But continuing to purchase fast fashion from cheap overseas labor. Shifting heavy manufacturing to less developed countries to avoid the cost of cleaning our air and water. Underpaying the poor and the illegal immigrant for their diligent labor.
Our industrial revolution- which brought America immense new wealth, longer lifespans and massive population growth- is a Potemkin Village. The “true” price of goods and services remains hidden away from view, only now coming into focus as the accounts are over-drawn.
How can we break this irresponsible habit of free-riding on nature and nurture?
In brief, stop doing stupid. Stop funding wasteful $100B weapons systems which enjoy strong political support but have no strategic value. Double the employment base by welcoming women and minorities and immigrants into the workforce. Help men retrain for the future. Accept settled science and get out in front of global warming and other foreseeable challenges. Move quickly towards a closed-cycle economy. Incentivize productive activities and remove tax subsidies directed towards the past. Educate the public on the consequences of their wasteful purchase decisions, and ignore the pointless tribal passions that divide us. Grow up.
If we don’t stop doing stupid the opportunity for growth evaporates, the economy stumbles and society will tear itself apart. The last time a free asset (slavery) was threatened, our country spiraled into civil war
Democracy can tolerate a little stupid, but cannot withstand a future absent great expectations.
Additional information:
[1] Individuals also benefit from debt. Consider a young worker financing a used-car for travel to a new, higher paying job. If their new salary more than covers their additional commuting costs, that loan is a productive investment in their future. And arguably a sound outcome for society- their employer gained a valued team member, and the government has one less mouth to feed.
[2] Increased productivity fuels human progress. Without productivity gains we are condemned to repeat the past.
The green revolution raised living standards and improved human nutrition, avoiding massive famines. The industrial revolution democratized manufacture. Today, even the poor have access to products once reserved for the aristocracy. These advances often required new infusions of cash, but more often than not, benefited from the diffusion of ideas. A single worker who figured out how to rearrange an assembly line to cut an hour out of car production paid for their salary ten thousand times over. A printing press disseminating knowledge beyond the limitations of an abbey full of scribes dragged millions out of the Dark Ages. Investing in human minds and being open to new ideas is our greatest source of opportunity.
[3] GDP also doesn’t capture the value of domestic labor at home (you know, mostly women raising children). Or the underground economy. Nor the vast improvements in product quality- a $2000 IBM PC from 1990 is counted the same as a $2000 macbook in 2023, despite the stunning advances in memory speed and displays. But these are small effects compared to the trust fund.
Comparing GDP growth to servicing debt is a “lite” version of Phelp’s Golden Rule.
[4] Interest on the Federal debt is ~7% of government receipts and rising. Federal borrowing costs are exceptionally low, in partial recognition of America’s low default risk. That is, until we drive the country over the debt ceiling cliff, and no longer attract prudent capital.
Interest payments on the federal debt dramatically rose in the 80’s and 90’s, and is projected by many to rise uncontrollably again, back into the 15% range.
Total debt may also be rising faster than the economy (note this graph illustrates “debt” and not “interest” on the debt. And GDP is on the left axis, with debt on the right).
Without the damping effect of the 2008 Great Recession, debt has a tendency to balloon out of control.
Working on a longer time series…
and a global issue.
