Debt service, even with ultra-low interest rates, becomes a burden that weighs on an economy. From Lance Roberts at davidstockmanscontracorner.com:
According to the World Economic Forum, the United States has achieved a new TOP 10 ranking. Tell us what we’ve won Bob:
“Coming in at #10 – the United States, at 104%, gets nothing but the privilege of being on the list of countries with the highest debt/GDP ratios.”
So…it’s just $19 Trillion? A mere doubling of the national debt in eight years isn’t really a problem, right? According to Bob Bryan at Business Insider, that answer is – no.
“Debt is an issue only if you can’t repay it or if other people believe you can’t repay it. And, as Business Insider’s Myles Udland has noted, the US can literally print the money it needs to repay its debt, and it still maintains a high credit rating.”
Bob is correct. The “fear mongering” over debt levels, and President Obama’s threats of default if we “shut down the government,” are just that – fear mongering. Entitlements and interest payments are mandatory expenditures of the government which get paid regardless of whether the Government is shut down or not.
However, what Bob misses is the much bigger point which is the impact on debt levels as it relates to economic prosperity.
According to Keynesian theory, some microeconomic-level actions, if taken collectively by a large proportion of individuals and firms, can lead to inefficient aggregate macroeconomic outcomes, where the economy operates below its potential output and growth rate (i.e. a recession).
Keynes contended:
“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”
In other words, when there is a lack of demand from consumers due to high unemployment, the contraction in demand would force producers to take defensive actions to reduce output.
In such a situation, Keynesian economics states:
Government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
Keynes’ was correct in his theory. In order for government deficit spending to be effective, the “payback” from investments being made through debt must yield a higher rate of return than the debt used to fund it.
The problem is that government spending has shifted away from productive investments that create jobs (infrastructure and development) to primarily social welfare and debt service which has a negative rate of return. According to the Center On Budget & Policy Priorities nearly 75% of every tax dollar goes to non-productive spending.
To continue reading: Why $19 Trillion In Debt IS a PROBLEM
