Build the Wall: A distraction from debt

“Build the Wall!” A distraction from debt

Edward Renner

The biggest threat to our national security is borrowing against the future, not the southern border. The Federal debt and the future economic security of the country should be the context for the debate over building the wall.

The current Federal debt is $22 trillion, and over the term of President Trump, expenses will exceed revenue by $866 billion per year based on current projections (see Box). The recently proposed 2019 budget would increase this amount to over $1 trillion per year.

 

 

An individual has no reference point for such amounts of money. So, let’s turn those amounts into a personal example which parallels the current debate about funding the wall.

Suppose your uncle – let’s call him Sam – has an income of $50,000 a year with a no cash reserves. He is due for a $500 raise at the end of year. His current debt is $52,000 (104% of his income). This means he has been borrowing money every year to cover several thousand dollars of excess living expenses. Now, he wants to borrow a relative small amount of additional money to purchase something that has no commercial value – say a portrait of himself.

Suppose further that, instead of the $500 raise, an anticipated market correction (10%) occurs, and his actual earnings drop to $45,000. When that happens, he will have to borrow $7,000 to stay even, for just for the first year. His total debt will jump to 120% of his reduced income.

Under these conditions, why would Sam want to buy the portrait in the first place, and why would anyone lend him any more money? Sam may soon need to default on his house mortgage, as did many people in 2008, and move back home to live with his parents.

 Borrowing money to build the wall is the same as Sam borrowing money for his portrait. Like Sam, the current Federal debt is 104% of the national income which is measured by the Gross Domestic Product (GDP). This debt will increase to 108% under the current budget of the US Government (see Figure).

 

 When the Federal debt exceeds the Gross Domestic Product (GDP) – which is now the case -- and interest rates are larger than economic growth – which is now possible – then the entire national debt becomes more expensive. This situation requires even greater borrowing and/or a reduction of government services. Both can restrict growth, widen the gap with the cost of borrowing, and trigger a downward spiral of accelerating debt and additional austerity measures. As a result the nation gets poorer each year.

 

But, the big catastrophe occurs when the next recession comes -- as many expect in near future. When the GDP drops, the nation is caught in the same trap as Sam when his income fell by 10 percent. That is what happened to Greece. No cash, big expenses and no way to borrow more, which would only have made the situation worse. The parallel, with Sam moving back home, is significant reductions in social programs, such as Medicare and Social Security, and other big budget areas, such as the Department of Defense. 

The economic stimulus required to reverse the recession of 2008, was possible only because the national debt had been reduced to manageable levels as a result of the “peace dividend” during the Clinton years. The stimulus spending over the Obama era produced a period of steady economic growth, but at the cost of a huge increase in the national debt (104% of GDP) to a level that is not sustainable.

The current projections are for economic growth to slow in the future. Without growth, similar to Sam’s anticipated $500 raise, the ratio of debt to GDP increases wildly, as it did over the G W Bush era as the result of annual budget deficits, the recession and reduced revenue from a tax cut. Any reoccurrence of these events, all of which are currently on the table, will crash the economy again. But, this time there is no capacity for additional borrowing by the Government to stimulate a recovery -- just as Sam has no capacity to come up with an extra $7,000 per year.

Building the wall doesn’t provide national security, it is not an immigration policy, and it does not serve the body politic. It only fulfills a campaign promise akin to Sam purchasing his portrait. Building the wall is a distraction, while a real storm, the growing national debt, is gathering on the political and economic horizon – a distraction that puts at risk everything that defines the American Way of Life.

 

The real Uncle Sam would never do this.

 

Data Sources: Congressional Budget Office, Office of Management and Budget, compiled at https://fred.stlouisfed.org/ and https://www.usgovernmentspending.com/. See also http://www.usdebtclock.org/.