Paying off the National Debt
Think the national debt burdens future generations unfairly? If so, we can pay it off. All it takes is a one time wealth tax of 15.6%. Painful but possible. Any takers?
I view the national debt as equivalent to a business’s long term debt. A financial consideration, one with real implications for our economy. An important issue, but one of many. Matthew Yglesias even makes a good but counter-intuitive argument that our economic health would improve if we increased rather than decreased it.
But others proclaim reducing the national debt a moral imperative. If they’re right, if the impact on future generations rises to the level of immoral behavior, then clearly we must act.
How much debt are we talking about?
The Gross National Debt is $16 trillion dollars and growing. The public debt portion, held by third parties, foreign and domestic, is $9.7T. The other $6T is internal borrowing against trust funds and the like, debt internal to the federal government. These trust funds are required by law to invest in assets backed by the full faith and credit of the United States. The moral imperative for attacking the $9.7T seems much stronger, so let’s focus on that.
What action should we take?
In the first 2012 presidential debate Romney talked about three approaches: cutting spending, growing the economy, and raising taxes (putting that last lever off limits). Incremental, indirect actions seem an insufficient response to a grave moral imperative—who knows how long such an approach would take to pay off any of the debt, forget all of it?
Meaningfully attacking the debt requires paying it off, now. What level of debt is OK to pass on to future generations? Let’s avoid the moral hazard attached and target zero.
Debt is a claim against wealth, not income
The debt is frequently described relative to Gross Domestic Product (GDP), confusingly. GDP is an income statement view; long-term debt belongs on our balance sheet. The Federal Reserve’s balance sheet for households and nonprofit organizations (Federal Reserve Z1, Table B.100) puts our aggregate net worth at $62T. So the $9.7T public debt is about 15.6% of our net wealth.
Everyone gets a share, proportionate to their wealth
There are 211M tax units in the US (let’s call them earners). To pay off the public debt we assign each earner a proportional share, based on wealth (balance sheet), not income.
Since the wealthiest 20% own 85% of the country’s total wealth they owe about $8T of the total. Earners in the 40 to 60% net worth range own a $400B share, and those between 60 and 80% about $1T.
These tiers have enough assets to handle the cash flow challenge, no doubt with real pain. We could cover the $19B owed by the least wealthy 40% by cutting that amount of spending for one year.
The scale of the allocation ranges from $230 per earner for the poorest 40% to $1.6M for the wealthiest 1%.
Step up or calm down
I personally reject the moral imperative framing, but I’ll happily pay my part along with everyone else if it will stop the posturing. That’s the key point, of course: calling it a moral imperative is just words. I see no serious risk of anyone juxtaposing their money with their mouths on this one.