Obama lied about paying down the debt. Why you should care.Note: This was written before the election, but it is still important since many media outlets *never* questioned his lie, and the few that did downplayed it. People need to be aware of the obvious lies politicians tell to persuade them to be skeptical and question other statements which may be not as obviously false. Obama said at the Democratic National Convention on Sept. 6th, 2012: "I’ll use the money we’re no longer spending on war to pay down our debt"In reality his own budget proposal on the White House site explicitly adds at least $900 billion each year to the national debt for the next decade, for $9.6 trillion more debt total ($4.3 trillion of that before the end of the next presidential term). In fiscal year 2012 the government borrowed $1276 billion. He implies lower war spending will save so much money the government won't need to keep borrowing. Yet his proposal only cuts $82.3 billion per year by 2014 for war spending compared to 2012. That is ridiculously far from being enough to balance the budget. This isn't a minor issue. The debt is bad for the economy, the poor, retirees, and the future of this country's children as you'll read below. Those who prefer a video summary can watch a few minute cartoon with clips of Obama's own words. Forward the short 1 minute intro to short attention span friends. Please spread the word about this issue to everyone you know. This wasn't a one time gaffe, he first said this during the State of the Union address in January and repeated it for months in a campaign commercial and almost every campaign speech up through the election. This link brings up a search of the White House for all the times he said "pay down our debt". Many politicians need to be more honest, but some lies are worse than others. Often supposed political lies are merely issues open to debate because experts disagree, sometimes because the details of a proposal haven't been worked out. Obama's own 2008 "hope and change" campaign was short of details which weren't worked out until he had a large government staff to do so. In this case he is explicitly contradicting his own detailed financial documents in an obvious lie. Some lies are a slight shading of the truth or about minor matters, like a white lie that a relative looks thinner. This is an unquestionable big lie about something important. If a CEO lied about his company's finances to get people to buy stock, many in the public would cry "fraud! send him to jail!". The sentiment would be there, regardless of whether the liar did anything that literally violated a law. Why should we have lower standards for the president of this country? Politicians won't be forced to be more honest if the public keeps voting for them anyway. He seems to be implying he saved us money by cutting back on military spending compared to what was planned. However Bush's last budget proposal gave his desired defense spending through 2013 including wars. Obama has spent around $500 billion more than Bush planned to spend. Obama's budget projects spending more every year on defense and wars than Bush budgeted for 2013. Why should you care about the debt?To put the size of the debt in perspective, imagine everyone in the country had to pay their share. At the moment the national debt works out to $51 thousand dollars per person, or $121.9 thousand per household. The national debt is over $16 trillion currently and the total household debt of everyone in this country is under $13 trillion. The graph below from the Federal Reserve compares the total national debt (in blue, GFDEBTN is the: "Federal Debt: Total Public Debt") with the money owed by households, companies in the financial sector like banks, and all the non-financial corporations in the country. Our government now owes more money than each of those groups.  Obama's budget estimates that within a decade we will be spending more to make interest payments on the debt than we will on the defense budget. It seems likely this will lead to pressure on the Federal Reserve to continue to keep interest rates artificially low. Unfortunately that may help the government, but it hurts people who keep their money in bank accounts or bonds. Lower interest rates mean they earn less interest. If interest rates were at more typical historical levels estimates are people would be earning from $400 billion to $550 billion per year more (more on damage done by low interest rates here, here and here). Rich people can risk keeping more of their money in stocks instead of bonds (which has driven up the stock market), but the poor and retirees need to keep a higher percentage of their money in safe investments so it hurts them disproportionately.
A high level of government borrowing hurts private employment and economic growth. Each dollar the government borrows is a dollar not invested in a private company to grow and create jobs. The money the government borrows has to come from somewhere, it doesn't magically grow on trees. If you invest $1000 of your savings in government bonds, you can't use that same money to buy corporate bonds. In order to hire people, companies need equipment for them to do their job and a place for them to work. Often they need to borrow money for these things. This graph compares how much the government borrows from the public each year (inflation adjusted) with how much all corporations combined borrow (or more accurately, non-financial corporations, i.e. not things like banks ). You'll see that typically as the government (red line) borrows more corporations (blue) borrow less, and vice versa.  If the government weren't borrowing the money it would be invested in the private sector rather than stuffed into a mattress. (see Alan Greenspan's comments on "crowding out" here, here, here, and a Stanford prof here, GMU here and here) . Usually banks need to lend out money to earn interest, but the Federal Reserve began paying them interest to keep their money at the Fed instead. It has used much of that money to buy federal debt and is considering buying more. You hear claims of less demand for loans, but that is misleading since it is harder to get loans. Forbes reports "Bank loans cheaper, but still hard to get." and the Federal Reserve says: "Besides the firms that were denied credit, some firms that may have wanted additional credit may not have applied for it because they anticipated that their applications would be denied" Fewer businesses will qualify for loans so there will be less demand for them. Banks have less money to lend to the private sector, so they are going to give out fewer loans. They wish the loans they do make to be less risky at the moment (due to regulatory changes, and the aftermath of the financial crisis) so standards are higher. Fiscal Child AbusePoliticians promise favors to the public to get votes. They like having the government borrow money since they can spend more on favors without being needing to risk being unpopular by asking to raise taxes to pay for them. They think they will be out of office by the time the debt needs to be paid, or they can blame debt on the spending of other politicians. Unfortunately they find it even easier to simply promise to spend even more money on favors in the future without worrying about where the money will come from when the future arrives. When the government promises to pay more money in the future on a program than it plans to actually have, that is called an unfunded liability, or a "fiscal gap". The Treasury Department puts out an annual report each year on the government's finances where they estimate the present value of unfunded liabilities (i.e. how much money we would need sitting in a bank account now to pay for these promises). The most recent report from December 2011 shows $51.2 trillion in unfunded liabilities. If you add the current national debt to that, it means the government needs over $67 trillion to pay its IOUs. That works out to be over $213,844 per person, or over $510,265 per household to be paid by upcoming generations for the promises of today's politicians. Offloading costs to future generations is considered by some to be "fiscal child abuse". The Federal Reserve estimates the total net worth of everyone in the country combined as less than that at $62.7 trillion. The impact of the future economy on those numbers is hard to predict so those are just estimates. Many people think the figures are way too low. William Gale of the liberal Brookings Institution and professor Alan Auerbach, Director of the Burch Center for Tax Policy and Public Finance at UC Berkeley wrote on August 27,2012: " the fiscal gap under the extended policy baseline is 6.09 percent of GDP, or $115.5 trillion"i.e. the government could need around a $million per household to cover IOUs when you add the national debt to that. That is closer to estimates the US Treasury made in the past. In 2009 they estimated unfunded liabilities were $107 trillion. Some people objected when they began lowering the estimates that the new figures weren't plausible. It is natural to wonder if they were caving to political pressure. In 2010 the Treasury Department said they were $77.9 trillion, and by 2011 they made that claim they were now only $51.2 trillion. It will be interesting to see what they claim this December. Others say different government data shows the problem is much worse than those estimates, and has been getting worse each year. Boston University professor Laurence Kotlikoff wrote on August 8,2012 "The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast -- the Alternative Fiscal Scenario -- is now $222 trillion"i.e. the government could need over $1.8 million per household. His numbers are also covered here, and here, and last year in the Economist where he wrote that "America is bankrupt". Misleading talk of spending "cuts"There are often concerns expressed in the media about an upcoming a deal they made called "sequestration" which would supposedly automatically make "cuts". If you look at planned spending however it would still increase each year:  Often politicians now talk about spending "cuts" in a way that is misleading. They have a baseline budget which projects spending to increase every year in the future. If they change the budget to grow more slowly they call it a "cut". Pretend for example they are spending $50 billion for department X this year, and the baseline shows they plan to spend $60 billion next year. If they change that to $55 billion they will call it a $5 billion "cut" even though they are spending more than they did this year. They have recently begun trying to confuse the public even more by often talking about changes to the total spending added up for all 10 years of their planned budget, partly to make the changes sound bigger. They would call a $5 billion a year reduction in the baseline spending a $50 billion cut, even if they still increased the budget every year. In reality they are debating how much to increase spending. If they merely froze tax rates this year, and froze spending or slowed its increase, the budget would balance within a few years as the economy grew and brought in more tax revenue (though they'd need to make more changes to deal with the issue of unfunded liabilities that most of them are ignoring):  If they rolled back spending to where it was a few years ago the budget would balance. Government spending has been constantly growing for many decades. The population has grown also, so lets look at federal spending per capita (per person), adjusted for inflation. You'll notice spikes for wars, but aside from that spending has mostly been steadily growing. It levels off a bit during periods of gridlock when different parties control Congress and the White House so they have trouble agreeing on what to spend money on. The issue isn't unique to the federal government. This is spending by government at all levels (federal, state, local) per capita, adjusted for inflation: While the government may have added some new programs, It seems likely government has built up a lot of waste in its budget and could learn to be more efficient. In free markets private companies compete which provides them incentive to keep costs under control. In the freest markets like consumer electronics prices fall while quality improves. There is little incentive for government to be efficient when people keep letting it spend more money all the time. There is no reason to give it more money until we are sure it won't merely waste it. Constant budget increases lead to governments spending far more over time (adjusting for inflation) merely to perform the same tasks without showing much if any improvement in the end result e.g. here is a graph of government data on total spending on K-12 education compared to test scores:  "If music players had suffered the same cost/performance trends we’d all
still be lugging around cassette boom boxes, but they’d now cost almost
$1,800"You often hear about the rate of medical inflation being too high, since it isn't a competitive free market like e.g. consumer electronics. Government cost per person has been rising even faster than medical costs. This compares the rise in per capita government spending (blue line) and medical costs over the last half century:  Even if you look at total government spending as a percentage of GDP, although it shows larger fluctuations up and down than the $ graphs, it has also risen quite a bit overall the last hundred years: The total federal debt has risen every year since 1956, even during Clinton's term. There is a myth he had a surplus, but as this page (and here) point out, they ignore the money government borrowed from social security which is a debt it needs to pay back just as much as the debt it borrows from private investors. (the graphs on this page that refer to how much the government borrows each year are dealing with what it borrows from the public, not including what it borrows from the social security trust fund. The publicly held debt may have briefly gone down, but the total debt (including what the government has borrowed from social security and medicare) has been constantly going up. Back to the the issue of the debt vs. the economy since there are some misunderstandings about it.
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