The following article was written by Dolores Saltzman of Ithaca and was originally printed in the Ithaca Journal. We reprinted it with the permission of Ms. Saltzman
National debt is different than credit card debt. Data show that about one-third of the nation’s debt is held abroad, with interest payments leaving the U.S. economy. The rest is owed to American entities.
The average interest rate on the entire debt is low. The debt is in dollars, our own global hard currency that the Treasury can print if necessary. America’s debt is viewed as a safe investment. There are many lenders. Moreover, the deficit is shrinking. We can borrow, we can pay our bills, and while large relative to gross domestic product (GDP), the nation’s debt is currently manageable.
The fear of a debt crisis gained credibility when research by two notable economists claimed the proportion of debt to GDP could become large enough to create fiscal disaster. However, a gracefully admitted error in the research led to its withdrawal. Since then, there has been no reason to shut down the government or not raise the debt ceiling.
Enough former proponents of government shutdowns and not raising the debt ceiling agreed. They helped defeat a Senate filibuster, and the debt ceiling was raised in February. Other members of Congress, including Rep. Tom Reed, continued to vote against ending the government shutdown, and then voted against raising the debt ceiling in February.
That’s dangerous. Credit-card holders and governments both need good credit ratings to borrow money at sustainably low interest rates. That depends, first, on diligently paying bills on time. Timely payment of government bills becomes uncertain when government shut-downs and debt ceiling quarrels threaten default.
The threat of default, whether for economic reasons or political instability, puts America’s credit-worthiness in doubt. That can result in lower credit ratings, higher interest rates and increased future debt burden.
An unnecessary higher debt burden squanders revenue best used in other ways, to grow the economy for example, or in better times pay down debt. We also learned from the sequester and shutdowns that taking revenue out of the economy costs jobs and income, can increase the deficit and impedes growth.
We know too that increased interest rates can be more dangerous that additional borrowing. Remember homeowners who lost their homes when they could not pay their increasing variable-rate mortgage interest.
Continuing to threaten default could eventually decrease the desire to hold American debt enough to make default unavoidable. That would really be fiscal disaster.
Is optimism related to the congressional budget truce (Ithaca Journal April 30) premature? Its effect is mild and temporary. It ends Sept. 30. Maybe there won’t be a shutdown or failure to raise the debt ceiling before the November election. Afterward, will the nation’s fiscal credibility again be held hostage to an austerity agenda that’s intended to drive down debt but makes overall growth, the time-honored solution to large debt, more difficult to achieve?
Reed and his colleagues haven’t an adequate solution to the problem of a national debt larger than we’d like. Instead, they seem determined to be part of the problem.
Saltzman is a Town of Ithaca resident.
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