IV. Should the Federal Debt be Paid
     Prelude: National Debt Basics Video 15 min
    A. Pay it 
         1. The external debt (owned by foreigners) has gone up from
             5% in 1960 to 13% in 1988, 22% in 1999 and 43% in 2005.
         2. The crowding-out effect slows growth as Federal dissaving 
             causes high interest rates lowering private investment.
         3. Paying $230 billion in annual interest causes incentive problems
             as this money could be used to solve many problems.
         4. Recently foreigners have been willing to invest their export earnings in America
             helping to minimize the effect of the high federal deficits on interest rates.
             a. If foreigners decided not to make these investments, interest
                 rates would increase, slowing economic growth. 
             b. Interestingly one of the reasons the Federal Reserve was unable to lower long
                 interest rates quickly during the 1990-91 recession and its recovery may have
                 been the Japanese decision to dramatically curtail their U.S. investments. 
         5. Annual interest on the federal debt increased 50% (from
             1.9% to 3.3%) during the 1980's. By 1999 it was down to 2.5%.
         6. How To Tell Debt Facts From Political Hype
         7. Good Is Bad Up Is Down
   B. Don't Pay It 
       1. The debt was caused by wars and recessions. 
       2. We are not going bankrupt, the debt is about 100 % of one year's GDP. 
      a. First-time homeowners go a few salary years into debt.
            b. Much of the annual deficit goes into capital expenditures and because the U.S.
                does not have a capital budget, these items are all expensed in the year of purchase. 
               During periods of growth, the result is an over statement
               of the deficit.
       3. Paying it would overtax the average American.

       4. Most Americans would rather spend tax
           money to solve problems rather than lower the deficit.
           a. This attitude changed substantially in the early 1990's. 
           b. By the end of the 1990's, projection had the debt paid off in 10 years.
               By 11/01 the impending recession and events of September 11
               cast a shadow on this 10-year projection
        4. What is the Federal Debt: a primer for politicians
        5. The Big Lie
        6. 2 Concerns: U. S. Governments Debt
        7. Deflating National Debt Through Inflation 5 min video
       8. Ray-of-hope-about-the-federal-deficit/

   C. Balance the budget is a simulation that allows
    participants to make changes and balance the budget.

  D. Modern Money & Public Purpose 1 hour plus
     1, The Historical Evolution of Money and Debt
     2. Governments Are Not Households
     3: The Eurozone
     4: Real vs. Nominal Economy
  

What if the Federal Budget Was $100

Navigating Big Debt Crises

Mark Blyth Videos  Devastates Approach to Budget

  Liberal View of Balanced Budgets

Interest Payment Management Approach

Please link to and Share!    10/2/22

See Quick Economics Notes  

Editor's Note:
The Debt to GDP ration headed up with Ronald Reagan, dropped with Clinton, then headed up again with Bush 2 and finally leveled off killing Obama's second term projections could force reductions in entitlements unless the economy really takes off. The effect of Obamacare are not known. Entitlements are not contracts. What congress gives it can
take away.

Editors Note: Revolutionary War debt had been piled up by both state and federal governments. Secretary of the Treasury Alexander Hamilton orchestrated the first federal tax on imports in 1789 to pay federal and state debt . This debt was our largest federal debt related to GDP until 1933 when the Great Depression crushed revenue collections which caused deep- do-do (d-cubed).

Secretary of the Treasury Alexander Hamilton began the practice of increasing taxes to pay for war expenses. Printing money causing inflation usually helped. 

This practice continued for over 150 years. Then both Hover and Roosevelt borrowed not for war but to help people survive the Great Depression. Then Bush II reversed over 200 years of logic as he cut taxes during good times so as not to pay for wars in Afghanistan and Iraq plus he created entitlement Medicare Part D. 

Hamilton's paying state war debts began federal government practice. Today many states take the money and show their appreciation by telling the federal government to stay out of state and local business.

Individuals also follow the practice of taking and saying stay out of my business. 
Retires and poor people don't want the FEDS involved with their lives even though much of our debt is caused by the big four of Social Security, Medicaid, Medicare and Defense.

State and Local Governments can't print moneys so they can't have deficits. They use unfunded pension and health liabilities to cover future spending. Unfunded state and local employee and retiree benefits would head list of major contributors to state and local liabilities.

I don't like the term entitlement programs when they are financed by individuals paying into a fund. This is especially true since there is not a contract so what the government gives it can take away so the word entitlements is a sham.

Governments spend so much more than is taken in that balancing the budget is futile. Living at such a peaceful and prosperous time should allow cuts in the gravy train but Greed, Guns, God, and Government get in the way.  Source

In the Good Old Days, FED's Borrowed To Finance War
Great Depression Began Barrowing To Fight a War on Poverty
Lately We Borrow to Help
State and Local Governments, Business, Unemployed, Education  ...

Revolutionary War  veterans were paid in worthless currency which they sold at a large discount to wealth people who were then helped by Hamilton's decision to redeem at full value. This could happen again as debt is bought by the wealth on margin on borrowed money at low Federal Reserve sponsored interest rates.

Some states had paid their revolutionary war debt and were not helped by Hamilton's decision to assume all war debts.

Financial stress caused by financial excesses were substantial during the 19th century and early 20th century.

Inflation during the 1970's hurt fixed income often retired older residents and fixed asset people. SS was not indexed to inflation until early 1980's.

BUT, recent financial crisis's have been moderated by government
action and the debt has been much larger.

The Future of Social Security

In 1980, my friend Mr. Average lamented his Social Security pension would be small. He wished the government would take more out of his pay to increase his expected pension. This would be difficult as Social Security was having  financial problems soon to be solved by a bipartisan commission chaired by a man named Greenspan. It recommended, Congress passed, and the President signed a social security tax increase, an increase in the wages subject to Social Security, and a delay in the normal retirement age. My friends normal retirement age increased from 65 to sixty-six. What have these changes accomplished over the past 25 years.
         

Uncle Sam’s Unfunded Promises October 8th, 2017 
in governments USA - all fed, state, local, macroeconomics

"Of course, Congress could always authorize the Treasury Department to authorize the Federal Reserve to monetize a certain amount of the Social Security and Medicare debt, which is essentially what Japan is doing (and seemingly getting away with it). I think we should all be grateful to the Japanese for being willing to undertake such a fascinating experiment in monetary and fiscal policy."

Outlook for Short-Term SS Trust Fund Adequacy?

2013 Trustees Report  measure short-range adequacy of OASI, DI, and HI Trust Funds by comparing  fund asset reserves to projected costs for the ensuing year (the “trust fund ratio”). A trust fund ratio of 100 percent or more—that is, asset reserves at least equal to projected cost for the next year—is a good indicator of a fund’s short-range adequacy. That level of projected reserves for any year suggests that even if cost exceeds income, the trust fund reserves, combined with annual tax revenues, would be sufficient to pay full benefits for several years.

 By this measure, the OASI Trust Fund is financially adequate throughout the 2013-22 period, but the DI Trust Fund fails the short- range test because its trust fund ratio was 85 percent at the beginning of 2013, with projected depletion of all reserves in 2016.  
The HI Trust Fund also does not meet the short-range test of financial adequacy; its trust fund ratio was 81 percent at the beginning of 2013 based on the year’s anticipated expenditures, and the projected ratio does not rise to 100 percent within five years. Projected HI Trust Fund asset reserves become
fully depleted in 2026. Chart E shows the trust fund ratios through 2040 under the intermediate
assumptions."  The 2013 report explores cost relative to GDP, the value of what we
 produce. Editors Note: What do you spend money on that is more important than retirement and health care? Current consumption, highway accidents, mental health of children, education, military safety,  death and carnage from terrorism, death and carnage from lighting strikes?

White House delaying Social Security trustee report to factor in Health reform

What to do! Options include increasing the wage base being taxed, the tax rate, and delaying the maximum benefit date. All were done in 1981. Ignoring the problem and borrowing the cash will be difficult as borrowing much more than we already have will push interest rates higher on Treasuries and lower the value of the dollar. So they will  increase from $90,000 base soon because it is politically easier although Republicans won't be happy. Then a bipartisan commission will be formed to increase rates, wages subject to Social Security taxes, and the normal retirement age. A commission shares the political burden. 
All have been done before. What bothers me is a new option.

Indexing Social Security to wages has caused Social Security pensions to increase. Wages go up because of inflation and productivity. A plan indexing  pensions to inflation lowers pensions and a Presidential/Congressional cash crisis is avoided for a while. The Center for Retirement Research at Boston College  analyzed this change. My friend Mr. Average just retired at 65 and receives $14,689. Had we indexed to inflation in 1951, the average Social Security pension would be lowered by $2,131 to $12,558.  To be candid, my friend Mr. Average needs this additional income. Let us move ahead to 2025. Under the current system, Mr. Average will receive $16,205 in 2005 dollars, a $1,516 increase.  If indexing to inflation passes Congress and is approved by the President, Mr. Average will receive only $14,689 in 2005 dollars. No real increase because he would not share in productivity increases. His pension would be larger in 2025 because it was but he could only buy the same amount of goods and services as in 2005.

The Center for Retirement at Boston College also reports the entire mess can be solved by increasing the normal retirement age from 67 to 70 over a period of years for people under 45 or people under 55 could receive a benefit cut of 20%. Becoming Oldest-Old: Evidence from Historical US Data from MIT shows we are living longer. Since Social Security was adopted in 1935, life expectancy for someone 65 has increase by almost 5 years to almost 17 years. Since these numbers are going up, my friend Mr. Average is making out very well. My normal retirement age is 66 years. Hopefully I will pay for one more year and collect for 4 more years. Not bad! Boston College has more on Social Security.

The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.