The middle class is shrinking. Those in power have run up enormous debts on public credit while shoveling most of the money into private pockets. The corporations that have benefitted from this borrowing binge, meanwhile, leverage the global trade system to transfer their profits beyond the reach of national governments.

Meanwhile, we have been told lies by Democrats and by Republicans, divided into artificial camps and led into debates that are either irrelevant or so dramatically scripted that we fail to realize every choice leads to the same result: the dismantling of the social framework that defined and sustained the opportunity of the last century. National mobilization of resources has given way to radical individualism under a narrative that, in the wealthiest nation in the world, we must always expect less.

In this tumultuous time, we search for a way forward - a new Square Deal for the American people.

Tuesday, July 5, 2011

Money Matters

We’ve heard it dozens of times, maybe hundreds, from ranting lawmakers: the United States is broke!

We heard it as they argued against passing last year’s budget unless tax breaks set to expire were extended (which they were). We hear it now as they argue over raising the ceiling on how much the United States can borrow.

Juxtaposed with this admonition that America is utterly broke, we are also inundated with assertions that is an exceptional, world-leading nation with the highest standard of living in the world. In other words… the United State is rich.

Which is it?

It’s certainly true that the United States is the richest country on Earth. To prove that, one need only check the International Monetary Fund (IMF)’s GDP records for 2010:


As you can see—and those numbers are in trillions of dollars, by the way—the U.S. has an economy larger than the next three combined. As a nation, America is very, very rich.

But if we are rich, how can we be broke? That depends on what we mean by “broke.” One context is with regards to the U.S. national debt. Another is the average income of an American. Let’s look at both.

The National Debt

Every year, the United States government spends more than it takes in every year. That’s something that it has done almost non-stop since the founding of the country, though there were a few periods in the 1800s when the government actively paid down debt.

America saw precisely two years (1835 and 1836) when debt was virtually nonexistent. Andrew Jackson—Old Hickory, they called him—was the President at the time and didn’t like debt, so he paid it off. (Jackson also didn’t like central banks and vetoed the renewal of the charter of the Second Bank of the United States, the precursor in some ways to the Federal Reserve, but that’s another story for another time.)

Outside of that very brief window, however, American debt has been a fact of life. We borrowed to fund infrastructure projects. We borrowed to finance wars (though prior to 2002, the idea that borrowing alone would fund a war was regarded by legislators as being as ridiculous as such an idea would be regarded by any rational person).

Ronald Reagan, that supposed advocate of small government and lower taxes? He presided over an increase in the national debt from just under $1 trillion in 1981 when he took office to $2.6 trillion when he left eight years later—a doubling and then half over again. That’s not speculation; it’s public record.

The Reagan years are significant for two reasons:

  1. 1981 marks the start of a huge shift in American public spending, because while the United States had always had an always accrued debt, the rate at which the country borrowed shot up under Reagan and has accelerated ever since.
  2. Among Republicans, Reagan is remembered with theological deference, and whatever one thinks of Reagan—I personally have only passing memories of the man, but I give him great credit for working with Gorbachev to end the cold war—the notion that Reagan actually delivered small government is utterly unsupported by reality.
By 1999, the national debt stood at $5.6 trillion. The debt did not grow in 2000 on account of the balanced budget championed by Newt Gingrich and Bill Clinton, but immediately after taking office, George W. Bush championed a series of large tax cuts intended as stimulus to shake off the breaking of the Dot-Com bubble. The September 11 terror attacks followed, and the economy slumped.

Pursuant to Republican economic orthodoxy, further tax cuts were enacted. The 2003 tax cuts came despite the United States taking on the burden of military action in Afghanistan and then a massive, extremely expensive invasion and occupation of Iraq. By the end of George W. Bush’s first term, the national debt stood at $7.3 trillion, about 40% higher than when Bush took office. (War is expensive, which is why it has always required borrowing even when accompanied by war taxes and other revenue mechanisms.)

In 2008, the massive housing bubble imploded, and the government stepped up with $800 billion to stabilize the banking system. When George W. Bush left office in 2008, the debt had ballooned to $10 trillion, nearly double what it had been when he came in.

Barack Obama came into office in 2009 with the economy in shambles. Pursuant to Democratic economic orthodoxy, massive spending followed (though less massive than Keynesian economists wanted). As of the end of 2010, the national debt stood at $13.5 trillion. Today, it is higher still—mostly because every budget projection assumed things that haven’t happened, like the 2001 tax cuts expiring when they were scheduled to expire earlier this year.

Average Income

How much wealth is in the country as a factor of economic activity is all well and good, but does that make life easier for the people who live there?

Up to a point, yes: people are hard-pressed to pursue their own goals if economic activity is too stagnant. But we should not be too quick to align GDP and the thing that most Americans actually care about, which is household income. “The economy” is a very abstract thing, and lots of money flowing through the system is of little interest to Americans if they don’t actually see any of it flowing into their pockets.

So, how are we looking in terms of wealth?

To start, let’s be clear that when we talk about average income, we’re looking at medians (midpoints) rather than the arithmetic means that one gets from adding everything up and dividing by the number of entries.
A mean is easily skewed; one millionaire and nine people making $10K a year yields a mean of $109K, but it’s obvious that the nine pulling in $10K are in no way connected to that number. Medians count from the ends to find the middle-most entry, a process that minimizes the impact of both high and low numbers.

Using data from the U.S. Census Bureau, we can see the median household income adjusted for inflation—that is, we’re making a comparison based on equivalent buying power and not just tallying numbers on the page—has gone up and down (with the business cycle). It has also gone down since the housing bubble burst in 2008.

Median income today is no higher than it was in 1997—but Americans are carrying a lot more debt, particularly debt on houses.

The Debt Limit

America is one of the few countries in the world to have a statutory limit on its borrowing. If you think about it, it is pretty odd: under the U.S. Constitution, no money can be spent unless Congress authorizes it, and Congress can raise any money it needs through taxation.

The deficit, therefore, is entirely a function of Congressional activity, because the only way that a need for borrowing can exist is for Congress to both direct that money be spent and refuse to raise that money. Surely, we don’t need a vote on the debt ceiling in order to remind Congress that it needs to write checks to pay for its own spending?

Oddly enough, however, that is exactly what we have.

Putting It All Together

So, we’re broke—or rather, there’s plenty of money in the U.S. economy, more than any other country could imagine, but Congress refuses to raise money through taxation to pay for the bills that it has itself run up.

We the (little) People of the United States must accept drastic cuts in government services—things that we asked Congress to provide, things that Congress voted to provide—because any tax increases whatsoever are utterly unacceptable to the entire Republican caucus. To these ideologues, trillions of dollars in cuts are better left untaken if it would mean hundreds of millions in new taxes.

I have already written extensively on America’s tax cut problem and why as opposition to tax increases is both foolish and a financial dead-end. Let me take a moment to address why the current brinksmanship over the debt ceiling is also a very bad idea.

The global financial system—that amazing, complex machine whose functioning was so important that Congress handed over $800 billion in taxpayer money in order to stabilize it in late 2008—is underpinned by the U.S. dollar. The dollar, in turn, is valued on the basis of the full faith and credit of the United States of America.

As far too many Americans have learned these last few years, when you owe a lot, even a slightly higher interest rate translates into much higher bills. Fortunately, so far, the U.S. government enjoys the lowest interest rates in the world on its borrowing, because bondholders view the possibility of default as virtually zero. Why do they think so? Simple: the United States has the largest economy in the world, and Congress has the ability to tap that economy to raise any sum needed to pay American obligations.

Recently, Republican Presidential candidates like Michelle Bachmann and Tim Pawlenty have questioned whether failing to raise the debt ceiling would really matter. After several cycles of big tax cuts, massive wartime spending, and sustained economic malaise, we have nowhere near enough revenue to actually pay our bills.

Forget about raising the debt ceiling to cover new spending (though President Obama’s budget certainly would continue overspending); we need to do it just to borrow the money to service our existing debt. Long-term, that’s not sustainable, but short-term, it’s unavoidable.

To those who think that markets would not consider a failure of the United States to pay its obligations to be a true default, one need only take note of the news from S&P today regarding Greece: even a voluntary roll-over of Greek bonds by current bondholders would be interpreted as a default by credit-raters. Don’t misunderstand the S&P stance here as limited to Greece!

After years of generous ratings that amounted to little more than rubber-stamps for Wall Street, raters are taking their jobs very seriously. If Congress fails to raise the debt ceiling—if legislators fail to take their jobs seriously—and the U.S. government has to start denying payment of certain obligations, the full faith and credit of the United States of America is very much at risk.

A U.S. default would return the United States and the world to the very point where things were in December 2008, to the brink of economic collapse. This time around, there won’t be any bailouts to save us, and by the time even the most ideological Tea Party supporters realize they were wrong, it will be too late.

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