In 1990, our country’s debt was 40 percent of G.D.P. Now, it’s 100 percent and rising. Does it matter? Does anyone care? Is there any chance it could go back down? Mike Switzer interviews Frank Hefner, Director Office of Economic Analysis and Professor of Economics at the College of Charleston.
TRANSCRIPT:
Switzer: Hello and welcome to another edition of the South Carolina Business Review. This is Mike Switzer. In 1990, our country's debt was 40% of GDP. Now it's 100% and rising. Does it matter? Does anyone care? Is there any chance it could go back down? Frank Heffner is director of the Office of Economic Analysis and professor of economics at the College of Charleston. He joins us by phone now to help us with this topic. Frank, welcome back to the program.
Hefner: Well, thank you very much on this fine day in the fall.
Switzer: So tell us, do you lose any sleep over the national debt?
Hefner: I lose sleep over a lot of things, yes in the news. But national debt? Yes and no. So the first thing, Herbert Stein, the economist from years ago, if I paraphrase him correctly, basically said with regard to the national debt, things that cannot continue to go on typically don't. The problem with the debt right now is multifold. One, when I was an undergraduate, my professor said, the debt is not an issue because we owe it to ourselves. Back then, your grandmother bought you some Series E bonds to prepare, you know, save up for college. It was an American lending money to the federal government. so there are a lot of scenarios that have changed. One is the amount of debt that is held by foreign entities is a lot different than it was, say, 50 years ago. And two, the size of the debt is getting very large. And that's putting pressures on things like the bond market, for example. The bond market determines the interest rates like mortgages, 10 year T bonds. The Fed can do whatever it wants. It's not going to be able to manipulate or change the mortgage rate. That's going to be determined by the market forces and what's going on in the bond market. So now the question is, what is the size of this debt going to do to us and what is it mean? Well, debt service is not discretionary. You've got to pay the interest on it. You've got to pay the principal when the bonds come due. The government is going to be hamstrung in its budgeting. It has to pay the deficit first, the interest on it at least. And so that restricts what government can do in terms of providing other services.
Switzer: Is there, any relief on the horizon for this situation?
Hefner: Well, I think Calvin Coolidge was probably the last president that actually ran on a platform of trying to eliminate the debt. Reducing the size of the deficit is about all we can hope for, which would hopefully keep the debt from growing. So the question is, how do you pay off this monster that's out there. Yeah, you could do it by taxes. There is a tax rate that you could apply to a wide swath of people that could possibly help relieve the growth of the debt. We're not going to eliminate it. The other thing that could happen is there's a sort of a, hopeful thought that we could grow our way out of the debt. In other words, economy keeps growing, keep everything as it is, and it'd be taxing the same rates, but a much larger pie eventually. And that could do it. And there are a lot of demands on government right now that signal the debt will just get larger. So basically, there is sort of a wishful thought process. We could tax our way out of the deficit or we could grow our way out of it. And that's going to be very difficult. But right now, the signals on the horizon are the deficit is going to grow, which means the debt is going to grow, which means that's going to put huge pressures on the bond market, which implies long term interest rates, hikes,
Switzer: which is going to pressure the economy.
Hefner: Which is going to pressure the economy. Yes. And the next, the last point on this is there are some strange economists out there that say you could monetize the debt. We can just print the money and pay it off. But countries that do that, we either don't hear much about those governments or their currencies no longer exist. So you don't want to do that. So I just have one quick figure here about inflation. And that is what you paid for in 1970 that cost $12, would now cost $100.
Switzer: Yikes.
Hefner: Yes. And that is why inflation is so pernicious. Why it is, it's a hidden tax. It erodes the value of the dollar. And deficits encourage inflation if you're not careful. So there is a lot on the table right now.
Switzer: Well, Frank, thank you so much for your insight and your time today.
Hefner: Well, thank you. I, wish there were more positive news on that front.
Switzer: Frank Hefner is director of the Office of Economic Analysis and a professor of economics at the College of Charleston. Remember, you can hear this show again at our webpage, SouthCarolinaPublicradio.org and you can find us wherever you find podcasts with the South Carolina Business Review. This is Mike Switzer.
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