Better Health: Smart Health Commentary Better Health (TM): smart health commentary

Article Comments (1)

Is National Debt As Bad As Paul Ryan Says It Is? Lessons From The Past

The last two weeks have made clear that the debate over our national debt will play a major role in the next election cycle.

On one side, many Republicans, lead by Representative Ryan, insist that the rate of growth of our national debt – especially the massive projected growth of Medicare and Medicaid – promises to destroy our society within a generation or two; and that the only way to avert that catastrophe is to make substantial structural changes to our entitlement programs. The subtext of their message is: Federal debt is bad, and debt of this magnitude will be fatal.

On the other side, most Democrats, led by President Obama, stress that our entitlement programs are promises that simply can’t be changed in any substantial way, insist that such entitlements are “investments in our future,” and suggest that whatever shortfalls our current system might encounter can be remedied by taxing millionaires and billionaires. The subtext of their message is: Federal debt can be a force for good, and in this case will trigger a much-needed redistribution of wealth (which is a primary goal of Progressives).

The debate over the national debt is as old as the Republic. In the original version of this debate, the part of the modern Republicans (i.e., debt is bad) was played by Jefferson, and the part of modern Democrats (i.e., debt is an investment in the future) by Hamilton.

In the early 1790s, unsupportable debt obligations, accumulated during the Revolutionary War and held by the various states and by private individuals, had entirely frozen up the credit markets, and precluded the brand new United States from having a functioning economy. Hamilton’s idea was for the federal government to buy up all these private and state obligations, and then issue federal bonds to raise enough capital to pay off the debt and to provide stuff, like a United States Navy, that would encourage investment and economic growth. (That Jefferson so viscerally disagreed with this approach, believing that all Americans should grow their own food and make their own clothes, etc., and that a national financial system was not only unnecessary but dangerous, was one of the chief factors that led to the two-party system in the U.S.)

Hamilton ended up doing a deal with Jefferson, and got his way (agreeing to move the nation’s capital southward, where the feds would find it more difficult to undermine some of the south’s more peculiar institutions).  And as a result of Hamilton’s massive and unprecedented bailout of the various states and private investors*, the United States of America became not only one united country, but a stable and growing concern. Indeed, it is arguably by this action that Hamilton definitively earned his place as one of our most important Founding Fathers.

____
*Many of the “private investors” who needed to be bailed out turned out to be prominent political figures and supporters of Hamilton, whose names we’ve all heard and revered, and whose shady deals had helped to produce the fiscal crisis in the first place. So there are indeed many parallels to our current situation.
____

Clearly, not all national debt is bad. Sometimes, just as President Obama insists, acquiring debt can be an investment in the future.

In fact, Hamilton’s great insight was that national debt can be the engine of economic growth. When the government borrows money to build out the national infrastructure, to provide easier access to markets, to provide easier transportation of goods, to provide easier access to energy, and to provide a stronger military to guarantee that its investments are safe, the government is doing what businesses do when they want to grow. It is borrowing money today that will generate economic growth, and that will, in turn, repay that borrowed money with interest. That’s good debt.

When Hamilton bailed out the various states and the private investors, he was essentially buying up war debt. He was taking upon the federal government the responsibility for paying for the war that had created the United States in the first place. In economic terms the Revolutionary War was like the high-risk start-up that exhausts its funding in creating its product. While the product of their effort (i.e. independence) was intrinsically very valuable, the various states had bankrupted themselves in achieving it. And because the states were bankrupt, commerce was paralyzed, and the new country was about to break up into warring factions. Hamilton saw that by creating a central entity to buy up the debt, and to raise capital against the country’s new independence, he could realize the intrinsic value of the new nation. Hamilton’s debt, because it was truly a catalyst to pent-up economic potential, was good debt. It truly was an investment in the nation’s future, one that paid off for future generations of Americans beyond even his wildest dreams.

On the other hand, when we accumulate national debt not to catalyze a growing economy, but instead to buy consumable products for individuals that the individuals “ought” to be buying for themselves (because they are consuming the products themselves), that’s just debt. It’s like credit card debt – it’s debt that is not paying for itself by stimulating new economic growth for the borrower, but instead it’s debt that will just have to be paid off sooner or later, and that in the meantime requires large payments in the form of interest. Such debt is not an investment in the borrower’s future; it’s not creating future growth that pays for itself. Instead, this kind of debt often compounds until it collapses of its own weight. That’s bad debt.

That’s the kind of debt, for instance, that was created by the mortgage crisis. The federal government has now gone into great hock buying up mortgages taken out by its individual citizens. It is taking steps to help those individuals stay in the houses they cannot afford, and to protect the institutions that made those bad loans. It is not taking active steps to stop the issuing of the sub-prime mortgages that created the crisis in the first place. One of the chief reasons we hear for freeing up the credit markets is so that more sub-prime mortgages can be issued. The notion that all Americans should have access to reasonable shelter is a compelling one. But that’s different from a policy that allows individual Americans to choose their own shelter, from a vast array of choices, and then send the taxpayer the bill.

While going into national debt bailing out the sub-prime mortgages is bad debt, it is nothing compared to our going into national debt buying healthcare for individuals. Our accumulating healthcare debt is really bad debt. According to the GAO, we’re already committed to accumulating $25 trillion to $55 trillion in healthcare debt over the next several decades. Furthermore, when a person “consumes” healthcare, it is well and truly consumed. There’s nothing left (except, for the individual, some chance of prolonged life or less suffering, which is good for the individual but neutral to our national economic health). At least when the government buys up mortgage debt it owns actual real estate, which has some intrinsic worth. Not so when buying up healthcare debt.

So going into massive debt paying for Medicare and Medicaid is not the same as the debt Hamilton took on in the 1790s. We’re merely accumulating debt, and not stimulating future growth. In fact, our irresponsible accumulation of bad debt is stifling economic growth.

So President Obama is correct to the extent that, sometimes, taking on a certain amount of the right kind of debt (the kind that stimulates real economic growth) can be an investment in the future.

But the Republicans are correct that the debt we’re taking on to pay for Medicare and Medicaid is not that kind of “investment,” but is a fiscal black hole – as we will all find out if we don’t get this debate right.

*This blog post was originally published at The Covert Rationing Blog*


You may also like these posts

Read comments »


One Response to “Is National Debt As Bad As Paul Ryan Says It Is? Lessons From The Past”

  1. Jim says:

    THE SOLUTION

    Everyone living in United States knows that our country is in trouble. We are headed towards civil unrest and rioting in the streets similar to what is happening in Greece and other areas of the world. 

    It is almost as if there is a dooms day scenario about to unfold and our leaders are saying run up the deficit. Who cares what our National Debt is because the world is about to end and we will never have to pay it back. 

    Let us put on our Nostradamus thinking caps! Imagine ourselves 100 years in the future looking back at the fall of the United States of America. What solutions will the Historians say that if we had implemented them could of saved us from destruction. 

    I believe that in this mindset we can easily agree that the following need to be implemented immediately. Not one or some of these solutions but all.

    1) One flat rate tax of 20% for all purchases and services in the United States. Dismantle the IRS.

    2) Debit cards must be used for all purchases in the United States. This would insure that taxes are being paid and help regulate any year end tax rebates.

    3) For every dollar spent for any new product made in the United States the purchaser would receive a 10 cent rebate at the end of the year. This would create American jobs.

    4) Any terminally diagnosed person would have an option to receive a one lump sum payment of $45,000 to go home and die with dignity as opposed to low quality life extension in a hospital at a huge cost to society. This money could be used for a spouse or to help put someone in the family thru college.

    5) Legalize all drugs. Regulate this industry. This would get rid of the drug cartels and eliminate all the senseless drug related murders. For forty years the United States has been at War with Drugs and we are still loosing. Do not condone drug usage just regulate it.

    Jim Burns
    Jibrns@aol.com
    You Tube mynation123

Return to article »

Latest Interviews

IDEA Labs: Medical Students Take The Lead In Healthcare Innovation

It’s no secret that doctors are disappointed with the way that the U.S. healthcare system is evolving. Most feel helpless about improving their work conditions or solving technical problems in patient care. Fortunately one young medical student was undeterred by the mountain of disappointment carried by his senior clinician mentors…

Read more »

How To Be A Successful Patient: Young Doctors Offer Some Advice

I am proud to be a part of the American Resident Project an initiative that promotes the writing of medical students residents and new physicians as they explore ideas for transforming American health care delivery. I recently had the opportunity to interview three of the writing fellows about how to…

Read more »

See all interviews »

Latest Cartoon

See all cartoons »

Latest Book Reviews

Book Review: Is Empathy Learned By Faking It Till It’s Real?

I m often asked to do book reviews on my blog and I rarely agree to them. This is because it takes me a long time to read a book and then if I don t enjoy it I figure the author would rather me remain silent than publish my…

Read more »

The Spirit Of The Place: Samuel Shem’s New Book May Depress You

When I was in medical school I read Samuel Shem s House Of God as a right of passage. At the time I found it to be a cynical yet eerily accurate portrayal of the underbelly of academic medicine. I gained comfort from its gallows humor and it made me…

Read more »

Eat To Save Your Life: Another Half-True Diet Book

I am hesitant to review diet books because they are so often a tangled mess of fact and fiction. Teasing out their truth from falsehood is about as exhausting as delousing a long-haired elementary school student. However after being approached by the authors’ PR agency with the promise of a…

Read more »

See all book reviews »