The Elbert Files: Bad debt vs. good debt
The U.S. government and the state of Iowa are headed in opposite directions on debt accumulation. While federal officials pile it on, Iowa leaders shun it.
Both are wrong.
The federal deficit totals more than $23 trillion and is growing at a rate of roughly $1 trillion a year, which many experts say is too much, too fast.
Republicans, who traditionally scorned big deficits, now follow the lead of our real estate developer president and ignore them.
The federal deficit is often compared to personal borrowing, which is a mistake.
Individuals are expected to pay back car loans and mortgages in specific time frames. But governments, unlike people, are perpetual and can roll debt into the future indefinitely.
That’s a big difference.
Alexander Hamilton was among the first to recognize that government debt could serve purposes beyond facilitating the exchange of goods. He used Revolutionary War debts to expand the money supply and help the economy grow.
Public debt is considered a positive when used to build infrastructure, provide pensions (Social Security) or to achieve specific goals, such as job training or improving education.
There are limits, of course, on how much is too much.
One way to measure the too-much factor is to divide debt by production, or gross national product. Studies by the World Bank found that when debt-to-GDP ratios exceed 77% for an extended period of time, economic growth slows.
The most recent ratio for the United States is 107% – 78% when you don’t include Social Security debt. Neither number is good, particularly given the increases following recent federal tax cuts.
Historically, the U.S. debt ratio has increased during wars and recessions, and it has fallen when crises passed. Until recently, the all-time peak was around 100% at the end of World War II.
After the war the debt ratio settled into a range of 30% to 50%. But it climbed sharply during the 2008 recession and has not stopped.
The only two ways to lower the debt ratio are to reduce spending or increase GDP. Today’s leaders are inept at the former and incapable of the latter.
Political leaders often “take on too much debt because the benefits make them popular with voters,” wrote economy expert Kimberly Amadeo for the financial website Balance.com.
When debt reaches critical levels, she added, investors demand higher interest rates, and that amounts to “driving with the emergency brake on.”
That’s basically where the U.S. economy is now.
But Iowa’s economy is different. Iowa’s debt ratio is consistently ranked among the lowest in the 50 states. That’s largely because Gov. Kim Reynolds and her predecessor Terry Branstad are rock-solid conservatives who believe in a pay-as-you-go philosophy.
While that may sound good, it’s resulted in Iowa’s economic growth consistently ranking below the national average.
Since the 1980s, the only consistent exception occurred during the governorship of Tom Vilsack (1999-2007). Part of Vilsack’s success was a strong farm economy, over which he had little control.
But another factor was the visionary way Vilsack used debt.
Vilsack’s Vision Iowa program borrowed $300 million that was used to jump-start local economies by investing in quality-of-life projects in partnership with local governments and private citizens.
Vision Iowa’s cultural and recreational venues created more than $2 billion in capital investments that drove economic development in communities large and small.
In 2015, Vilsack suggested Gov. Branstad create a similar effort that would borrow money at low interest rates to support projects aimed at improving water quality in the state.
But Branstad and Reynolds opposed his plan, leaving Iowans to pay for the crushing federal debt, without the benefit of a visionary investment that would significantly improve the quality of Iowans’ lives.