Why Debt Matters and Who Is Its Source

During the Bush administration, when America accumulated $6 trillion in debt, with a Republican Congress and White House, at a time that there was absolutely no need for it and before the baby boomers had even started to retire, a Republican commentator stated that Reagan had proved that deficits do not matter.

Yes they do. Debt sucks investment capital out of the economy and slows economic activity to a crawl. Over the long term, it results in downgrading of the debt and constantly growing interest payments and, resulting from that, a constantly growing debt, still less capital available for investment, still higher payments and still higher debt. We see the endgame of that for Argentina
in the crisis of 2001 and 2002, when it had to default on its $300 billion debt. For America, whose debt is 50 times that amount,  the endgame is unaffordable, and not only for America.

This is why under Clinton administration, when debt was being brought under control, there was a vast economic boom even though taxes under Clinton were higher than they are now. And it is also why under Bush, who gave America close to a half of its present debt at the time that there was absolutely no need for it, the economy did not register continued growth. Deficit-cutting policies freed investment for productive sectors of the economy and convinced the investors that it was safe to invest in America. Debt-generating policies ended that confidence while again tying up investment capital in government bonds.

One problem is that, when GDP is used as the sole measure of economic activity, practices that are economically short-sighted can in the short term result in a rise in GDP and thus be seen as adding to economic strength of the country. But what does GDP actually measure? GDP measures consumption. And while it is no secret that consumption can be made to rise through short-sighted practices, these short-sighted practices do not result in sustained economic well-being. So yes, expansionary fiscal policy can raise the GDP, but it does not improve the health of the economy.

It is important that this distinction be made, as many people make the error of seeing GDP as the only economical indicator with value. GDP measures consumption; it does not measure economic strength or economic health. And over the long run of policies that are economically unsound, GDP suffers as well, but more importantly so does the population.

So yes, deficits and debt matter. And while most of the talk on the right-wing is about blaming Obama or Democrats for the debt, it was the gross Bush and Republican mismanagement that brought about the bulk of the problem. Bush inherited a booming economy and a treasury on the mend. Obama inherited a vast debt and a vast economic crisis. And while deficits under Obama continued to be a problem, he had an excuse, which Bush did not.

Now it is common among right-wingers to blame everything on the Left even as they themselves claim to be big responsible men. But this problem was caused precisely by right-wingers. Reagan started it with vast deficits; Bush took them to a far higher level than had Reagan, at the time when there was no need for it and before the time that there was. This problem is entirely a creation of Republicans, and they deserve the full blame for it. And it is only through restoration of fiscally responsible policies, such as existed under Clinton, that economic health of the country can be restored.