NATIONAL DEBT, TRADE DEFICITS, AND TARIFFS
Christopher Ebbe, Ph.D. 5-25
This essay will attempt fairly simple definitions of the key elements of economic policy currently in the news and will suggest psychological reasons for our apparently poor management of the issues.
The current national debt of the U.S. is approximately thirty-seven trillion dollars. This is the amount that the government “owes” others (as a result of those others buying U.S. government securities like bonds, which are the key way that the government borrows money). Eight trillion of this is debt held by foreign countries, and presumably the rest is owed to U.S. citizens who have bought federal bonds. Just like in a “run on the banks” (when banks go out of business because they do not have enough cash reserves to pay all the customers if all the customers ask for their money at the same time), the government could not pay everyone off for this national debt if they all asked for their money at the same time. There is a certain amount of concern that foreign countries might seek repayment all at the same time, depending on world events, in which case the U.S. would end up “in default.”
The national debt, if divided up among all citizens, would be about $108,000 per citizen (or $323,000 per taxpayer). (These figures are from usdebtclock.org.)
The yearly federal budget is approximately seven trillion dollars, and the federal government takes in about five trillion in taxes. The government borrows the difference, approximately two trillion dollars, which then adds that amount to the national debt every year. It’s hard to believe, but the U.S. Congress is borrowing every year to make up for what they don’t raise in taxes to pay for their spending. You and your children will be paying off this borrowing, because the government doesn’t have any money except what we all give it in taxes.
We are paying approximately one trillion a year in interest on our total debt. This is pretty small compared to interest on other kinds of loans, because interest rates for banks and governments have been so low for so long now. As overall interest rates go up (as they seem to be going now), the U.S. (you) will be paying out more in interest every year.
The trade deficit is the amount of money spent by U.S. consumers (and government) buying foreign goods versus the amount that foreign sources spent buying our goods. Our trade deficit is currently about 1.3 trillion dollars, meaning that we spent that much more on foreign goods than foreigners spent buying our goods. This “stands to reason” because we are such a wealthy country. There is no cost or penalty for doing this except that we are using up our nation’s total wealth at a faster rate than we would if our trade deficits were smaller. (The trade deficit can also be figured using all spending—both goods and services, and the trade numbers could be a surplus instead of a deficit if foreigners spent more than we did.) The trade deficit/surplus can be figured with regard to one country or as a grand total–e.g., the trade deficit with China is about seven billion.
It might appear to one that this trade difference is like a debt, or that we are losing money, but it is not a debt, and we are not losing money—just spending it. It simply means that we are using a certain amount of our wealth buying foreign good/services and a certain amount buying U.S. good/services. Since we are a wealthy country and since our consumers want some foreign goods in preference to American goods (because they are cheaper or because they are better made or convey more status), we simply spend quite a bit more on foreign goods than we spend on U.S. goods. If we couldn’t afford to buy those foreign goods/services, we just wouldn’t buy them (or would borrow in order to buy them). The trade deficit is not a “bad thing” in and of itself, although Pres. Trump would prefer that we buy more American goods because that would mean more jobs for Americans making those goods/services. Tariffs are one way to push us to buy more American goods/services by making foreign goods/services more expensive. (See A Closer Look At Pres. Trump’s Economic Plan | Live Wisely, Deeply, and Compassionately for a detailed analysis of our current tariffs.)
The logic behind the “global economy” (with free trade) is that everybody benefits if each country makes the goods that it can make most cheaply and sells those to other countries. We can all then minimize our costs for each kind of product we are buying. We have found recently that this is basically true (all countries do benefit from a global economy), although our foreign purchasing means that the people in our own country that make the products that we are not buying because we can get them cheaper overseas are having a harder time economically. They can still sell some of their products in this country but not near as much as when we were buying most of our things made in the U.S. It is also true of the global economy that not everyone in a country benefits equally. Those who are able to find foreign buyers for their products/services do considerably better than those whose jobs disappear because their products cost more than foreign products.
Many manufacturing jobs in the U.S. have been moved overseas, mostly because labor costs are lower there, which has closed U.S. factories and put their workers out of work. Pres. Trump wants to make foreign goods more expensive to us with tariffs, so we will go back to making more things ourselves and buying them here instead of overseas. The flaw in his reasoning is that as long as we pay our workers more than foreign companies pay their workers (as long as we are a wealthier country than most other countries), then most of our products will always be more expensive to make than foreign products, so that if U.S. consumers do buy more U.S. products, then they won’t be able to buy as much or as many, because most U.S. products cost more than they would in a global, free-trade economy. If U.S. consumers want to subsidize some of their fellow Americans by buying American (and therefore having less buying power themselves), then that would be OK, but the President is not explaining that in his plan–some Americans will be supporting other Americans, at some cost to themselves, by buying American.
One possibility for making American products more saleable worldwide would be if we continued to pay our workers more than other countries but utilized some new efficiency to make our products more cheaply, but this is unlikely because in the global marketplace, whenever someone figures out a new efficiency, other makers are onto it in a day or two so they can utilize it, too. Therefore, wages and cost of raw materials will continue to be the only significant variables between countries.
REASONS FOR THINGS BEING THE WAY THEY ARE
In the U.S., we give all makers of products and givers of services the right to charge whatever they want to for their products/services, and the result is that given our human desire to have more than we do, everyone charges as much as they can (as much as they can sell things for). If we did not always want more, then we could set prices somewhat lower. (Notice that when there are product shortages, the makers of those products always raise their prices, saying that their own costs have gone up so they “have to” pass on those increases to consumers. What they don’t say is that they don’t want their own incomes to go down, so they are charging their customers more. They could make less themselves, but they never choose to do that (unless they feel obliged to in order to hold onto market share,) Our own desire to get as much as we can for ourselves is the basic problem regarding prices. We don’t know how to be satisfied with any less than the maximum we can get.
Even given this innate desire for more, we could still limit our spending to what we can earn or reasonably borrow. Individuals and households have to do this or go bankrupt. The federal government has discovered a way to spend more than it takes in, for a short while anyway, by borrowing. We have encouraged maximum buying by citizens by making credit so easy to get, that we now think that borrowing must be OK, even if it is leading to the financial ruin of themselves or the country. We act as if people shouldn’t have to have limits on what they can buy. This attitude about borrowing has softened our whole view of government debt. It must by OK, right, because it’s OK for us as individuals to be in debt up to our eyeballs.
Ignorance is another reason why government spending has gotten out of hand. Citizens don’t know where their tax money goes and don’t understand how the government gets its money (through taxes), so they leave it to their Senators and Representatives to handle this, with unfortunate consequences.
Some Senators and Representatives may seek office in order to serve the country and their constituents, but many seem more interested in the status and perks. In order to maintain their status and perks for an entire career, they must be re-elected over and over. Congress is the body that has the power to restrain federal spending, but Congresspersons usually seek to do something visible for their voters to prove that they care. This takes spending. The last thing they wish to do is to propose higher taxes or take away some benefit that their constituents are receiving so borrowing seems like an answer to making up the difference between what they ask of us in taxes and what they want to spend on us. Most Congresspersons therefore are very little disposed to cut spending or have a balanced budget, since it might lose them an election.
There is no chance for rationality to enter into the situation, since Congresspersons usually do not bare their souls in service to the country or to do the right thing, and to explain the budget to constituents is beyond the capability of many Congresspersons.
This lack of motivation to control spending could be helped if we helped citizens view taxes not as something taken from them by the government but as their contribution to the public good, as determined by their Congresspersons. Congresspersons could then explain what they think is best for the country. Most Congresspersons seem unwilling to risk not being elected if they argue for things needed for the country (that will require more in taxes) or argue for cutting back on benefits that voters are getting in order to balance the budget or pay off some of the national debt.
Fifty years ago it was argued by some Congresspersons that budget deficits would always be made up by the greater amount of taxes collected in good years, but this has proven to be false. The desire to spend and to look good to voters ensures that any surplus will be immediately spent rather than applied to the national debt.
It is therefore very difficult for our federal government to control its own spending. Voters could elect people who have the stamina to raise taxes or lower spending, but there are not many of these. We seem unable even to have an informed public discussion about what we want government to do for the people and for the country, since, rationally, Congress should decide how much to do, based in part on voter input, and then taxes could be set to cover that spending. Instead of collecting the taxes needed to pay for what Congress authorizes each year, we keep the amount of taxes collected steady and borrow any difference.
Congresspersons could solve the government-borrowing problem by insisting on a balanced budget every year and refusing to borrow more, but they don’t because it would make some voters mad, and they might lose their next elections.
Voters could solve the government-borrowing problem by electing only Congresspersons who believe that the country would be better off without this national debt and who are willing to risk their careers in Congress to do something about it, but voters don’t because they don’t understand the gravity of the problem, because they don’t understand the self-destructiveness of continuing to borrow, and/or because they don’t want to tighten their belts at all unless they are forced to.
The most likely thing to happen to correct the situation, unfortunately, is that interest payments on the debt will have to get so high relative to voter income that voters wake up and want to get rid of those interest payments (as well as the debt generating them). They will then turn out of office the Congresspersons who did the borrowing (if they are not already deceased) and blame them for the problem, instead of taking responsibility as voters for electing those borrowers for so many years.
We have been addressing simply stopping the government’s borrowing to pay current bills and spending, but an even larger problem is how to pay off the debt so that we aren’t paying one trillion or more in interest every year. The most appropriate way would be for Congress to authorize, by law, a one trillion dollar repayment to take place every year until the debt is zero (at the same time that it forces itself to have an actually balanced budget every year (except for true emergencies)). This could take place only if enough Congresspersons were dedicated to solving this problem, which will probably be only after entirely new Congresspersons are elected, since those in place are so used to borrowing (and putting the nation’s citizens in greater debt) that are likely to keep on doing it as long as they are in office.
WHAT NEEDS TO BE DONE
1. Educate the public about the amount that they are losing each year through interest payments on the debt and other consequences of the debt. An interest payment of one trillion averaged over 340,000,000 citizens is $3000 this year for every man, woman, and child, in the U.S.! Wouldn’t you rather not be paying this (or putting it off by even more borrowing so your children can pay it off)?
2. Pare down annual spending gradually, so that in five years we have a balanced budget (without making the shift any more painful for citizens than it has to be). Establish by law that there must be a balanced budget (except in emergency) (with no “outs” for Congress).
3. Establish by law a repayment plan for the national debt (again, with no “outs” for Congress).
Do you as a voter have the determination to face up to the problem and elect Congresspersons who take it seriously?
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