The United States of Insolvency

This past week my macroeconomics classes finished their review of the national debt.  I assign it in the vain hopes that perhaps my small efforts will awaken at least our students from the slumber of wishful thinking and denial of reality.  One of the best parts of being at a Christ-centered university is to be able to bring one of my fellow profs who is in the School of Biblical and Theological Studies over to review some of the public discussion of scripture as a rationale for high taxes to solve this problem.  The good news is that our students are now aware of both the moral and technical difficulties that our national debt presents.

Fortuitously, Jim Grant has just done his own small part (but MUCH larger than mine) to educate America on this problem in the recent issue of Time magazine.  His post is a must read (click the link), but here is a sample:

Debt per se is neither good nor bad, though less is usually better than more. How it’s priced and how it’s used are what tips the scales. If chocolate cake cost a penny a slice, the best of us would be tempted to break our diets. Well, government debt is priced at less than 2%, and Washington fell off the wagon years ago.

As I often say, what cannot go on forever, will not go on forever.  The day of reckoning gets closer daily.  Yet we worry about Mr. Trump’s orange hair and rude language, and why everyone in DC hates Mr. Cruz and Mrs. Clinton’s cough.  Oh my.

24 thoughts on “The United States of Insolvency”

  1. It is scary the lack of attention the national debt has, especially considering how big it is. I wonder what will bring Washington’s attention to it, before it’s too late.

  2. I do wish the government would be awakened, as you say, to see the reality of our national debt problem. I do appreciate your assignment on debt though to stimulate my thinking of logistical ways to do my small part in helping solve the problem. Continuing to do our parts and encouraging others to do their’s is what may just help drive ourselves a little bit out of this hole eventually.

  3. It’s scary that people don’t know that depth of the problem that our country is facing. I was talking to some of my friends about the national debt and the situation that our country is in and they were so oblivious to it and the implications that it means.

  4. I like Mr. Grant’s quote, “We speak of the Department of the Treasury rather than the Department of the Debt.” The amount we owe is frightening. What seems very important is when that debt will become due and how we will deal with that. If we refinance at 4.8% interest, as Mr. Grant mentions, then the government would be paying more in interest than on national defense! This is unsustainable.

    1. The money we spend on defense is borrowed money. I hope that they teach you the difference between mandatory spending and discretionary spending at Cedarville.

      The easy way to cut the kind of spending that requires borrowing is to shrink the size of the defense significantly.

      But what do Trump and Cruz propose doing? Getting the US involved in more military affairs, which will only increase our debt.

      Btw, social programs like Social Security and Medicare do not contribute to the national debt. They have been fully funded for decades, unlike defense spending, which has not been fully funded for decades.

  5. I would gladly pay you tomorrow for a hamburger today. Anyone know who’s famous for saying this? Thank you Fed keep the Press running and party on.

    1. If the press were so out of control, we would see EVIDENCE of that through inflation.

      But we don’t.

      As for your Wimpy analogy, has the federal government ever not paid its debt back?

      1. “As for your Wimpy analogy, has the federal government ever not paid its debt back?”

        Yes, the federal government defaulted on its debt twice last century; 1933 and 1971; perhaps you were not aware.

        As Rinehart and Rogoff showed conclusively* in This Time is Different, Eight Centuries of Financial Folly** , countries that owe their debt in some other currency (such as in our case with the gold standard) default; when they owe the debt in their own currency they debauch (print, such as what we continually do now, and will do in the future).

        * Some errors in their spreadsheet calculation have no bearing on the central conclusion of their work; if the response raises this issue they are just muddying the water.
        ** You can find an excellent book review of this work here: :-)

      2. The evidence is in inflated stock prices…the rich get richer. Paid back by borrowing from Peter to pay Paul.

  6. The day when Cedarville does a Hillsdale College and actually stands up for its so-called principles and eschews all federal funds (including the Pell Grants some of your students need in order to avoid having to go to Ohio State), I will take your views a little more seriously.

    But Cedarville University, when it keeps out its own hands so it can get money from Uncle Sam, actually contributes to the (so-called) problem of the national debt, and its own marketing materials sent several times a week to my home affirm this. Fact is, federal funds paid by borrowed funds subsidize tens of millions of dollars of Cedarville’s budget.

    Do the students KNOW this? Do they even care? Or is it like other Millennials in that it is all about them?

    As for your claim that “the day of reckoning gets closer daily,” I have heard the same thing from James Grant for at least three decades now. The difference between Grant and Chicken Little is that Chicken Little did not drag out his failed prediction for multiple generations. Oh, and the poor bird did not make his living selling failed predictions to the ill-informed.

    Have you decided finally to short government paper so at least you can say that you are putting your money where your mouth is, or are you just interested in scaring young people with half-truths?

    1. Isn’t it great that the mighty Jeff Adams is here to set all of the world right? Just makes my heart feel safe.

    2. Please elaborate on my half-truth.

      As for CU contributing to the national debt, this is absurd, being both obviously true and irrelevant at the same time. You could essentially say the same thing about someone that drives on the public road system that they are contributing to the national debt. If indeed the beneficiaries (to any degree) of government service are contributing to the national debt, then of course everyone and every institution is. With the size and scope of government today, it would be impossible to be completely separate from government.

  7. The amount of debt that the government has accumulated is staggering. Unfortunately, it seems that at this point, the solution must include both raising taxes and limiting government expenditures to a great extent. Unfortunately, it seems that the latter is more difficult to accomplish considering that most large portions of the debt are attributed to Republican presidents who unsuccessfully tried to limit the size of the government. Higher taxes will be necessary, and thats a policy that no one really wants. Any step towards less debt is a good step, and that starts with a smaller yearly deficit. Obama has accomplished this, and for that, at least some credit is due.

    1. Michael–
      You must be careful about “raising taxes.” What we need is perhaps more tax revenue. Raising rates may or may not lead to increased revenues. What is the historical record of higher tax rates generating significantly more revenue? I think you know this answer!

      1. The answer is dependent upon where you think we are in the laffer curve. I understand it as though we are to the left of the vertex, so that an increase in rate still means an increase in revenue.

  8. Dr Haymond,

    Did your class include all forms of governmental debt in your national debt analysis or only Federal debt? Also, did your class include unfunded accrued liabilities associated with public pension (including Social Security) and medical plans (including Medicare) as part of our national debt? I have an actuarial background and at one time worked with several public plans. A colleague was the former Chief Actuary for the Social Security Administration. He has written books and testified about the problems associated with Social Security funding. If you begin including governmental pension debt (local, state, and national) and governmental medical plans in your analysis along with local and state debt in the national debt, the results are truly staggering. A number of people in the investment community have written about the upcoming problems but have largely been ignored. While I don’t agree with the “chicken littles”, there will clearly be a day of reckoning coming, probably preceded by a devaluation of our currency.

    1. Pat,
      We did cover the overall fiscal balance, which includes all unfunded liabilities. When I gave them the ~$200T debt, I mentioned that it does NOT include state liabilities toward unfunded public pensions and health care plans. Suffice it to say, they are aware of the magnitude of the problem.

  9. The national debt assignment that was done in your class really allowed us students to see the causes of the debt and what can be done to help limit it. I hope that since it is becoming more of an issue that more people are going to be able to research it and learn more about our nations large debt and what it really means.

  10. My Dad always jokes, “Why do today, what you can put off until tomorrow?” This seems to be the way our government and nation view the national debt. It is seen as something that will become better by ignoring it and not changing anything. That 200T fiscal imbalance is going to become a reality at some point and we are no where near ready for that.

  11. As one of your students, I was definitely awakened not only by this assignment, but also this semester to different terms and concepts of what is actually going on. I agree that it is scary to see how people overlook what is being said and take politicians at their word without doing the research for the cause and effect.

  12. This really is an eye opener. Many people don’t think about the debt in this way. It is important to actually understand the problem and the process. As one of Professor Haymond’s students, I can say that I have learned a lot about both.

  13. What’s infuriating to me is that people – especially those my own age – fail to recognize the REAL problems we have in America. Maybe it’s because real issues are “boring” to the Buzzfeed-readers of my Facebook feed. Maybe it’s because the media would rather focus on a misquoted Trump segment than anything that truly matters.

    All I can say is that too many of my Bernie-supporting friends failed high school economics and I’ve had a blast showing that graph comparing tax revenue to the top marginal rate to them.

  14. I am worried that our politicians will not take action until it is too late and at this point I feel as if it is inevitable. I hope we don’t end up like Greece.

  15. I agree with you that many Americans focus too much on elections and not enough on real issues. If this extreme focus on elections carried over to focus on policies in the future I would have no complaint, but I feel that people get in a fervor during elections and then remain rather silent while actual policy is enacted. Perhaps this is a naive view of the world, but I’ve only been alive for a handful of elections so forgive any ignorance.

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