Debt Ceiling Games

I saw a scare piece on last night’s television news. The reporter estimated that the national debt has now grown to an amount estimated to equal approximately $200,000 per person. In other words, each American now owes the government (i. e., we owe ourselves) the equivalent of a house mortgage.

There are two ways of looking at a figure like that. On the one hand, we could jump out of our collective socks and scream, “How in the world are we ever going to pay off a debt like that?”

On the other hand, we could look at $200,000 the way most homeowners look at their house mortgages. No big deal. It’s an investment in our collective future.

Neither approach is entirely satisfying, at least from the point of view of a Spirited Reasoner. The problem with the alarmist approach is that it ignores the fact that we’ve been looking at a five- and six-figure per person national debt load for most of our lifetimes. So long as creditors are willing to accept the risk of buying U. S. government bonds at relatively low interest rates, then those same creditors are telling us (via their willingness to accept that risk) that they have faith in our ultimate ability to repay the debt.

The problem with the home mortgage analogy is that, unlike the U. S. national debt, those of us who own homes are required to make a mortgage payment each month—one that includes both interest and a partial repayment of principal. In contrast, our repayment of the national debt tends to be negative. In other words, when our tax payments are received by the IRS, those tax receipts only cover the interest, while the principal is allowed to grow via increased government spending. It would be as if a homeowner continued to borrow money to increase the size of the house each year, but without increasing the mortgage payment to cover the full amount of the cost.

But what makes the $200,000 per-person figure truly misleading is that it ignores the increasing value of property (both real and intangible) and infrastructure owned by all of us collectively via the U. S. government. For example, what dollar value would we place on the interstate highway system? How about the dollar value of our national parks? How about the strategic value of our military bases and other assets at home and abroad? One could argue that the dollar value of these assets, if aggregated at today’s market prices, would far exceed the $200,000 per person liability.

When we look at our collective debt we are looking at only one side of the double-ledger balance sheet. The real question is not so much “how much do we owe?” The real question is whether what we owe exceeds the value of what we own. If our national “house” is worth far more than the mortgage we owe, then isn’t the per-person liability worth the price? (Would we counsel a young homeowner not to enter into a $200,000 mortgage without considering the market value of the home?)

Ultimately, the debt ceiling debate is one for the bond markets to decide. If, at some point, they believe the national debt has risen too high in relation to our national wealth and ability to repay individual bonds, then they will insist on higher interest rates before being willing to purchase government bonds. Based on the relatively low rates we have experienced over the past thirty years it would appear that such creditors are a long way from considering the federal government to be a major credit risk.

A purely political, non-rational problem could appear, however, between now and June. If the House of Representatives refuses to raise the debt ceiling, thus forcing the United States to default on the repayment of government debt, then our nation’s credit rating will suffer irreparable damage, not only in our own lifetimes but in those of our children and grandchildren. The reason will not be because we allowed our debt to grow too large. (Which, as noted above, is a number that must always be compared to our nation’s collective assets and equity.) The reason will be because a political party found it expedient to score political points at the expense of our nation’s future.    

The fact that a political party has not only the twisted will but also the means to accomplish that much damage to its own people might just be enough to change the minds of future creditors about our nation’s ability to repay its debts.