Do debt and deficits matter?

Dallas reader D. Smith and his brother-in-law differ. Smith writes, "I am of the opinion that the federal debt is relative in the scheme of our economy…"

As long as it remains reasonable relative to GDP, he says, debt doesn't matter. His brother-in-law disagrees. He thinks growing federal debt is damaging his earning potential.

In fact, a new kind of deficit is coming our way. It will change our economy.

We're about to experience the retirement of the boomers. When this happens, the informal debt of Social Security and Medicare promises will start becoming formal debt. For more than 20 years American workers have paid more in employment taxes than was necessary to support retiree benefits. The extra payments will continue for 10 more years. Over the last 20 years the extra money was used to pay for government spending. It will be used to pay for government spending over the next 10 years, as well.

When our extra employment tax payments haven't been enough to cover government spending--- which was most of the time--- additional money was borrowed from the public and other nations. Since 1983 publicly held government debt has tripled, to $4.2 trillion. About 40 percent of it is held by other nations.

When the employment tax surplus disappears Social Security will start to redeem the horde of Treasury obligations in the Trust fund. Basically, we'll be running the 30 years of surplus Social Security revenue in reverse.   Instead of reducing government need to borrow from the public, Social Security Trust fund redemptions will increase government borrowing from outside sources.

This will be a new kind of federal deficit. It will be materially larger than anything we have experienced with the exception of World War II. It will impact everyone and everything.

Using the high cost assumptions from the Social Security Trustees, the Social Security and Medicare programs will be cash short in 2010. By 2025 the benefits-driven deficit will hit $1.2 trillion; $2.4 trillion in 2031; $6.5 trillion in 2043, and $58.3 trillion in 2080.

The benefits deficit will grow to 2 percent of GDP in 2020, 5 percent of GDP in 2030, 7.5 percent of GDP in 2040, and 14 percent of GDP in 2080. The worst year of the Great Depression, 1934, had a budget deficit of 5.9 percent of GDP. Only the war years--- 1942 through 1945--- had larger deficits as a percent of GDP.

This is just the benefits deficit. It doesn't include the tendency of our government to operate at a deficit in its normal operations. In the last 74 years normal government operations have run a surplus 8 times: 1930, 1947, 1948, 1951, 1956, 1957, 1960, and 2000. The combined total surplus in those years amounted to 9.5 percent of GDP. In 2004 and 2005, alone, the deficits in the normal budget will total 10.4 percent.

None of this is imaginative fear mongering. I am simply using published government estimates and historical records in the tradition of the late investigative journalist I.F. Stone.

Will our government be able to borrow all those trillions?

If it can, interest expense will displace other government spending. Today, net interest payments on government debt are only 6.7 percent of government spending and 1.4 percent of GDP. These are the lowest figures since 1968, due to historically low interest rates.

This is about as good as it gets. A mere return to the peak interest cost year, 1996, could take interest expenses to 15.4 percent of government spending. That's a change of 8.7 percent of all federal spending. The change alone is about half of all defense spending.

So do deficits matter?

If they didn't before, they will soon.

On the web:

Public Debt, 1950-2000

Interest Rate on Public Debt

Summary of Public Debt Outstanding, by maturity

Interest Expense on Public Debt

Federal Debt/GDP

President Budget for 2005