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We're close to getting debt under control

Critics blame President Barack Obama for adding to the debt, without regard to what would have happened if he hadn’t. It’s like putting out a fire and being blamed for using too much water.

Associated Press

Critics blame President Barack Obama for adding to the debt, without regard to what would have happened if he hadn’t. It’s like putting out a fire and being blamed for using too much water.

Sen. Tom Colburn, R-Okla., told Joe Scarborough, host of MSNBC's Morning Joe program, that he was disappointed in the outcome of the "fiscal cliff" negotiations because we will still have large deficits.

He predicted that ultimately "the math will force us to be responsible." He cited Rep. Paul Ryan's Path to Prosperity as evidence of an impending disaster triggered by growing deficits.

Actually, for the past three years, our deficits have been slowly shrinking. However, since all deficits — even falling ones — add to the debt, why not cut them faster?

President Barack Obama took office in January 2009 facing an economy that was tanking: The nation was losing 750,000 jobs per month. His administration began four months into the fiscal year, obliged to administer President George W. Bush's last budget. With the economic conditions extant at that time, that budget generated a $1.4 trillion deficit. Had he attempted to engage in an aggressive deficit reduction effort — say by canceling the bank and auto bailouts, the rapid growth in food stamps begun in 2007, and his stimulus initiative — he would have wreaked further damage on an already weakened economy.

The rate at which the Obama administration shrank the deficit — $300 billion dollars over three years — is normally considered a good rate of decrease. Still, the deficit remains over $1 trillion per year, because to bring it down faster would court a second depression. Critics blame Obama for adding to the debt, without regard to what would have happened if he had not. It's as if he was told to put out a house fire and then blamed for using too much water.

We Are Incredibly Close to Stable Debt. It is common to evaluate indebtedness as the ratio of debt divided by income. That key ratio is projected by Ryan to grow wildly, but the math shows that we are instead very close to stabilizing it at 75 percent. Economist Jared Bernstein explains that the combination of spending cuts and tax increases implemented since 2011 has brought us very close to a stable debt/GDP ratio. We'll get there with just another $1.2 trillion over the next 10 years. In his words, "It would not be a heavy lift to find the $600 billion from each side of the ledger." This is only 0.6 percent of the $200 trillion of GDP the economy is expected to produce over those 10 years.

The math shows how to stabilize a debt/GDP ratio. This ratio will stop growing if the numerator (debt) grows no faster than the denominator (GDP) grows. If your income is $50,000 and you owe $25,000, the ratio of debt/income is $25,000/$50,000 = 0.50. Now suppose both your income and debts grow at the same percentage rate. Any rate will work; let's add 10 percent to both the debt and the income to get the ratio $27,500/$55,000 = 0.50, the same value as before. Of course, if the debt rose more slowly than income, the ratio would fall. For example, if income rose 10 percent and debt rose 9 percent, the ratio would be $27,250/$55,000 = 0.495.

Despite recent successes in reducing the size of the annual deficit, some in Congress cling to the false belief that the nation's financial condition can only be improved if they shut down Washington to force an agreement to limit future borrowing and bring the deficit to zero. Despite today's low borrowing costs, investments to restore infrastructure devastated by major disasters are now being seriously challenged.

These investments generate a very high return on investment because they put some of the finest American workers back to work rebuilding their homes, businesses and modes of transportation. One would think that borrowing to make these high-return investments would be a no-brainer.

The urgency of other long-lived infrastructure investments is obvious; sewer and water systems, streets and road improvements, broadband expansion, and K-12 math education immediately come to mind.

Instead of seeing these growth-enhancing investments as cost-beneficial for the nation, even if paid for with borrowed money, too many in Congress would allow our infrastructure to continue to deteriorate and our economy to continue to decline. Instead of leaving our children and grandchildren a robust economy, failure to make these investments in infrastructure and human capital will leave them an economy that is but a pale shadow of its potential.

William L. Holahan is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.

We're close to getting debt under control 01/27/13 [Last modified: Friday, January 25, 2013 4:30pm]
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