National Debt – One Issue, Two Perspectives

February 14, 2007

How can we expect the government to be financially responsible if we can’t even stay out of debt ourselves? That’s the question I asked yesterday in a guest post over at Blogging Away Debt.

A interesting comment on the article from Kevin Morris discusses how government debt is okay as long as tax revenue continues to grow.

“Simply put, it is OK for the debt to grow, and continue to be rolled over, as long as the economy grows along with it, so we can continue to pay the interest.”

He references the Steve Conover over at the Skeptical Optimist who has a $1,000 bet that that tax receipts will surpass spending by May – June 2008 if current trends hold.

My Reaction
I understand their point of view. From their perspective, the debt is okay because it funds future growth. Kevin gives an example of how people begin with a starter home and upgrade homes throughout their life as their income grows.

However, if you carry that analogy through, just as consumers borrowed more than they could afford in the housing boom of the last several years, so has the government borrowed more than is fiscally healthy. In personal finance, a home loan is often considered “good debt” as long as the amount you borrow is not excessive. Along the same lines, government borrowing can become foolish if done in excess.

Passing the Buck
The other thing that makes me uneasy with Kevin’s point of view is that it puts a good deal of pressure on future generations. As Steve says,

“By the way, both sides of the bet are now in the hands of a neutral third party, invested in short-term government bonds – i.e., invested in a piece of the national debt. If I win, I will bequeath that piece of the national debt to my granddaughter. Remember, our grandchildren will inherit the national debt; I’m just trying to do my share to further the cause.”

In my opinion, the government is assuming that we will pay off our borrowing in the future, which often means future generations. What happens when tax receipts suffer for one reason or another? Will the Baby Boomers be around to pay the piper? Or will it be Generation X and Generation Y that have to pay the bills that another generation racked up?

In summary, while it may make sense for the government to use debt as a tool to fuel growth, they should do so responsibly and keep the impact on future generations in mind.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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Comments

2 Responses to National Debt – One Issue, Two Perspectives

  • Kevin Morris

    I can’t really fault anything you say here. Certainly I don’t want the government to borrow towards foolish ends, or borrow excessively. Unlike The Skeptical Optimist, I would be perfectly happy to see the federal gov’t run a balanced budget. Heck, during great economic times, I’m all in favor of paying some of it down with the high tax revenues.

    The whole debate about the national debt is framed incorrectly. Future generations do not have to pay off the debt. They merely have to service the interest on the debt, while continuing to roll it over. This is what we are doing now and having been doing for hundreds of years already. A growing economy, and thus growing tax revenues solve that problem.

    Furthermore, the economy need not grow continuously. It can have short recessions as we do now. As long as the long term trend is growth, we’ll be fine.

    Picture this. Let’s say the gov’t restores fiscal discipline and balances the federal budget for the next 10 years. Right now we’re paying under 10% of tax revenues to service the interest on the debt. In 10 years, with probably a doubling of tax revenue, that portion will be less than 5%.

    OK, let’s say the gov’t doubles the debt, and we double our tax revenues in 10 years. Then we’ll be right where we are now. We’ll be paying 10% of tax revenues to service the debt.

    The national debt is not a big burden that future generations will have to pay off. It’s not the boogeyman that the alarmist media and politicians want us to believe.

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