A manufactured crisis?

The United States, we all know, owes $14.3 trillion, a staggering sum essentially equal to our GDP, one that threatens to mortgage our children's future and bankrupt us unless, to quote Yeats once again, "something drastic is done." Until this very morning I believed that too. But then, on p. A14 of my New York Times, I found the extraordinary chart above breaking down the debt, and a great many things became clear to me for the first time. (That was as legible as I could make it.)

As most of you probably know, I've been working for three years on a book on FDR and US entry into the Second World War, and I've read a great many of his speeches. They have a simple clarity that very few contemporary politicians can equal. In addition, Roosevelt never feels compelled to apologize for anything he is saying or doing, since he is so convinced that it is the logical step to take--something that certainly distinguishes him from Barack Obama. So I'm now going to take a stab at how Roosevelt would discuss the current crisis. It won't be perfect--I'm not actually going to refer back to his speeches--but I hope I can both convey some of his characteristic tone, and, more importantly, do what he would have done and make clear some critical facts.

"My friends.

"For the past few months, the Congress has been locked in struggles over raising the federal debt ceiling. That ceiling is now pegged at $14.3 trillion dollars and the government will not be able to continue operating if it is not raised. The Republican Party claims that we cannot afford it; that we must make massive cuts in federal government programs to stop or slow its growth; and even, in some cases, that we should simply let the government default on its obligations. In any storm at sea, some people are likely to lose their heads. I speak to you tonight to explain that while our economic problems are very real, our debt problems are in fact quite manageable. Here is why.

"The figure of $14.3 trillion seems daunting because it is rather close to our current estimated GDP. That is not unprecedented: in 1945, at the end of the last great crisis in our national life, our accumulated debt was considerably in excess of our GDP. That did not prevent the United States from converting from a wartime to a civilian economy and launching an era of unprecedented prosperity that lasted for several decades. There is in fact, as I shall now explain, no reason why we cannot do the same, if we see things clearly, discount counsels of fear, and take appropriate action.

"Yes, officially, the government owes $14.3 trillion--but in fact, it only needs actively to service about half that sum. Let me explain by breaking down the debt based upon whom it is owed to. $3.6 trillion of the debt is owed to you, the American people, who have wisely entrusted your savings, directly or indirectly, to the government's care. There was no reason not to do so: the 14th amendment to the Constitution, adopted at another moment at which the public debt was at an all-time high, guarantees it for all time. And indeed, as many of you know, the return on Treasury bills has compared very favorably with other assets during the last few years, because of the world's confidence in our economy.

"That, in turn, is why an even larger portion of the debt--$4.5 trillion--is held by foreign nations. They have shown no haste to unload it despite our economic crisis. This debt is the inevitable consequence of our trade deficit: since we import so much more than we export, we can only pay for the imports by borrowing either at home or abroad. But we have had no trouble doing so for decades and there is no reason why we cannot continue doing so in the future, even though there are very good and sound reasons for us to want to stop shifting production overseas and improve our trade balance.

"Simple addition will have already told many of you that our combined domestic and foreign debt, then, totals $8.1 trillion, $3.6 trillion at home and $4.5 trillion abroad. Yet the official figure for the debt is $14.3 trillion. Where, you are undoubtedly asking, can that come from? To whom can we possibly owe the additional $6.2 trillion?

"The answer, my friends, is that we owe it to ourselves--and, if we now take some simple, necessary and equitable fiscal steps, we will not need to worry about it very much.

"To begin with, $1.6 billion of the debt is held by the Federal Reserve Bank--part of their reserves. As you all know, the Federal Reserve is dedicated to the maintenance of a strong U.S. economy and currency. It is never going to use its holdings of U.S. debt to try to bring down the government of the United States.

"The remainder of the debt--$4.6 trillion--is owed to trust funds of the federal government itself. Of that sum, more than half--$2.2 trillion--is in the Social Security Trust fund. We are now entering into some complicated accounting by ways, but they are easy enough to follow, particularly if we begin with a little history of the modern Social Security system.

"In 1972, President Richard Nixon and the Congress raised social security benefits substantially. In the early 1980s it was clear that these benefits would be hard to afford several decades down the road, when the Boom generation retired, and President Reagan and a Democratic Congress led by Speaker Tip O'Neill reached an agreement to raise Social Security taxes. Indeed--and this is the key point--they raised the payroll tax, shared equally between employers and employees--well beyond the level that was needed at that time to pay the Social Security benefits that the government currently owed. Some had expected that the surplus payroll taxes would actually be saved, but that was not what happened: they went into the federal treasury and were spent to help cover the very large deficits that resulted from President Reagan's economic policies. In exchange, special non-negotiable government bonds were deposited in the Social Security Trust fund. Those were claims on the federal government to pay future benefits. For as long as payroll taxes sufficed to cover benefits, however, it was not necessary to make good on those obligations.

"Here is another chart showing debt held by the Federal Reserve (blue), by trust funds (red), and by the domestic and foreign public (green.)



"Even now, payroll tax receipts remain barely adequate to cover Social Security benefits. That situation is indeed about to change as the Boom generation retires. If however we can make appropriate adjustments to the payroll tax, and perhaps slow the annual rate at which benefits increase, we can quite easily afford benefits out of current revenues indefinitely. The easiest adjustment, which I have proposed, is to end the payroll tax exemption on incomes of more than $106,800 a year. Because of that exemption, social security taxes take up a far smaller percentage of the income of wealthier Americans than they do of those in among the poor and middle classes. There is no reason for this to continue. If we make these changes social security benefits will continue without the government having to pay off any of the bonds held by the Social Security trust fund.

"I have been talking about the problem of the Social Security trust fund, which now accounts for $2.7 trillion of the federal debt because payroll taxes have exceeded expenditures for the last 28 years. The situation in other trust funds is similar: they represent the excess of revenues over expenditures dedicated to certain federal programs, including highways. So long as we adjust revenues for those funds so as to cover current expenditures as well, we will not have to spend current income to require the debt that they hold either.

"And thus, the situation is very different from that of 1945, when our total public debt was not only larger relative to our Gross Domestic Product than it is today, but when it was composed almost entirely of real obligations to private persons or institutions, not trust funds. I would suggest that in real terms, we are twice as well off as we were then. We can easily continue refunding and servicing our current debt and even allow it to increase during the economic crisis. Indeed, in order to get out of the economic crisis, that is what we have to do.

"Our biggest problem today is not debt: it is jobs. You know it better than I. We need, once again, to put people to work. We also have plenty of work for them to do: the repairing and improvement of our nation's infrastructure. Many of our roads and bridges are in a deplorable state. High-speed rail, which is playing an important role in the economies of both Europe and Asia, has not yet even got a foothold in the United States. We have barely begun building a new generation of automobiles. Our power grid needs work. None of this should be in the least discouraging: it should be inspiring. It gives us, and especially the young people of America, a task worthy of ourselves, a task equal to the great work accomplished by earlier generations.

"Sadly, the Republican Party has for thirty years been engaged in an intermittent crusade to reduce, if not destroy, effective government in the United States. For many years their leaders appeared to recognize that much of their rhetoric was excessive and could not be reconciled with sound policy. Both Ronald Reagan and George H. W. Bush bit the bullet when necessary and raised taxes--not always fairly it must be said--in order to reduce huge deficits. Now, however, sadly, the party of Lincoln, Eisenhower and Reagan has lost its bearings. It would return us to the days of the late 19th century, when millions lived in poverty, when health care and public services were shamefully inadequate, and when corporations and monopolies ruled our society. The American people are too smart to follow them down that road.

"The debt crisis which the Republican Party, particularly in the House of Representatives, is trying to use to undo the work of the last century is largely illusory. We have more than adequate resources to pay the debt. When we allow the Bush II tax cuts to expire and all Americans start paying a bit more for the government much of the deficit will disappear. More will disappear with the end of the wars in Iraq and Afghanistan. Meanwhile, our plan to rebuild America will make a dent in the unconscionable unemployment that is the real threat to our well-being.

"We have nothing to fear but fear itself."