The House majority leader Eric Cantor (R-VA) recently published an op-ed, in which he argued that “If Washington actually had the discipline to live within its means over the long term, every American citizen would not owe $46,000 toward the national debt.” The rhetoric is effective, but the logic is flawed; not every American “owes” an equal share of the national debt.
The national debt is what the federal government owes in long-term interest on government-backed bonds, Treasury bonds. Long-term Treasury bonds pay out over several decades, and have (thanks to the high credit rating of the United States government) a very low rate of interest. The bonds are used to finance spending in the short term for which there are no sufficient tax revenues in reserve.
Over the life of a given Treasury bond, the interest accruing behaves, in a sense, as government debt. It requires that future budgets cover the cost of putting sufficient funds into a pool of revenues that will eventually be paid out as interest on those bonds. The rate of interest is often not as high as the rate of inflation, making it easy to “finance” the bonds without actually spending extra cash.
At the present time, the rate of interest is actually negative on some Treasury bonds. That means investors are paying more than they expect to get back, in order to have the security of investing in US Treasury bonds, the most secure investment product in the world. The national debt is what it will cost, over time, as all interest is paid out, to finance all bond payments.
The total is not necessarily more than all the revenue that can be expected to be taken in, over the life of the securities in question, and is not necessarily unsustainable, even when it reaches such high levels as 50%, or 80% or 100% of GDP. The comparison is something of a red herring, because GDP is annual (and more than 20% of it is government spending anyway), and long-term Treasury bonds pay out over several decades.
More than the percentage of current-year GDP, it is the combination of inflation, GDP growth and tax policy that will determine the viability of such debt. There are short-term T-bills as well, which “mature” in as few as three to six months, but the full scope of the “national debt” is more about long-term borrowing than short.
Deficits are not healthy, unless the level of borrowing stays within the range that credit analysts and credit issuers (bond investors) view as likely to yield a reliable return. But the key to understanding who actually “owes” money to pay down the national debt is understanding two key components of how it is financed: first, who owes what share of the tax burden, and second, who is actually benefitting from the debt itself, or rather, who is being financed by the government’s borrowing.
In the United States, at present, there is a tragic wealth divide that has, for decades, been eroding the middle class. The wealthy hold most of the wealth and take in most of the income. The top 20% own as much as 90% of all the investment income in the country (this includes Treasury bonds), as well as 84% or more of all the wealth.
It is the wealthy who invest in stocks which benefit directly from government spending (the bottom 50% of the “income ladder” hold virtually no investments of any kind). This could be the record Defense and war spending, or record subsidies to the most profitable corporations in history, the big oil companies. Or, it could be investments that benefit from the massive direct and indirect subsidies that flow to nuclear energy generation, coal production and natural gas drilling. It could be Medicare and Medicaid spending that helps to make the private health insurance model profitable, by covering the most costly segments of the population.
The wealthy enjoy many collateral benefits of government borrowing, not least of which is the direct financing of their own investments, whether through government spending, subsidies or bond payments. Many high-end private-sector investments simply would not be viable as a secure investment, without the government’s activities doing something to support that sector or that type of financial activity.
The fact is, the national debt is made up of a cycle of borrowing and of investment income, which benefits the wealthy far more than it benefits the poor. They benefit from every one of the public services the poor struggle to benefit from, and they do so not only on the personal level, but also as an indirect subsidy to the entire scope of their private investment portfolio, which depends on the stability of the American economy and of its government’s ability to borrow and to finance borrowing.
A scientific calculation of the overall cost-to-benefit ratio of national debt financing for the wealthy or for the poor, specifically, may be too complex to flesh out without a dedicated study. But when you consider that the working poor, and much of the middle class, enjoy relatively little investment income related to government borrowing, yet must pay a significant portion of their taxes each year to finance it, the national debt is actually a system of transfer of wealth from the middle class and working poor to the wealthy.
What motivates such hostile and vitriolic rhetoric on the tax-cuts-for-the-rich side of the political spectrum, in the United States, when discussing the national debt, is the very clear fact that it is their preferred constituency that in fact owes the majority share of the national debt.
The populist rhetoric of the Tea Party is often driven by the misconception that everyone in the country will be working off tens of thousands of dollars in irresponsible government borrowing, which is simply not the case. It is a fundamentally unfair and misleading calculation to say that the national debt should be divided equally among every man, woman and child in the United States, because the equation does not balance out.
Indirect beneficiaries of government borrowing cannot owe more, relative to income, than direct beneficiaries. And those who pay more in pre-tax cash to finance government borrowing than they receive in after-tax cash returns on investment, cannot owe more than those who receive more in return than they pay in.
This is not a question of class warfare or of a socialist-minded redistribution of wealth. It is just simple arithmetic: if you are reaping complex financial rewards from the system of government borrowing, you cannot ask those who are paying out of pocket to help you, but getting nothing concrete in returns, to share your burden equally.
In other words, you cannot ask a military enlisted family of four, with one low-ranking military salary and one part-time private-sector salary, and two children, to pay $46,000 to help billionaires and hedge funds manage their profits. That every single American owes $46,000 to finance the national debt is a distortion: each owes his or her own share, and those shares depend on how the pie was divided up to begin with.
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Originally published July 14, 2011, at IndependentsOfPrinciple.com
The Poet Economist 