National Debt: Good News & Bad News

Chart 1: Size of the National Debt by Year 2006-2011 (Data Source: U.S. Treasury Department)

Former Secretary of Labor Robert Reich, when accused by Stephen Colbert on “The Colbert Report” of being “one of those wealth redistribution guys“; he cleverly replied:

I’m not a wealth warrior; I’m a wealth worrier!

What he meant by that is that there’s a widening wealth gap between rich and poor in this country and he is worried about the growing effect it is having on the national economy.

At the time Reich was promoting his new book, “Aftershock“. In it he points out how the wealth gap today has enlarged to the size it was in 1928 just before the stock market crash of 1929 that triggered the Great Depression of the 1930s.

Reich and all Keynesian economists, who seem to dominate every discussion of economics, downplay or ignore debt.

However, just like the wealth gap, government spending is sapping more and more wealth out of the national economy and storing it in the national debt. At about 5% of GDP that, too, drains the national economy.

As seen above, the national debt has risen linearly since 2007. More important than that, as will soon be revealed, U.S. sovereign debt has dynamically shifted even more negative since 2007.

Since no Keynesian, like Reich, will ever seriously address the issue of debt, I will.

The Good News

Chart 2 - National Debt Growth by Year 2006-2011

Since there isn’t much, lets cover the good news first.

In calendar year 2011, the national debt grew much less than the previous year for the first time since 2007. 2007 is the last year before what Robert Reich calls “The Great Recession“.

National debt growth fell from its record high of $1.74 trillion in calendar year 2010 to ‘only’ $1.2 trillion in 2011. That is a $540 billion plunge in the right direction.

Interestingly, most of the 2011 drop was because ARRA (“The Stimulus package”) spending ended in 2010. ARRA was unfunded and spent about $840 billion over two years. If ARRA had been a 3-year program then 2011 debt growth would have dropped only $120 billion and the national debt today would be $15.7 trillion instead of $15.2 trillion.

Though it didn’t create any jobs according to the BLS, ARRA helped soften the blow for hundreds of thousands of public employees and for all Americans on government assistance.

“I’m Fuzzy on the whole Good/Bad Thing”

– Bill Murray, Ghostbusters (1984)

The national debt includes two types of debt… good debt and bad debt.

“Bad” debt is debt owed to entities outside government, like China, that must be paid back with interest and affects the national credit rating.

Anyone remember that the credit rating of the United States was downgraded last year? That happened because we failed to address “bad” debt.

The U.S. Treasury Department quaintly calls “bad” debt the “Debt Held by the Public”.

In all the charts in this article “bad” debt, debt held by the public, is shown in red.

Bad Debt Growth

National debt growth from 2006-2011 in Chart 2 above shows a disturbing reversal.

In 2006-2007, the pre-recession growth of “bad” debt was small compared to total growth of the national debt. It was small because the government borrowed a lot more from itself as “good” debt than it did from the Chinese.

However, by 2011 things reversed. Since the recession, the vast majority of national debt growth comes not from government borrowing from itself, but from outside borrowing as “bad” debt.

A primary reason for the change is Social Security, a major source of borrowing, no longer has “excess collections” of payroll taxes to borrow from as “good” debt.

So what do the President and the other braniacs in Congress do? Yup, they REDUCE payroll taxes more!

Percentage Growth of The National Debt

Chart 3 - Rising Growth of "bad" Debt

Chart 3 plots the percentage growth of the national debt compared to the percentage growth of “bad” debt – debt held by the public.

In 2006 and 2007 the pre-recession percentage of “bad” debt growth was less than the percentage growth of total debt.

Since then that has been reversed. “Bad” debt now grows faster than total debt.

To put it in technical economic language…
That is not good!

The explosive growth of “bad” debt since 2007 was driven by two major factors:

  • The Great Recession
  • Reductions in payroll tax collections

The Great Recession obviously resulted in lower tax revenues, there are fewer people working, which was made up for by borrowing more. To fight the recession we passed ARRA, the “stimulus” package, that was totally unfunded. All of it was paid for through even more borrowing.

Unfortunately, at the same time, what Congress affectionately called Social Security “excess collections” from payroll taxes went negative. There are fewer workers contributing due to the recession and baby boomers are retiring at record pace.

Those two things were a double whammy on government spending for which Congress took no serious action to mitigate.

The Percentage Growth of “Bad” Debt

Chart 4 - "Bad" Debt Growth Compared to Overall Debt Growth 2006-2011

Perhaps most revealing of all is the total growth of just plain “bad” debt.

Chart 4 shows two distinct things:

  • The percentage of total national debt that is “bad” debt
  • The percentage of growth in the national debt made up of “bad” debt since 2006.

Back in 2006, “bad” debt made up 56.6% of the entire national debt. Today, that percentage has grown to 68.8% of the national debt.

That doesn’t sound like a big jump until you look back at Chart 1 to see that in terms of current dollars the total amount of “bad” debt has nearly doubled since 2006.

Back in 2006, “bad” debt accounted for 37.7% of the total growth in the national debt. It was less than the growth of “good” debt.

However, since then “bad” debt skyrocketed to peak at 91.4% of total debt growth in 2010. Last year it dropped only slightly to 90.8% as the economy began to recover.

Economists predict it will be years before the economy recovers. The CBO says Social Security revenues will be less than expenditures for the next 75 years!

Together, that means total debt growth will be very high for years to come and that “bad” debt growth will make up the bulk of it for a very, very long time to come.

Conclusions

A growing national debt is not the biggest debt challenge facing the nation.

The biggest challenge is the growth of “bad” debt borrowed from outside of government that must be paid back with interest.

The only reason we are doing as well as we are right now is because the cost of government borrowing remains at historic lows. And that is only because the U.S. dollar remains the currency of global trade. That will necessarily have to change if our “bad” debt continues to grow this fast.

The United States is teetering on the brink of a European-style sovereign debt crisis. Congress and the President need to take our debt problem seriously before it has irreversible consequences.

Since Keynesians, like Robert Reich, will never go on TV to seriously address the issue of debt, I would.

You see… I’m a “debt worrier” who aspires to become a “debt warrior”!

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jan 12, 2012, in ARRA, Debt, Debt crisis, economics, Economy, National Debt, news, Politics, Robert Reich and tagged . Bookmark the permalink. Leave a comment.

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