- The Washington Times - Thursday, August 5, 2010

ANALYSIS/OPINION:

In their paper “Growth in a Time of Debt,” economists Kenneth S. Rogoff and Carmen M. Reinhart argue that advanced economies tend to see economic growth stagnate when their ratio of debt to gross domestic product (GDP) exceeds 90 percent.

According to just-released numbers from the U.S. Bureau of Economic Analysis, our debt just hit this red line: The bureau’s estimate for the nation’s second-quarter GDP is $14.597 trillion, while our total debt is $13.302 trillion. That gives us a ratio of just over 90 percent.

And we show no signs of slowing down.

Besides sounding ominous, what does it really mean? Without a more relatable context, it’s hard to understand the significance of these statistics.

Few of us have much experience managing a nation, but most of us do know what it’s like to obtain a mortgage and balance a household budget. To be clear, the ratios are not necessarily the same, and there are big differences between a nation’s economy and a family’s income. But it’s a helpful analogy with which to start.

If you go to a mortgage broker to start the process of buying a new home, the broker will ask how much money you make. The general formula is that a family can afford a total mortgage of about three times its annual income. That translates to a suggested monthly payment of about 30 percent of take-home pay, leaving room for other expenses.

During the subprime bubble, lending standards got loose. Too many people took on mortgages that were more than they could afford. So in order to make their monthly house payment, they racked up big balances on their credit cards or even compounded the problem with a second mortgage.

Today, the United States is like a family with a very big mortgage, right at the edge of being able to pay its other bills. On the outside, things look pretty good. We’ve got a nice car, a swimming pool and a big-screen TV that’s the envy of the neighborhood. But at the end of every month, there’s just not enough money to go around, so we borrow a little more or defer paying off our debts. It’s a vicious cycle.

If a friend came to you and said he was worried he wouldn’t be able to afford his mortgage payment, what advice would you give him? Would you say he should trade in his new Lexus for a ‘98 Camry and cancel that trip to Las Vegas? Or would you say he should borrow more money and buy 13 more houses?

If the United States is a family with a mortgage it can barely afford, the Congressional Budget Office predicts that our current debt trajectory equates to our planning to buy 13 more houses. This story cannot have a happy ending.

Up to a certain point, borrowing can be a good thing. A modest mortgage gives families the stability of homeownership. A modest national debt enables nations to invest in infrastructure and future economic growth. But for families and nations alike, there is a point at which the weight of that debt will overwhelm the ability to pay it off. We’ve already seen what happens when families can’t pay the bills: Last year, a devastating 2.8 million homes were lost to foreclosure. A million more are expected to be in default shortly.

Defaulting on a home loan is painful enough, but defaulting on a nation’s debt? That’s a disaster of unthinkable proportions. We are rapidly approaching a point where we have never been before. Congress must take bold action now to stop promising benefits we can’t afford and spending money we don’t have.

Michael Saltsman is research fellow at Defeat the Debt, a campaign of the Employment Policies Institute.


Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide