So What's So Bad About Debt?

“A trillion is not a ‘bleak’ number, per se. It's just a number. We might need two trillion,” said the University of Texas’s James Galbraith in an email. “Deficits have to grow. They will grow. Please get used to it.”

As the quote above indicates, not all economists are concerned about our rapidly growing deficits. Some believe that the only way to make our economy grow again is for the government to infuse huge amounts of money into it. In other words, we can spend our way out of this mess we are in.

You and I know, if we have one iota of common sense, that we can NOT spend our way out of debt. Nor can we go on borrowing forever – we will eventually run out of other people’s money!

In fact, such official sounding agencies as the OMB (Office of Management and Budget), the GAO (Government Accountability Office), and the CBO (Congressional Budget Office) have all issued statements to the effect that our current budgetary practices are unsustainable. Well, even a fifth grader should be able to figure that out!

So what is the problem with debt? One of our biggest problems is the fact that it keeps growing, and will continue to grow exponentially into the foreseeable future. Why? Because the government has certain debt obligations mandated by law that are certain to grow – namely Social Security, Medicare, and Medicaid, programs known as entitlements. (We Americans have been promised these payments and have paid into the system by having part of our income deducted from our pay checks. Therefore, we are “entitled” to them.) The reason entitlements will certainly grow is because of the existence of people like me – baby boomers. You remember that generation that came into being shortly following WWII; returning soldiers made babies, and lots of them! Now we, a very large generation of Americans, are beginning to retire and grow old. Soon, by 2017, there will be more of us drawing retirement checks than there will be young workers paying into the system. Then watch the debt really grow! Our health care needs will grow rapidly as well, requiring ever greater Medicare payments.

Other spending HAS to take place. Remember, the government is obligated to pay interest on our growing debt. Since our debt has exploded in the past few years, so has the amount of interest we are obligated to pay.

Entitlement spending and interest paid on the debt are known as mandatory spending, meaning we are required to spend this money. It’s kind of like when we sit down to do our personal budgets. Some things are just a given. We have to pay our mortgage if we want a roof over our heads, we have to buy food, we have to pay taxes or we’ll wind up in jail. And we have to pay our debts, you know, those credit card bills, or we will find ourselves in a world of trouble. We really don’t have much choice about those things. So what we do is set aside enough money to cover those mandatory things before we decide what we have left for things we would just like to have. Spending we don’t HAVE to do is called discretionary spending. Obviously, the more mandatory spending we must do, the less discretionary spending we can do. This is true for us individually, and it is true for our government as well.

Therein lies the trouble with debt. The more money we owe because of past spending, the less we have for current wants and needs. Our life style must be seriously downsized because of our past indiscretions. Eventually, our government will face the same problem. There will be less money for building roads and bridges, providing education, and keeping us safe. Programs will have to be cut; there will be great wailing and gnashing of teeth. People will not be happy with their government. (Yeah, I know, we’re not too thrilled with it now, but it can get a WHOLE LOT WORSE!)

There are other problems with debt as well, but I want to keep these posts short, so I will save them for another day.