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Big, scary economy stats have been seen before

BY GUEST OPINION | OCTOBER 03, 2011 7:20 AM

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I was recently a bit put off while reading a column written by Dean Treftz in the Sept. 26 edition of The Daily Iowan.

It seems that he found a few scary numbers and decided to write a column voicing a policy position based on ideology instead of a solution. Fact of the matter is, no single number, even one as big and scary as 14.8 trillion, has much significance at all in this economy. There are more than 14.8 trillion separate numbers in this economy, each of which is telling a different story about what's going good and what's going bad.

Let's get to the issue, then. Can the government afford to stimulate the economy? Starting with the obvious numbers, the government is $14.8 trillion in debt. How significant is that? It's really only significant in that it's not zero. One might say, however, that our debt is almost 100 percent of our GDP. That number isn't that meaningful, either, because it's an amalgam of a lot of different numbers measuring different things. About a third of our debt is something called "intra-government" debt, such as Congress borrowing money from Social Security to pay for programs in the general fund such as the military or education, and another, smaller piece is owed by lower governments.

As such, the responsibility for this debt is significantly spread out; the federal government doesn't have to pay back all of it as quickly as possible. Also, there are many governments functioning at or above a 100-percent debt-to-GDP ratio. The most impressive of which is Japan, which is fully funding relief efforts after the tragic earthquake and tsunami earlier this year in spite of having an approximate 200-percent debt-to-GDP ratio.

You can also note that our government is spending about 25 percent of our GDP, or that we're borrowing over 40 percent of what we spend, but neither of those figures are numbers that this country hasn't seen before. During World War II, the government actually ran a deficit of 25 percent of GDP, not to mention the spending that was actually paid for by the much higher tax rates of the era. What's more? Immediately after World War II , much of the debt was paid off thanks to the economic boom of the '50s bringing in extra tax revenue. So yes, economic stimulus is affordable.

I don't mean to play down the severity of these numbers, but we need to look at these numbers rationally. Here we come to the biggest issue I have with Treftz's column, and that's the idea that we can somehow do nothing and things will get better on their own. We'll pay down our credit cards for some number of years and then do something about jobs after that. That position simply does not hold water.

As I've said before, we are in debt, and that debt is growing. The government can't change this strictly through budget cuts or tax hikes, either, because cutting 40 percent of the budget with the intent of balancing it would have a profound negative effect on the working class.

That said, there is a number that hints at a possible solution. The number is 2 percent. That's how much interest the government will pay by taking out loans via 10-year treasury bonds. To put that number in perspective, the interest rate on student loans s probably somewhere between 6.4 and 8.8 percent, depending on when and how you borrowed the money. In other words, the government can borrow this money at a dirt-cheap interest rate.

We again know from experience that an increase in government spending will result in economic stimulus, a stronger economy will bring in more tax revenue, and the government will be in a position to start paying down its debts in relatively short order. It's the solution to the economy and to the debt.

Cody Childs is an undergraduate student in mathematics and computer science at the University or Iowa.


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