November 4, 2011


How Democrats--and the Tea Party--Get Reagan Wrong (Steve Conover, October 21, 2011, American)

Families, private enterprises of all sizes, state governments, and local governments all employ a measure of debt financing to help fund good investments. Moreover, it is common practice for growing entities not just to roll their maturing debt over, but also to finance new growth by adding new debt on top of rolled-over debt, instead of paying the debt down. Wise use of debt financing is a valuable method for enhancing growth. Examples abound. [...]

For a successfully growing "going concern" such as a family, a company, or a government, the so-called burden of the debt is the affordability of the interest payments--not the level of the debt, or the resources it would take to pay the debt down to zero. Successfully growing families, companies, and governments can continually roll old debt into new debt commensurate with their successful growth--just as the United States has been doing since 1837. The debt burden is therefore not the debt principal; instead, it is the affordability of the interest payments. The burden increases when interest payments become less affordable, and decreases when they become more affordable.

A good indicator of the affordability of our interest obligations is the portion of total tax receipts required to pay the interest on the debt. It gives us a reading on the debt burden in total, even though many individual programs yield intangible benefits. When the economy grows, aggregate tax receipts grow (even if tax rates don't change), which tends to make the aggregate interest obligation more affordable. Lower interest rates have a similar effect. Conversely, higher interest rates tend to make the interest obligation less affordable, as does an increasing level of debt.

In mid-2011, it is taking just under 10 percent of federal tax receipts to pay the interest on our publicly held debt. It may come as a surprise, but that debt burden is lower than it was for the entire 20 years between 1980 and 2000. How could that be, given that today's debt level is skyrocketing? It's because interest rates in this sluggish economy are nearly zero--which is short-term good news, but also a warning that the debt burden should begin to climb rapidly after interest rates return to typical non-recession levels.

When is the debt burden too high? That's difficult to answer, but it is obviously something much less than 100 percent (the point at which interest payments consume every dollar of tax receipts). Based on our track record, 20 percent seems to be a rough ceiling for comfort--as long as we stick to Reagan's principles of investing for the long term and trusting the private sector to deliver growing prosperity in a favorable environment. With today's debt burden of 10 percent, we have some runway remaining, but it won't last forever.

Of course, just because the debt is trivial doesn't mean the GOP shouldn't use hysteria over it to force some worthwhile entitlement reforms.

Posted by at November 4, 2011 5:43 AM

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