In this issue of Highlander, two of our distinguished faculty members discuss debt. Not just national debt, which is certainly a topic of great interest in our American debate, but also personal debt. Indeed, we have become a nation of debtors. Many people live on credit cards, and if they make the minimum payment every month, they won’t ever be able to pay off those debts, which can amount to tens of thousands of dollars. So what has brought Americans to this point? What kind of policies must be put in place to reduce the national debt and keep the economy stable? What can we do as individuals to spend responsibly and live well?
Discussing the subject is Donna Mantooth, associate professor of psychology, and Dr. Dudley Salley, professor of economics.
Mantooth: In America we seem to be focused on material possessions as evidence of personal success. Until very recently, most people could easily obtain credit cards and loans to enable all the trappings of success without waiting to afford them. Besides the expectation that material objects will make us happy and successful, we demand that our government back up our need to have only the best – the best roads, safety, education, housing, medical care and more. While such expectations are part of the American DNA, they are extremely expensive. Personal debt problems are merely a reflection of what we see at a national level, which now carries debt in the trillions of dollars. Freud might say that our id, which operates on the pleasure principle and stimulates our need for immediate gratification, drives our insatiable desire for more and more things. Behaviorists might point to the environmental reinforcement that occurs when others recognize and admire us. That can increase our desire to have more products and better quality in all areas of our lives.
Salley: I’ll leave the psychological analysis up to you, but let me talk about our national debt a bit. Senator William Fulbright is famously remembered for saying, “A billion here, a billion there, pretty soon we’re into a lot of money.” Obviously, one can easily lose perspective when dealing with huge sums.
But let me quote some billions from the Joint Economic Committee from last November. When we look at the entire U.S. economy, about $13,000 billion of goods and services are created annually. Last year state and local governments spent about $1,500 billion, but collect as much in taxes. The federal government spent about $3,600 billion, but collected only $2,300 in tax revenue, leaving a deficit of -$1,300 billion, which the Treasury borrows from the bond market. Who buys the bonds, or in other words, lends the money? Private individuals, insurance and investment companies, banks, foreign governments and central banks. Our central bank is the Federal Reserve System.
Since 1945, only about six years have produced government surpluses. Deficits from so many years add to the national debt, which presently totals $15,000 billion (that’s $15 trillion). This amount is incomprehensible for most of us. But if we put the $15,000 billion into perspective with what the U.S. earns each year ($13,000 billion), you can see that we could pay off the debt in a little more than a year. How many family households could say the same?
Mantooth: Sadly, you’re right about that. Personal debt often begins with student loans and other debt associated with going to college. Then those students get their first job, possibly their first apartment. They need professional clothes, furniture and small electronics for their lifestyle. Out come the credit cards, which have been easily accessible on college campuses. If they went straight to work from high school, credit cards were still readily available for them. In fact, credit cards used to be very easy to acquire for anyone with employment. As young adults build their lives and expand their families, their debt may simply grow larger and larger. Earlier generations were much more frugal and had a pay-as-you-go mentality. The Baby Boomers, that post-World War II generation, were the first to tie success to possessions and affluence, and to place less emphasis on waiting for the things they wanted to be affordable before purchasing them. As a result, we have become a culture more comfortable with being in debt. After all, when credit cards were easy to acquire, the employment rate was high, salaries were competitive and people were able to make their payments, all seemed well. And the younger generations that followed the Baby Boomers unfortunately display a greater sense of entitlement for the finer things. It’s no wonder that this mad behavior, which pervades all levels of our society, has been met with a shocking wake-up call.
Salley: The difference, however, between individuals and the body politic is that families, when faced with economic uncertainty, tighten their belts. During the recession we saw that personal savings increased and retail spending decreased. The opposite happened with federal government spending. Many economists believe that there are some circumstances in which government spending should increase, at least in the short run. A war is one of those times. The U.S. borrowed from households using war bonds during the first and second World Wars. Also, since the Great Depression of the 1930s, many economists maintain that the government should increase spending and reduce taxes during a recession to counter unemployment and speed recovery. Such action today is called a fiscal policy stimulus package.
Look, many people (especially politicians) get explosive and angry over the deficit. But let’s look at it more rationally. The deficit tripled in 2009 to $1.4 trillion. This amount is the equivalent to the total federal spending each year during the 1990s. That’s typical in a recession with falling employment and income, and in 2009 tax receipts fell at the same time spending increased. Receipts fell by 17 percent, or $419 billion, and unemployment insurance increased by 24 percent. At the same time, other expenses – a euphemism for the financial bailout – increased by $287 billion, or 79 percent. So you can see that the reason for the massive increase in the deficit in 2009 was the recession. (See chart above for the increases between 2007 and 2009.)
Mantooth: Well, I can see that many personal stories parallel the national one. Maybe personal debt isn’t completely like running a deficit. After all, most people can eke out their bill payments every month, even if they owe a great deal. But that minimum payment isn’t going to make a dent if their balances are really huge. While they’re not living in the red, they are certainly living on the edge. And that doesn’t make for a carefree life. I often wonder how much people can enjoy all their “stuff” when they don’t really fully own it. How does that translate to our national story?
Salley: You’ve hit on something here. There is a sort of shadow hanging over the national consciousness – because our debt is the real ogre, the bigger problem. Government debt is the basis of our paper money, not gold. The national debt is what we carry around in our wallets and our bank statements. Think about it. Why is this green paper accepted when there is no gold? Like any paper currency, it works as long as whoever issues the IOU will redeem it at face (or par) value. The U.S. government redeems (accepts as payment to itself) these IOUs from us every April 15 as income taxes. Imagine the results if our government insisted we pay taxes in gold or yen or Euros. The U.S. dollar would become just a piece of paper. And there’s more bad news.
It turns out that the immediate impact of deficits from either war finance or fiscal policy affects the value of the paper currency. Deficits can cause inflation, which eats away the purchasing power of our savings. Inflation is the silent tax that can pay off the debt. If inflation is three percent a year, in 30 years the debt is paid for, not by our grandchildren, but by our depleted retirement savings that can buy only a loaf of bread.
Mantooth: So how do we address the national problem? We can obviously agree that too much debt is destructive. Here’s my advice at the personal level. As individuals we need to refocus our priorities and our definitions of success so that our worth is not tied to big houses, big cars, country club memberships and expensive vacations. Instead, we should be more focused on our ability to derive happiness and satisfaction through our relationships with friends and family, our achievements related to hard work and service to our community and country. When I ask students what they are most proud of, they never mention their possessions. Inevitably they cite their accomplishments and hard work. What really matters to the majority of the human family is that we are known and remembered for our contributions and our significance in the lives of our friends and families. I’ve never heard anyone eulogize another by listing the great possessions he/she accumulated in life. What we remember are the kindnesses, the selfless gift of time and effort. If our culture could embrace that value, we’d be a better country.
Salley: At the national level, the choice is to cut federal spending or have market forces pay the balance through inflation. Congressional focus now is on measures to end the recession. Just why is shown in in the sidebar chart. No sectors of spending show exceptional increases except those associated with the recession, unemployment payments and the ubiquitous “other.”
A recovery would increase tax receipts and simultaneously lower unemployment spending, quickly reducing the deficit. Otherwise, cuts have to come from the major spending sectors of Social Security, Medicare and Defense. Such spending cuts are so unpopular among voters that the challenge is as enormous as the debt. Politicians stand like deer, frozen in the hunters’ spotlight.