To jolt the economy and end a recession born out of too much homeowner debt, Congress and the US Treasury this week plan to take on at least $1.1 trillion in new national debt. This "good" debt will be thrown at "bad" debt, in Keynesian logic. It's not really a Ponzi scheme. But that's true only if it works.
At the very least, the expected stimulus of some $827 billion and a new bank rescue of $350 billion will serve as a safety net to keep jobless Americans and the economy from sinking further. Some $50-$100 billion, for instance, is expected to go for mortgage relief.
But it is a leap of faith, even among Keynesian economists, that throwing money into a debt-ridden economy will thaw frozen credit markets and revive the kind of entrepreneurial risk-taking that creates jobs. Meanwhile, it takes little faith to see the debt costs of that leap.
This year, the federal deficit in spending, as a percentage of the gross domestic product, will be the highest since World War II. The total federal obligations for future spending is $56 trillion, or $483,000 per household. Much of that debt commitment is for Medicare. At the same time, Americans still owe about $14 trillion on mortgages, credit cards, and car loans – more than the US economy produces each year.
As lender of last resort, the federal government can live with a large "debt overhang" when others who live beyond their means cannot. It can rely on taxpayers, the dollar printing press, and, for now, foreign countries willing to buy US Treasuries. But this latest spike in national debt should finally force Americans to accept that they and their government must lick a chronic addiction to debt.
Tapping new credit cards to pay off old ones isn't that different from tapping future taxpayers to pay off today's government bills.
An overreliance on debt has also eroded the virtue of thrift. Personal savings were near zero in 2007, down from 11 percent in 1985. Only as the recession struck last year did savings start to rise slightly.
Piggy banks are now antique items. Maybe it's time to bring back National Thrift Week, which was honored from 1916 to 1966 until the debt culture hit America.
A host of reforms are needed to better manage debt. Exotic financial products must be better regulated. Reforms are under way for appraisers who determine the worth of homes and for credit-rating agencies that evaluate securities. Too many companies outsourced these tasks of assessing risks with little oversight, and too many conflicts of interest arose that resulted in overestimations of the value of assets. Debt was cheap, so why not party on?
Congress must now lead by example. Even as it takes on more debt to end a debt-triggered recession, it must commit itself to reining in the long-term costs of Medicare and Social Security, which hang over the nation's finances as the biggest mortgage in history.
One path is for lawmakers to set up a commission of respected leaders to identify savings or new taxes for these entitlement programs. Congress then must vote yes or no on the recommendations.
Such a bite out of the national debt would send a signal to Americans that life on a risky installment plan should no longer be the American way of life.