Increased debt due to income stagnation, not increased borrowing or consumption;

It’s a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It’s also well-known that household borrowing has increased sharply over this period. Indeed, for most people — including many economists — these are two ways of saying the same thing. In fact, though, they are quite different claims, and while the first one is certainly true, the second is not.

How can debt have increased if borrowing hasn’t? Though this seems counterintuitive, the answer is simple. We’re not interested in debt per se, but in leverage, defined as the ratio of a sector’s or unit’s debt to its income (or net worth). This ratio can go up because the numerator rises or because the denominator falls…

Think of it this way: If you borrow money and your income in dollars rises by 10 percent a year (3 percent real growth, say, and 7 percent inflation) then you will find it much easier to pay off the debt when it comes due. But if you borrow the same amount and your dollar income turns out to rise at only 4 percent a year (the same real growth but only 1 percent inflation) then the payment, when it comes due, will be a larger fraction of your income. That, not increased household spending, is why debt ratios rose in the 1980s.

Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing by shorter time horizons and a general lack of self-control, and the liberal theory explaining it by efforts of those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking. 

Chart courtesy of Mother Jones. Above, J. W. Mason takes out the popular misconceptions that the debt increase is due to increased borrowing or increased consumption. In reality, the consumption and borrowing hasn’t changed significantly- it’s the stagnation of income that has caused the issue.

This is adjusted for inflation. I don’t think our education system is about education anymore.

politicalprof:

US Bond Ratings in Comparative Perspective. High ratings = cheap loans. Default will cause the bond rating to be cut, compelling interest rates higher. This, in turn, will make federal, business AND personal borrowing more expensive.

It’s whack a mole people: you might save money crashing the budget in the near term, but you’ll pay for it in the long run. You always do.

From the New York Times.

Does anyone really believe that one of our two major political parties lacks this information? That they genuinely don’t understand what default will do? I’m sick of pretending like Boehner has good intentions, that he’s some sort of a good-natured buffoon that doesn’t understand the consequences of his actions. He, and the majority of current sitting Republican legislators, know exactly what will happen if the US defaults: the economy will tank. They’re hoping Obama gets the blame, and see middle and lower class American’s economic safety as collateral damage to take out ‘the other side’.

First, we don’t really have a “spending problem.” We have what grown-ups and people who are good at arithmetic like to call a “revenue problem.” In fact, federal revenues have dropped to 15% — a 50-year low — and is a driving factor behind the deficit Republicans created and now pretend to care about.

Second, the “American people” are really ”demanding” that policymakers spend less. What they’re actually demanding is a balanced approach that cuts spending and increases revenue. We know this to be true, because the American people have been asked about this many, many times…

And third, “somebody’s gotta get serious about cutting spending”? Actually, somebody’s gotta get serious about raising the debt ceiling so the nation can pay its bills.

As one prominent official recently explained, failure on this issue “would be a financial disaster, not only for us, but for the worldwide economy. I don’t think it’s a question that’s even on the table.”

The official, of course, was John Boehner.

Steve Benen

As we’ve noted, my colleagues Kathy Ruffing and Jim Horney have updated CBPP’s analysis showing that the economic downturn, President Bush’s tax cuts, and the wars in Afghanistan and Iraq explain virtually the entire federal budget deficit over the next ten years.  So, what about the public debt, which is basically the sum of annual budget deficits, minus annual surpluses, over the nation’s entire history?

The complementary chart, [above], shows that the Bush-era tax cuts and the Iraq and Afghanistan wars — including their associated interest costs — account for almost half of the projected public debt in 2019 (measured as a share of the economy) if we continue current policies.

The tax cuts are the largest contributor to both our debt and our deficit.  If the GOP was so concerned with the debt and deficit, why don’t they eliminate these tax cuts? What about the tax breaks we give big oil?