How Debt Can Help Save America

[one...two...tree 2,762]

While the structure of what President Obama has proposed to get jobs fired up throughout the nation is an excellent beginning, there will be those—including myself—who believe that far more has to be committed to the investment side of the proposal to really make a serious difference.

While there is no disputing the importance of the investment being made for badly needed school modernization, the amount left for spending on important infrastructure repairs to our roads and bridges, while also taking a significant step forward in bringing our transportation system into the 21^st century, falls far short of what is required to make a real impact.

Yes, there are political realities. If the President is going to be constrained by only making those investments that he can pay for by raising taxes on the wealthy and highly profitable corporations or by cutting elements from the other federal programs, it is going to be impossible to get the job done.

But there is a way. It's called debt.

With the GOP successfully pushing the narrative that debt—in any form—is the evil threatening to take the nation over the cliff, it's time to remind the more sensible among us that debt can sometimes be a very good thing.

At its core, it is a very simple proposition. If you can make a good case that borrowing at a given interest rate will produce a predictable return—one that not only allows for timely repayment of the debt obligation but is highly likely to create ongoing, future profits as a result of the investment made with borrowed money—debt is an excellent way to go.

Currently, the federal government can borrow at an astonishingly low 2 percent interest rate. If we can make investments that will produce a predictable return of at least 3 percent in increased revenue, why would we not want to take advantage of these low rates to make those investments?

Recently, MoJo's Kevin Drum proposed a one trillion dollar investment in the nation's infrastructure—a figure that is wholly realistic in terms of the country's needs in this regard, and for really making a dent in the jobless figures.

This sort of committment can only be accomplished by borrowing money.

Not only would a national infrastructure program on a massive scale create the jobs that will more than increase our federal revenues by 3%, the improvements would be the gift that keeps on giving, as they would bolster our ability to modernize and continue as a world economic leader long into the future.

The Obama Administration, in its 2010 report entitled "An Economic Analysis of Infrastructure Investment" (surprisingly interesting reading), highlighted the benefits of investment in transportation. It noted that improvements in mass transit will save Americans a huge amount of money and go a long way toward dealing with our energy problems—while also creating a good return on investment.

Many studies have found evidence of large private sector productivity gains from public infrastructure investments,

in many cases with higher returns than private capital investment (emphasis added.)

Research has shown that well designed infrastructure investments can raise economic growth, productivity, and land values, while also providing significant positive spillovers to areas such as economic development, energy efficiency, public health and manufacturing.

The President's proposal emphasizes transportation choices, including mass transit and high speed rail, to deliver the greatest long-term benefits to those who need it most: middle class families. The average American family spends more than $8,600 a year on transportation, one-third more than they spend on food. For the 90 percent of Americans who are not among the top decile in income, transportation costs absorb one out of every six dollars of income. This burden is due in large part to the lack of alternatives to expensive and often congested automobile travel. Multi-modal transportation investments are critical to get American families moving again without wasting their time and their money sitting in traffic.

The wave of jobs created by such a large program would be a pretty welcome development, too.

Certainly, there is also bad national debt, the kind that produces no return. Unfortunately, we have lots of that.

Every time the federal government goes to the markets to borrow money to pay for deficits in Medicare, this is money that will not be producing a cash benefit. Every time we fulfill our national obligation to help out our fellow citizens who are hurt by natural disasters, this is money that is not going to flow into U.S. coffers.

And yet, these are expenditures we must make. Medicare is a hugely important obligation to which millions of people have contributed in the belief that it will be there for them when they reach 65 years of age. The federal government has an obligation to insure that these people get the benefit of this arrangement. Similarly, we cannot turn our back on Americans ravaged by hurricanes and earthquakes who are suffering through no fault of their own. To do so would just be wrong. The federal government must therefore make investments that will produce the revenues needed to pay for our societal safety net.

Yet, in our current environment, this is never going to happen. So successful are the Republicans at selling the story that all debt is bad, and so weak have the Democrats been in their response to this false narrative, that we now find that Democrats are actually treating the Republican pitch as if it were gospel.

Why?

Primarily because it is difficult to educate the public to understand that not all debt is bad—particularly after the GOP has done such a fine job of convincing Americans otherwise through the effective use of easy to understand sound bites intended to provoke fear and anger.

But a fearful talking point doesn't make the Republicans right. It simply serves to poison the politics to the point where the nation is unable to utilize solid and sensible business principals when attempting to deal with our many challenges.

The $450 billion program the President has proposed is a healthy and meaningful start, but it is not enough to really get the job done. With approximately half of the money being spent on extending unemployment benefits and improving the payroll tax holiday, which are useful and necessary tools to be sure, there simply isn't enough left in the package to embark on the type of national building and repair program that will produce the big returns that can fund our social and defense obligations so we don't need to borrow stupidly to pay these bills.

The American Jobs Act proposed by the President will make for a good start in 2012. But if the President wants to be the man who made the difference, he is going to have to think beyond the limitations presented by the Congress, explain to the American people the difference between good debt and bad debt and get things set up for a second term that will permit for the real growth the nation so badly needs.

http://motherjones.c...d-debt-bad-debt

[scandal 951]

Currently, the federal government can borrow at an astonishingly low 2 percent interest rate. If we can make investments that will produce a predictable return of at least 3 percent in increased revenue, why would we not want to take advantage of these low rates to make those investments?

...

Certainly, there is also bad national debt, the kind that produces no return. Unfortunately, we have lots of that.

The 'astonishingly low 2 percent interest rate' is the current yield on 10-year bonds. The 30-year is currently yielding 3.25%. Which is also very, very low. But which is relevant since the financing for major infrastructure projects (roads, airports, bridges, hospitals, schools, etc.) typically assumes an amortization closer to 30 years than 10. So that extra 1.25% interest should be considered in the viability argued in the OP for such spending.

That aside, it's the latter problem that is the rub. We already have a lot of debt. As in -- A LOT. Not just the Tea Party recognizes this, all Americans do, our business leaders do, S&P does. We already bear an existing interest burden that is unsustainable with current spending and growth rates. That is - if we keep paying the government obligations we've promised, even under the rosiest economic scenarios we will have trouble paying the interest on the debt we have. Debt which is growing with every annual deficit even without new programs.

Bondholders don't distinguish "good" debt from "bad" debt, at least not in the sense intended by the OP. Every bondholder expects to be paid in full. The interest burden we assume from any new debt just gets thrown on the pile. We have to start reducing that debtload before long (not necessarily while the economy is in such peril though). Adding significant new debt is not the right course for this country.

[SMR 368]

I think the author of the OP wasn't paying attention during the recent budget default crisis. All of the relevant credit rating institutions are threatening to reduce the US credit rating if the ratio of debt to GDP does not start to improve. If the credit rating goes down, interest rates are going to go up. Considering the gigantic debt already incurred, even a small increase in interest rates is huge.

[one...two...tree 2,762]

I think the author of the OP wasn't paying attention during the recent budget default crisis. All of the relevant credit rating institutions are threatening to reduce the US credit rating if the ratio of debt to GDP does not start to improve. If the credit rating goes down, interest rates are going to go up. Considering the gigantic debt already incurred, even a small increase in interest rates is huge.

S&P's statement says:

We lowered our long-term rating on the U.S. because we believe that the

prolonged controversy

over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements,

or on reaching an agreement on raising revenues is less likely than we previously assumed

and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and

our perception of greater policymaking uncertainty

, consistent with our criteria. Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

The debt crisis was entirely made up by the Republicans to try and paint the Obama Administration as being out-of-control with spending, which conveniently ignored the policies of the previous administration that led to the Recession. The Republicans still refuse to believe that the stimulus was needed or that it had any positive effect, meanwhile they all turned a blind eye to how the Bush's Tax Cuts added to the debt, along with two wars.

Sorry, but the Republicans are not fiscally conservative. They just keep holding on to the notion that taxes should never be raised without understanding that the things they voted for need to be paid for. That's fiscal recklessness. In that sense, the debt ceiling is less an issue and the bigger issue is coming to terms with paying for what we want out of government. While the teabaggers of the Republican Party eagerly envision simply 'starving the beast' of government, they are detached from the realities that we actually need a functioning government if we want to be an economic powerhouse in the future.

[Bad_Daddy 2,209]

So being trillions of dollars in debt is a good thing?

[mawilson 2,133]

The debt crisis was entirely made up by the Republicans

Really? Alright then! Let's keep on spendin!

[one...two...tree 2,762]

Really? Alright then! Let's keep on spendin!

Bush added 5 trillion without a peep from Republicans or even teabaggers. Obama gets into office with a train wreck on his hands, tries to clean up the mess and all of sudden, people get violent and angry over the national debt. Selective outrage reigns over intellectual honesty.

[Ban Hammer 13,399]

Bush added 5 trillion without a peep from Republicans or even teabaggers. Obama gets into office with a train wreck on his hands, tries to clean up the mess and all of sudden, people get violent and angry over the national debt. Selective outrage reigns over intellectual honesty.

bush took what, 8 years to do that - and how much as obama added in less than 3 years?

perspective, steven.....

[mawilson 2,133]

Bush added 5 trillion without a peep from Republicans or even teabaggers.

Bush added $4.9 trillion over 8 years (the debt was $5.8 trillion in 2000 and $10.7 when Bush left office in 2009). He too had to deal with a pretty severe recession (not to mention something called 9/11.)

Obama added 4 trillion in 2.5 years ($10.7 -> $14.7 trillion).

[Bad_Daddy 2,209]

I'm in debt so therefore I'm doing good financially. I just have to convince my wife on this one. I think it might be a hard sell.

[one...two...tree 2,762]

bush took what, 8 years to do that - and how much as obama added in less than 3 years?

perspective, steven.....

You're right - perspective is needed. The only significant thing Obama added to the debt was the stimulus, which not only was needed, did actually help prevent us going into another Depression. That fact, however, is what the Republicans and particular, the teabaggers refuse to acknowledge. You know, perspective. Nah, instead they want to paint him as out of control spender which is a bold faced lie. Bush, on the other hand, got us into two wars, cut taxes on the wealthy and expanded Medicare prescriptions - all without any plan to pay for it all. Fiscal responsibility isn't just reigning in spending. It's making sure you are bringing in enough revenue to pay for what you are spending on. Starving the beast is fiscal recklessness and out of touch, not only with reality but with the American people, who, from poll after poll, support much of the policies that the Obama Administration has been fighting to implement against the Do-Nothing Obstructionists.

But lets suppose Obama stretched out that 4 trillion he added over 8 years - would that mean there would be no angry mob of teabaggers? Hah

[mawilson 2,133]

The only significant thing Obama added to the debt was the stimulus, which not only was needed, did actually help prevent us going into another Depression.

The stimulus only accounts for 700+ billion out of the 4 trillion dollars that he added to our debt during his short 2+ years in office.

[mawilson 2,133]

But lets suppose Obama stretched out that 4 trillion he added over 8 years - would that mean there would be no angry mob of teabaggers?

Stretching 4 trillion over 8 years would mean an annual deficit of $500 billion per year (3.5 percent of GDP), which is still high but well within historical norms.

[one...two...tree 2,762]

The stimulus only accounts for 700+ billion out of the 4 trillion dollars that he added to our debt during his short 2+ years in office.

Exactly. So where did the rest come from? What other huge expenditures did he make that weren't a carry over from the Bush Administration?

[Ban Hammer 13,399]

But lets suppose Obama stretched out that 4 trillion he added over 8 years - would that mean there would be no angry mob of teabaggers? Hah

i'd like to see that happen - but he'd have to play a lot of golf in that pending 5.5 years.