The US government has a lot of debt, around $19 trillion of it.
Yes that’s a huge, intimidating number on the face of it, but according to Scott Brown of Raymond James, it’s also not a serious issue.
“Just when you thought all the fear-mongering had subsided, the national debt has resurfaced as a topic in this year’s presidential race,” said Brown in a note to clients Monday.
“Yes, the deficit is large. No, it is not a problem.”
In Brown’s analysis there are two things happening when people talk about the debt. On the one hand, they are concerned about the current deficit, essentially the rolling short-term additions to the debt. The increase in this, said Brown, is simply a necessity of response to the last recession.
“The federal budget deficit hit $1.4 trillion in FY09, or about 10% of nominal GDP. That is enormous, but it simply reflected the magnitude of the Great Recession,” wrote Brown.
“Revenues fell. Recession-related spending (unemployment insurance, fiscal stimulus) rose. As the economy recovered, recession-related spending went away and tax receipts improved. The deficit is now down to 2.5% of GDP, which is sustainable.”
On the other hand, people are also concerned about the long-term amassed debt, that gnarly $19 trillion number. The issue with this line of complaint, said Brown, is there is no nominal level is which the whole thing comes crashing down.
“There is no magic level of debt that gets an economy in trouble,” said Brown, the chief economist at Raymond James, in a note to clients on Monday. “Research arguing that view has been discredited. The federal government currently has no problem borrowing, nor is there any evidence that it is crowding out private investment.”
Brown’s argument is fairly simple, debt is only an issue if you can’t repay it or if other people believe you can’t repay it. And, as Business Insider’s Myles Udland has noted, the US can literally print the money it needs to repay its debt and it still maintains a high credit rating.
Additionally, Brown posits there are a few solutions that could improve the situation, though some he is less inclined to support. They are:
- Cut entitlements: “Some now argue (I kid you not) that we have to cut entitlements now so that we don’t have to cut them later (which makes no sense if you think about it for more than a second).”
- Raise revenues through tax increases: “Raising revenues is tricky. Republicans aren’t going to go along with increases in tax rates (even if called “revenue enhancements,” as they were during the Reagan years).”
- Broaden the tax base: “Broadening the tax base, as part of overall tax reform, could get bipartisan support, but that means giving up certain tax breaks that some will object to (that is, those benefiting from those tax breaks).”
- Raise effective corporate tax rates: “It’s true that the U.S. has one of the highest corporate tax rates in the world, but the effective rate (what corporations actually pay) is among the lowest.”
This isn’t to say $19 trillion is a big number, it is. However, it’s unlikely the US government will descend into total insolvency and even before it got there, solutions are possible.