Friday, December 25, 2009, 5:45AM ET - U.S. Markets Closed for Christmas.

Charles Wheelan, Ph.D. The Naked Economist

Charles Wheelan, Ph.D., The Naked Economist

Mountains of Debt: America's Economic Realities

by Charles Wheelan, Ph.D.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story
Excellent (979 Ratings)
4.360554/5
Posted on Tuesday, June 23, 2009, 12:00AM

Ben Franklin supposedly said that it's better to skip supper and go to bed hungry than it is to wake up in debt. Ben would be quite disappointed in us. We Americans didn't skip dinner; instead, we opted over the past decade to gorge at the buffet and then charge it.

We woke up as the world's largest debtor -- so deeply in debt that our global creditors are getting nervous, and rightfully so.

Here are some economic realities associated with our deepening fiscal hole.

It's bad. As in, $11 trillion bad. That number alone doesn't mean much, at least without context. So here is some context. First, that's roughly $40,000 for every man, woman, and child in the country. Second, our debt is projected to grow to roughly 100 percent of GDP by 2010, meaning that, if we were to devote everything we produce as a nation to paying down debt, it would take us an entire year to pay off what we owe.

Eating Up the Global Capital Pool

Other countries have become more indebted as a percentage of GDP, but they were small countries, so they sucked up less of the global capital pool. There is only so much money in the world, and we have borrowed a shocking proportion of it. The only other time the U.S. has been so indebted was at the end of World War II.

Big debt means big interest payments. The Chinese haven't loaned us a trillion dollars because we're good-looking; they've loaned us a trillion dollars because we pay for the privilege of using that capital. Interest payments now make up more than 8 percent of the federal budget -- meaning that nearly one of every 10 of your tax dollars gets you absolutely nothing in return. No schools, no bridges, no domestic wiretaps. That's just the cost of servicing the debt we've run up.

And we've done nothing terribly productive with all that borrowed money. Debt, after all, is not inherently bad. If you borrow $100,000 to go to medical school, then you've probably done a very smart thing. When you graduate, your earning potential will be higher, enabling you to live better even after you pay off the loans (with interest). In this case, you used borrowed money to invest in something that made you more productive.

Now suppose that you borrowed $100,000 to sustain a lifestyle that you could not otherwise afford: to pay the rent, to buy nice clothes, and to make the payments on your luxury car. When that bill comes due (with interest), you're no more productive than you were when you started borrowing. You borrowed used money for consumption, not investment.

Unfortunately, America's borrowing resembles the latter more than the former. We haven't upgraded our transportation infrastructure or made major investments in alternative energy or financed education for those who could not otherwise afford it.

Stop the Bickering

We need to stop bickering about who got us here. Was it the Bush tax cuts (yes) or the Obama stimulus (yes) or profligate Congressional spending (yes) or voters who continually reward pork more than parsimony (yes)? But analyzing just overcomplicates things. We are deeply in debt because we have routinely spent more than we collect in taxes. That's just a mathematical reality that has become needlessly confounded with politics.

If you're a small government conservative, that's great. But let's say enough of the tax cuts without corresponding spending cuts. Those aren't tax cuts; they are tax postponements. You've just left the bill for future taxpayers, with interest.

And if you believe that government can and should build a stronger America, terrific. I'm sympathetic: I like early childhood education and the high-speed rail and Army sharpshooters who kill pirates. If you want those things, then pay for them.

Big government or small government, the revenues need to equal the expenditures. It really is that simple.

When the Big Bills Come Due

The big bills haven't even come due yet. If the U.S. were a family, we'd be crouched over the kitchen table trying to figure out how to pay the Amex and Visa bills -- and the gigantic Mastercard bill would still be in the mail.

The big bill still in the mail for the United States is for our entitlement programs -- primarily Social Security and Medicare. We've made huge commitments to these programs that are not adequately funded. That Social Security check you're counting on when you turn 65 doesn't show up in the debt figures, but it's still money that we will owe. Lots and lots of money.

And the Chinese are worried U.S. debt, as they should be. All debtors have creditors; ours are all over the world. The biggest one is the Chinese government, which has been buying up U.S. Treasury bonds with all the vigor and foresight of a 1990s Las Vegas real estate developer.

If we don't honor our bonds, China doesn't get to repossess the White House or the national parks; they don't get to carve their own leaders on Mt. Rushmore. Treasury debt is secured by the "full faith and credit of the U.S. government" -- which won't command much at auction, if it comes to a foreclosure type situation.

Chinese officials aren't worried about bankruptcy because the U.S. has an easier and more insidious option -- we can print our way out of the problem. Our debt is denominated in dollars, and the U.S. government has the authority to print those dollars. We could take a page from the Zimbabwe policy manual and just print money to pay our bills -- thereby debasing the currency, creating inflation, and devaluing the real value of what we owe.

Is that a sensible solution? No, as it imposes the costs of inflation on all of us. I don't know anyone eager to revisit the 1970s (in terms of economic performance or fashion).

Is it a possibility? You bet. In fact, I'm surprised that long-term interest rates haven't climbed more than they have. (When long-term lenders fear inflation, they demand higher interest rates to protect against that contingency.)

The solution to all this is straightforward: Spend less than we take in, and use the surplus to pay down debt. At the risk of lapsing into economics jargon, yes, this is going to suck. Think about it: Americans don't like their current tax bills -- which aren't even high enough to pay for our current spending, let alone the bills we've run up from the past. In the future, we will have to pay more and get less.

But we've done it before. We paid off the debt accumulated during World War II. In fact, the ensuing decades saw some of the most impressive gains in wealth and productivity in American history. But it will require a radical change from what we're doing now.

An economic recovery will help. But we can't pretend that will be enough. We need to raise taxes, cut spending, and/or reform our entitlement programs. Probably all three, and in a serious way.

Will that dampen economic growth in the short run? Yes. Will it jeopardize important social programs? Yes. Will it compromise our ability to make important public investments? Yes. Does it limit what we can spend on healthcare reform? Yes.

But as Ben Franklin would have pointed out, we should have thought about that before ordering room service and then charging it to a credit card.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story

Rate This story

Excellent (979 Ratings)
4.5/5
Sign-in to rate!

268 Comments

Showing comments 6-35 of 268<< PreviousNext >>
Sort: first to last

  • michael j - Tuesday, July 28, 2009, 10:29AM ET  Report Abuse

    • Overall: 5/5

    Common sense and truth are often frowned upon by people who live in a world of "magical thinking" -- like believing in the talking heads on tv. who are paid to sell stocks, bonds, whatever. This article is common sense and reality. If you spend more than you make you are going into debt. The U.S. is in a bad spot here. This run up in the market has many people acting like they did before the crash. Has anyone ever mentioned that "cash" is not a bad investment when the markets are so predictable? What this article points out is a fact: the U.S. economy has a huge hole to climb out of before we can start celebrating.

  • Yahoo! Finance User - Sunday, July 26, 2009, 10:44AM ET  Report Abuse

    • Overall: 2/5

    For the United States, suffering from a 9.5 percent unemployment rate, the ultimate goal is to help put more Americans to work." That is the ultimate (last) goal. The first goal is to suck all their wealth away.

  • Lorraine - Thursday, July 23, 2009, 12:50PM ET  Report Abuse

    • Overall: 3/5

    Good article, But was it mentioned how Americans have been grossly underpaid and need their cards to be able to live on? Capitalisim does not work! Corporations get too greedy and eat their own young.

  • Yahoo! Finance User - Sunday, July 19, 2009, 10:51PM ET  Report Abuse

    • Overall: 4/5

    Good article. The only problem I have is with the WW2 reference. I see it frequently. It is true we paid down debt but, the rest of the industrialized world was bombed out. We had a ~25 year window where we were the sole manufacturing source. We were able to improve standard of living while paying off this debt. It doesn't appear we would be able to do that this time.

  • Yahoo! Finance User - Sunday, July 12, 2009, 4:58PM ET  Report Abuse

    • Overall: 5/5

    I always make sure my spending is well below my income. Even as a Peace Corps volunteer, I was able to save on my meager stipend, $200 a month. I was able to retire at age 49. Now I am making more money than ever before. All for practicing boundaries on money. Charles Wheelen is the man!

  • Sir Hammed - Saturday, July 11, 2009, 12:08PM ET  Report Abuse

    • Overall: 5/5

    Brilliant and well written. Keep up the good work and hopefully our politicians will take heed.

  • Yahoo! Finance User - Wednesday, July 8, 2009, 9:51PM ET  Report Abuse

    • Overall: 1/5

    When someone says "stop bickering" to or about politicians, it is usually because they have an interest that everyone else is supposed to agree with. In this case, Wheelan is arguing that an annually balanced budget is the priority - and anyone disagreeing is simply bickering. So here I go, and everyone else needs to stop bickering... Current budgets should not be balanced. Perhaps they should never be balanced, except by accidental coincidence. Why? Because when the unemployment rate is higher, we collect less in tax revenues from those millions of jobless folks and we spend a great deal of money trying to give a temporary nudge to move the economy (and unemployment) in the right direction. When the unemployment rate is low, we will have millions of extra tax payers, and we can avoid spending money and have temporary surpluses. It is not that G.W. and Republicans or the Democrats were necessary evil or stupid. But for some bizarre reason, G.W. decided to run deficits when the unemployment rate was radically low (unheard of in U.S. Economic History), and run even bigger deficits when unemployment began to rise. Simultaneously, a spineless Congress (both Republicans and Democrats voted in favor of this nonsense) decided to not question his reasoning of perpetual annual deficits (cheney's infamous assertion that "deficits don't matter") until the total debt was infinite - or his term of office ran out... To argue that during a downturn we should run a balanced budget takes us back to the days of Hoover - to heck with the unemployed and the current economy, let's cut spending to balance the budget to add fuel to the recessionary fires. While I appreciate the University of Chicago free-market-at-all-costs sentiment, I now understand why Wheelan was a loser in the voting booth - it is really hard to convince unemployed, underemployed, and uncertain-employed persons to vote for you when you say - "Darn the unemployed, full speed ahead with budget cuts!" It is nice to see his concern for a financially secure long-run, but the short-run economic reality is that unemployment and underemployment are pushing 20%. Balancing the budget today while there are 10 Million fewer tax payers, and another 10 Million working for significant less income (meaning they pay less in taxes) is not realistic. On the other hand, once those numbers drop there had better be a serious plan to use the additional millions of tax payers to generate surpluses - avoid the trap of electing another charletan selling tax-cut snake-oil - and pay off parts of the debt.

  • Boubou - Wednesday, July 8, 2009, 1:25PM ET  Report Abuse

    • Overall: 5/5

    Explained in all its stark simplicity and yet without anger or political sniping. Unfortunately poeple who see this and talk like this never seem to be the influential ones.

  • Yahoo! Finance User - Wednesday, July 8, 2009, 9:21AM ET  Report Abuse

    • Overall: 2/5

    Between fed income taxes, FICA, state income taxes, sales, tax, real estate tax, estate tax, gas tax etc ad nauseum, many of us already pay more than 50% of our income in taxes and yet you want to raise taxes more!! When an individual keeps less than half of what he earns, we're in socialism at that point. Cut spending!

  • ArmchairEconomist - Wednesday, July 8, 2009, 7:23AM ET  Report Abuse

    • Overall: 5/5

    Well said Dr. Wheelan! I have been making these arguments for years...perhaps if enough people get it, we will demand fiscal responsibility of our government and each other!

  • bigqueue - Tuesday, July 7, 2009, 7:24PM ET  Report Abuse

    • Overall: 5/5

    The article i simple, and almost stupid....but in being this it is SPOT ON! The only thing that was NOT covered was how we spread this pain....which is a problem I see. I am a saver....and I can see how my government can reach into my savings account and TAX my money away. I know many SPENDERS, who themsevles are in over their heads. I do NOT see the government getting blood from those stones....but is it fair that they don't feel some of the pain. I suppose the Inflation option combined with some of that RAISE TAXES stuff is going to be the most fair.....if there really is such a thing as fair.

  • Kenneth B - Tuesday, July 7, 2009, 5:43PM ET  Report Abuse

    • Overall: 5/5

    The deficit: everyone's fault. Bush, Obama, Congress, Republicans, Democrats ... they all have failed us. Bush gave congress everything they wanted so He could get everything he wanted(Iraq). Current policy: "The problem with socialism is that you run out of other people's money." Of course the "change" that people voted for turned out to be socialism. The taxes associated with cap-and-trade and health care are the next "change" we can look forward to. We will not have the big changes the author describes until we have big pain. Get ready for round two of the great recession.

  • Stephen M - Wednesday, July 1, 2009, 11:06PM ET  Report Abuse

    • Overall: 5/5

    I hope everyone in the Executive, Legislative and Judicial branch of our government reads this column. The day has arrived when we all are going to have to sacrifice to live within our means. We must finally stop dumping the bills for our profligate lifestyles on the backs of our great-grandchildren.

  • Jon - Wednesday, July 1, 2009, 6:04PM ET  Report Abuse

    • Overall: 5/5

    "our debt is projected to grow to roughly 100 percent of GDP by 2010." Well, my mortgage will take 3 times my GDP (yearly salary) to pay off. The US isn't that bad off in comparison. I'm more concerned that the money wasn't well invested (ex: education). Rather we used it to fund entitlements and wars.

  • Randall - Wednesday, July 1, 2009, 1:51PM ET  Report Abuse

    • Overall: 1/5

    Good article, but unfortunately none of his other articles are consistent with this one. Talking about a balanced budget doesn't balance it when all along you support bailouts and publicly funded higher education and other worthless policies. Instead of just thinking about it before ordering room service and charging it on a credit card it should be taught to the students in his ecomics classes, which of course does not happen.

  • Yahoo! Finance User - Wednesday, July 1, 2009, 11:48AM ET  Report Abuse

    • Overall: 5/5

    I read 2 articles tonight at yahoo finance. This one and one from Mr Kiyosaki (also an expert apparently). Clearly one article is written by an educated expert, and the other by a salesman.

  • Toqwundiq Nzalu - Wednesday, July 1, 2009, 8:26AM ET  Report Abuse

    • Overall: 5/5

    Folks, I hate to break it to you, but something more than the math is going to have to change. Enshrining greed at the core of our ethics is going to have to change. We'll have to start living right, which means communities have to matter. In order for communities to matter, people have to matter more than dollars. And this is a long way off from where we are today. If we can regrow a backbone, and start building true wealth again, (which by the way is the capability of our people to deliver more value than they earn), then we can serve the world once again what it needs, and profit in the process. We're talking a 20 year process of restoration. Greed will never furnish the patience or fortitude required.

  • Hotblack - Tuesday, June 30, 2009, 11:25PM ET  Report Abuse

    • Overall: 5/5

    It all makes such perfect sense. It's a pity that policy makers are so driven by the need to pander to voters that they can't put any truly helpful reform in place. It's like parents so worried about losing their child's acceptance that they knowingly don't make the child drink a medicine that tastes bad.

  • RobertM - Tuesday, June 30, 2009, 8:11PM ET  Report Abuse

    • Overall: 5/5

    Excellent points. The USA is a country in decline because we are too self-satisfied to deal with our problems and our political system to too weak to make hard decisions. He missed the point on one key issue. The collapse of the housing market and earlier dot com boom sucked trillions out of the economy, which combined with the deflationary effect of cheap Chinese goods has kept the inflation rate down. However, in the not to distant future smart people will have their wealth in tangible assets rather than bonds and most stocks.

  • Tex - Tuesday, June 30, 2009, 5:49PM ET  Report Abuse

    • Overall: 5/5

    Anyone thinking there is a "trust fund" for Social Security needs a quick beating with the reality stick. The "trust fund" is full of IOU's from Congress as they raided it beginning in the 70's...some of those original crooks are still in Congress. THAT should scare the crap out of everyone! Madoff gets 150 yrs for stealing about $30B...Congress keeps their jobs for 30 yrs for STEALING FIVE TRILLION DOLLARS! Wake up! VOTE THEM ALL OUT! Turn them all into homeless bums!

  • JGIB - Tuesday, June 30, 2009, 2:37PM ET  Report Abuse

    • Overall: 4/5

    WOW, I didn't know we had 5 trillion in a trust fund. Whose balance sheet contains that money and who is the trustee - Barney Frank or Chris Dodd? Let's hurry and raise taxes and see how much revenue goes down rather than up.

  • Yahoo! Finance User - Tuesday, June 30, 2009, 1:13PM ET  Report Abuse

    • Overall: 4/5

    I normally like Wheelan but he mispoke a bit in this article. First, the $11 trillion of debt INCLUDES $5 trillion of trust fund money, primarily for Social Security and Medicare. The net debt to outsiders ( i.e. not to ourselves) is $6 trillion. Secondly, the intent of the Social Secuirty and Medicare programs were to be pay as you go, not like a pension where you put the money away for 40 years and then withdraw it back out. As such, to call future benefits unfunded debt defies the design of the program. It is comparable to saying that WalMart has an unfunded liability fo $8 trillion for the goods it intends to sell over the next 40 years. That would be absurd to say - it is equally absurb to talk about future benefit obligations as unfunded liabilities when the entire intent of the programs were to fund as you go, i.e. future "sales". or future receipts from the payroll taxes. To deal with the baby boomer crunch, we put away nearly $5 tirllion of reserves over what has been paid out in social security benefits. The problem is that, between Republican irresponsible tax cuts and irresponsible spending by both political parties, that money, and much more, has been spent. And now I fear that people like Wheelan want to renege on the country's social contract with its elderly citizens.

  • Mobyware - Tuesday, June 30, 2009, 11:22AM ET  Report Abuse

    • Overall: 5/5

    Great article! How come everyone doesn't see the obvious! We are so beyond paying this debt back it will crush our country. The $40K per person is not a good number to quote. It is more like $1million per real taxpayer. That will never be paid back because if you squeeze the taxpayers any more they will either quit their jobs and go to the black market or they will leave the country and take their wealth with them. Nobody in their right mind will work for less and less take home pay. Hyper inflation and high unemployment are the future of this country. I see no alternative except a revolution or a constitutional convention.

  • james - Tuesday, June 30, 2009, 10:09AM ET  Report Abuse

    • Overall: 5/5

    Franklin also was reported to have said, "The more he talked, the faster I counted the silver." How appropriate when aimed at our politicians. Thanks for an excellent article.

  • Arlingtonian - Tuesday, June 30, 2009, 3:32AM ET  Report Abuse

    • Overall: 2/5

    Look at comment 5. It is spot on. The author is correct in a sense. He's not saying anything we don't know. I think most normal people are frustrated at how the government is handling things. Its still tied at the hip to Wall St. The Central Bank and the Treasury are both concerned about their rich pals at Goldman, et al. The bottom line is that if all Americans spent less than what they made, we could be ok after 5-10 years. Similarly, the govt has to do the same in a big way. After about 10 years of sacrifice and a stagnant stock market, the real bull run can begin. It will take a long time to get rid of these past excesses and even longer thanks to the politicians' bickering.

  • Yahoo! Finance User - Tuesday, June 30, 2009, 12:57AM ET  Report Abuse

    • Overall: 2/5

    I give you credit for pointing out the astronomical amount of debt we are in, unlike the many of the other "experts" on here who claim the U.S. is an economic superpower but fail to mention how much of our so called prosperity is funded by debt and deficits. But then you mention that we shouldn't discuss how the crisis was caused and you solution involves taxing us to death?! Just forget about it and move on america!?! looks like you are a true politician after all aren't you. Im sooooooo sick of this over-bloated bureaucracy's wild spending sprees funded by future generations and the non stop intervention in the free markets by a private central bank with the use of proven failed keynessian economic policies that create every major boom and bust!!!! The freedom robing garbage legislation passed like the patriot act, AKA police state act to take away our very civil liberties that the so called terrorist envy us for!!! This country is long overdue for an awakening, You politicians and the mainstream media have done a great job spreading misinformation and keeping the majority of Americans in a zombie like state addicted to "american idol", "americas next top model", and the many other superficial vile reality TV shows that add no value to society except for to keep our eyes on the shiny red ball while you instigate and spread war all throughout the world and inflate the value of our currency to unprecedented levels!! This country is a arrogant, brain washed, ignorant mob of fools!! and the ones aware of these problems just sit around and talk about how bad things are then shrug it off and do nothing about it!!! America, you are a disgrace and you've let your liberties and freedoms get robbed from you by the corrupt private bankers and shadow government special interests groups like the CFR. I can't take it anymore this is absolute madness!!! Give me liberty of give me death!!!

  • William - Tuesday, June 30, 2009, 12:40AM ET  Report Abuse

    • Overall: 3/5

    Close, but no cogar. The author is in the fantasy world of DENILE (not a river in Africa) when he thinks the way out is so simple. There is no way out except to negotiate a write down in our debt. The Chinese will go for it- they need American dollars with some reasonable value to keep their economic engine running. Americans are the most self indulgent beings on the planet with the greatest sense of false entitlement. The wake up call is gonna be ugly.

  • MichaelM - Monday, June 29, 2009, 5:44PM ET  Report Abuse

    • Overall: 3/5

    Nice article. But, if interest payments were only 8 - 10 percent of tax revenue, the US government would be OK. I think your information is old. Last time I checked (last month) it is more like 20%. Check your facts.

  • Masmoola - Monday, June 29, 2009, 3:40PM ET  Report Abuse

    • Overall: 5/5

    No rocket science nor PHD needed here. The Doc was spot on! Conjure all the "bad ol' banker" conspiracies you want and, yes, cut the defense budget. (Put some dollars aside for Chinese lessons just to be safe) In 2010 we MUST restore the checks and balances in our government. Both Parties have proven that they are unworthy of a solid majority. Gridlock looks better everyday.

  • Lici - Monday, June 29, 2009, 9:39AM ET  Report Abuse

    • Overall: 5/5

    "People used to go without things to have money and now they go without money to have things." (Unknown) Individual habits need to change before the larger group thinking can change. Government borrowing and spending is merely a reflection of what we've all been doing at home. WE need to change. We owe it to ourselves.

Showing comments 6-35 of 268<< PreviousNext >>
The columns, articles, message board posts and any other features provided on Yahoo! Finance are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author's own and not necessarily those of Yahoo! and there is no implied endorsement by Yahoo! of any advice or trading strategy.

More From Charles Wheelan

Naked Economics: Undressing the Dismal Science

An accessible and entertaining introduction to economics for lay readers, now available in paperback.

View more about Charles Wheelan.

The Chicago Tribune described Naked Economics as "clear, concise, informative and (gasp) witty."

Order Naked Economics today. Average customer review on Amazon.com: 4.7 out of 5 stars.

More from Yahoo! Sources

  • CNN Money
  • Consumer Reports
  • Kiplinger
  • The Motley Fool
  • Business Week
  • Wall Street Journal

Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Morningstar, Inc. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.

Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer.