Wednesday, October 10, 2012

Fat-Free Econ 26: US Public Debt and the November Elections

* This is my article today in TV5's news portal,

Whoever wins in the US Presidential elections next month will govern the biggest economy in the world, which also has the largest public debt worldwide. In fact, the US public debt is larger than its gross domestic product.

At the start of the current fiscal year, October 01, 2012, the US public debt stood at $16.159 trillion, composed of (a) debt held by the public at $11.311 trillion, and (b) intra-governmental holdings at $4.848 trillion. A day after, the total moved up to $16.171 trillion or an increase of $12 billion in just one day. For a good debt clock of the US to watch that is moving every minute and every second, just refresh this link.

And here is the growth of such debt through the years.

While the US government holds the 1st place worldwide in absolute amount of public debt, the Japanese government holds the 1st place worldwide in terms of the ratio of public debt to GDP, followed by Greece and Portugal in 2nd and 3rd places.

What explains the huge spike in US public debt and spending, especially in recent years? Or where can the next administration possibly make some spending cuts in order to minimize the fiscal bleeding and reduce the need for endless borrowings?

chart 4


The welfarist and collectivist philosophy prevents or opposes cutting such spending. The advocates of this philosophy argue that the main function of government is to redistribute income, to confiscate more money from the haves and give it to the “have nots” or “have little” through a thick layer of bureaucracy at the national and local government levels that act as middlemen between these supposedly contradicting camps.

There is a twist somewhere here. As the need for more taxes by the US government rises, the number of people who do not pay federal income tax also rises. And this contributes to a pernicious situation where expenditures keep rising while tax revenues do not follow in step.

chart 4

Source: The Economist, September 18th 2012,

The appropriate solution to reduce revenues would have been to reduce spending. Ordinary households do that. When the income is low, they cut on spending and minimize borrowings whenever possible. Most governments - the US and the Philippines among them - do the reverse. As the funding gap between expenditures and revenues rises, they keep borrowing to maintain high expenditures as if the public debt burden can be solved by Batman or other fictitious characters.

The biggest challenge for the next President of the US is how to reduce public debt and government spending without compromising the productive capacity of the citizens, the entrepreneurs and ordinary workers, who will ultimately pay off those mountains of debt that have been accumulated through decades of fiscal irresponsibility by various administrations.

And the public – in the US, Europe, the Philippines and elsewhere – have to reconsider the welfarist and forced collectivism philosophy.  There is ample room to manage or allow society to run on more personal, parental and civil society responsibility, and less on government responsibility.

Here is the additional chart and table that were not included due to space constraints:

a. Growth of US public debt through the years:

b. Top debtors, OECD member countries.

I marked in red huge jumps in the ratio, moving up by 10 percentage points or more in just one year. Except Ireland and Iceland, those huge spikes in public indebtedness among the industrialized countries occurred in 2009 and 2010, with hang over until 2011.


See also:
Fat-Free Econ 22: Three Years of Drug Price Control Policy, August 30, 2012
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012
Fat Free Econ 25: Property Rights and the Cybercrime Prevention Law, October 01, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012

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