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Tuesday, February 7, 2012

President Obama and the National Debt

In both its news article ("Obama Makes Populist Pitch") and its editorial ("The State of His Policies") about President Obama's State of the Union speech, the Wall Street Journal omitted two revealing errors in the text of his speech. The president said, "Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home." Later in the speech he said, "Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else –- like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."
But a government that is running deficits cannot pay down the debt. All deficits - large or small - increase the national debt. The only way the federal government can pay down the debt is to generate an annual surplus and use some or all of the surplus to reduce the debt. President Obama has never proposed and never will propose a surplus budget. His 2011 budget plan showed annual deficits and therefore annual increases in the national debt each year from 2012 to 2021. Does the president believe lower deficits will reduce the debt? If so, he needs a primer on the national debt.

Tuesday, January 17, 2012

Austan Goolsbee: What National Debt?

Austan Goolsbee, in a Wall Street Journal op-ed, (“Washington Isn’t Spending Too Much”, 1/6/12), reveals a core flaw in his approach to fiscal policy: not once does Mr. Goolsbee even mention the national debt of $10 trillion. He ignores the lethal impact of higher interest rates on the federal budget when interest rates return to typical levels. Interest payments on the national debt will consume over 30% of federal revenues when interest rates increase 4% (400 basis points) over CBO’s optimistic projections. He waxes on about federal spending and tax revenues as percentages of GDP yet whatever these percentages and whatever the debt/GDP ratio, the debt interest must be paid in cash. If CBO’s 2011 annual forecast turns out to be correct, the U.S. will spend $5 trillion on national debt interest payments in 2012 – 2021. If interest rates return to typical levels, the U.S. will spend $10 trillion on interest payments in 2012 – 2021 and by 2021 interest payments will be the largest item in the federal budget – larger than Social Security, larger than Medicare, and larger than defense. Mr. Goolsbee claims the fiscal crisis will be “…much easier to address if the economy were growing again.” Yet in the last 40 years, Washington has run 27 deficits in years when GDP grew by 5% or more. Mr. Goolsbee says the 2012 election “…should lay out each candidate’s fiscal grand bargain and growth strategy.” But we already know President Obama’s fiscal grand bargain and growth strategy: his 2011 budget plan, submitted when Mr. Goolsbee was chairman of Obama’s Council of Economic Advisors, called for the national debt to almost double by 2021. Is that why Mr. Goolsbee did not mention the national debt?