Richard Posner on the Dangers of U.S. Public Debt

The Real Danger of Debt
Richard A. Posner
Foreign Policy
February 16, 2010

In 2000, the United States had a balanced federal budget. Today, America has a deficit problem that threatens the country's future. It is compounded by former President George W. Bush's fiscal recklessness, the economic crisis that began with September 2008's financial collapse, President Barack Obama's spending ambitions, and the mysterious ability of the weakened Republican Party to create political deadlock in Congress.

Under Bush, spending was increased, taxes were cut, and the result was huge deficits financed by borrowing. Then came the "Great Recession," as it is being called (I call it a depression because of its probable long-term economic and political consequences). The public debt (the important component of the national debt -- the part that is more than an accounting entity -- that is really owed), which the Bush administration's deficits had caused to double, soared further. It soared because of falling tax revenues, rising unemployment benefits, and rising government expenditures to fight the depression (such as Obama's $787 billion stimulus plan). The public debt reached $7.5 trillion by the end of fiscal year 2009 (Sept. 30, 2009) and is expected to increase another $1.6 trillion this fiscal year and another $1.3 trillion next year. That means it may exceed $10 trillion by Sept. 30, 2011. Almost half the debt is owned by foreigners, and the interest payments to them are a drain on American wealth. Interest rates on the debt will rise as the world economy recovers, increasing competition for capital.

The United States has a deeply wounded economy. At this writing, transfer payments by the government to individuals and families (Social Security, unemployment benefits, tax credits, etc.) exceed the taxes being collected from the household sector. At the same time, private investment net of depreciation is negative. This means that private savings are being borrowed by the government, combined with the government's foreign borrowing, and then transferred to households to enable them to maintain their accustomed level of consumption. People are saving more, but government borrowing overwhelms their saving, with the result that aggregate saving -- public plus private -- is negative. So: negative savings, negative private investment, an incredible ratio of household debt to disposable income (1.25 to 1, though down from 1.39 to 1 in 2007), massive government borrowing to finance private consumption -- not a nice combination.

When the American economy does finally recover, tax revenues will rise, unemployment benefits will fall, and depression-fighting programs will end -- so annual deficits should decline. But realistically, this means only that the public debt will grow more slowly than it will be growing this year and next.

Faculty: 
Richard A. Posner

Comments

National debt

I agree with Professor/Judge Posner. When former Chicago professor and now Supreme Being Antonin Scalia cast the deciding vote in Bush v. Gore, abandoning his principles for political expediency, he began the process of the decline of the United States from its apex of power in the year 2000 to what it is today - a country which may be crippled by its huge debt for generations, caused largely by the "fiscal recklessness" (in Professor Posner's words) of President George Bush and his Republican cronies (and a few Democrats as well).  President Obama has increased the deficit by additional spending, but he must be given the opportunity to put in place his agenda to try to get the United States out of this massive hole created by Bush and his cronies, and this agenda calls for additional spending to stimulate the economy and correct the damage that Bush created.

National debt

Thank you for a helpful synopsis of our national fiscal problems. We are also caught in a trap created by the Laffer curve, making it very hard to increase tax revenues by increasing tax rates. The State of Missouri is considering repeal of its income tax and use of a sales tax to get less volatile revenues. It is certainly time to look hard at our institutions to make them better able to foster economic growth in the future.

Henry J. Mohrman, Jr.

Class of 1973