The following article was published in the Fox Valley Labor News on August 4, 2005.
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Additional Reading: “A Lesson from Nature.”
National Debt or National Disaster?
by Adam Florzak, member | About the Author
United Auto Workers Local 145
The national debt now amounts to over $7.8 trillion. A trillion is one of those numbers that is almost too large to comprehend, but the following conversion may help. One trillion dollars is enough money to make one million people millionaires.
Unfortunately, the national debt is not the money that we own, but the money that we owe. According to the U.S. Census Bureau, our country is home to slightly less than 300 million people, so our national debt breaks down to over $26,500 for every man, woman, and child living in America. While politicians are often fond of quoting these figures for their own political gain, they never actually bother to explain the details. Americans need to learn the truth about our national debt.
Despite the obvious problems associated with debt, politicians often seem unconcerned by their current spending habits. While not every politician feels this way, there have always been politicians who have catered to the needs of a select few at the expense of the many. It’s no secret that running for public office requires a lot of money, and corporations are often the major campaign contributors. Even those candidates with the best of intentions find themselves making compromises and concessions in order to secure adequate campaign financing.
Once in office, these politicians are forced to create spending packages for the corporations that helped them get there. In order to support these lucrative contracts, the government must then issue interest-bearing debt. Further compounding the problem is the fact that many treasury securities earn high rates of interest, and government bonds are viewed as a risk free investment. Therefore, if our country were not in debt, many wealthy Americans would have no safe place to invest their money.
As unbelievable as it may seem, many politicians are unaware of the fact that the national debt is rapidly becoming a national disaster. This is because they have been trained to view the national debt in terms of the gross domestic product (GDP). The GDP represents the total value of our country’s industrial production, and this figure is typically used to measure the growth of our economy. In 2004, our national debt amounted to 63.7% of the GDP, and since this percentage remained within historical averages, Congress was able to justify its massive deficit spending. However, referring to the national debt in terms of GDP is a dangerous accounting trick.
To better illustrate this point, it would help to look at the financial statements of the Big Three automakers. For the trailing twelve months, General Motors had gross revenue totaling $190.72 billion. In comparison, Ford produced $173.74 billion and Chrysler $170.44 billion. Judging by these figures, it would be easy to assume that General Motors was making the most money. After all, GM produced $16.98 billion more than its nearest competitor, and that is a tremendous amount of money. However, the value of production does not matter nearly as much as the profit gained from that production. Even though General Motors had the largest revenue, it had a negative profit margin, and this means that the company actually lost money. During this same time period, Ford had a profit margin of 1.46% compared to a 1.66% profit margin for Chrysler. Therefore, while Chrysler had the lowest total revenue, it also made the largest actual profit.
While the Big Three are not doing particularly well right now, neither is our country. The value of our domestic production continues to grow, but as a country, we have a negative profit margin due to our rapidly expanding trade deficit. Global competition has pushed corporate profit margins down to almost ridiculous levels, and even though our productivity is increasing, we do not benefit from this production as much as we once did.
Furthermore, by viewing our national debt behind the mask of production, we are only deceiving ourselves. After all, we cannot use the GDP to repay this debt; we can only use the profit derived from this production. Calculating this profit is not as difficult as it may seem, because income taxes are applied against profit, not production. Since taxes are the main source of government revenue anyway, this is the only logical way to assess our national debt.
For fiscal year 2004, the federal government collected $809.0 billion in individual income taxes and $189.4 billion in corporate income taxes. The government does collect additional taxes for programs such as Social Security and Medicare, but this money has technically been allotted for a specific purpose. Nevertheless, these taxes are automatically included in the budget, and a single accounting entry allowed the government to “borrow” $198.7 billion from these programs in 2004.
Soon enough, the government will no longer be able to borrow money from Social Security, so it does not make sense to include this surplus in the debt analysis. Therefore, government revenue totaled $1,146.8 billion in 2004. While that number is impressive, the interest expense on the national debt amounted to $321.6 billion for the year, and this means that 28.0% of our available tax revenue went towards paying the interest on the national debt. Personally, I find this fact rather alarming. In fact, it no longer seems like such a good idea to compare our national debt to the GDP, because this has given us a false sense of security.
Furthermore, if Social Security faces an upcoming financing crisis, then the entire government faces the same financing crisis. When the Baby Boom generation retires, there will be a significant decline in the amount of income tax revenue collected. Therefore, it is imperative that we act now to reduce our record budget deficits and take control of our rapidly expanding national debt. Not to mention that politicians have been able to hide the deficit problem by borrowing from Social Security, but in a few short years, Social Security will be the one that needs to do the borrowing.
Since the solvency of our government is largely dependent upon the solvency of our workers, the best way to fix our budget problems is to fix the economy. If American workers have better jobs that pay higher incomes, they will also pay higher income taxes. Therefore, the solution is not to raise taxes, but to raise incomes.
American corporations should stop trying to compete for the lowest price, and start trying to compete for value. In an effort to lower costs, corporations started moving their manufacturing bases overseas to capitalize on cheap foreign labor. Unfortunately, other corporations were then forced to adopt similar practices in order to remain competitive in the marketplace.
Consequently, many American workers lost and will continue to lose good paying jobs, and they will no longer have the purchasing power that they once did. The end result is that consumers are more price-conscious than ever before, and this continues to drive down profit margins and force corporations to outsource even more jobs. However, this practice has proven to be very shortsighted.
Our country must promote strong American industrial production, and the government should do everything in its power to protect American jobs and American workers. This does not mean that we should resort to outright protectionism, because there are still many opportunities for profit in the global marketplace. We simply need to focus our attention on profit margins rather than production levels. We need to work smarter, not harder.
