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Experts: Economic Road Ahead Could Mean Higher National Debt

Story and photo by Emily Tower, Staff Writer

(Editor’s note: The Pointer View presents a special series about the current economic crisis, its causes, the impact it has on the world and possible solutions. The series contains interpretation of facts by experts and is not intended to be commentary about any political affiliation and does not necessarily reflect the official view of West Point, the U.S. Military Academy. This is the series’ fifth and final story and discusses the economic future.)

Ambitious counters who wish to tick off one dollar of the current national debt a second at a time need to have started three ice ages ago to finish by now––an awfully tricky task considering Homo sapiens didn’t yet exist back then, according to scientists.

The bill owed by the United States currently sits at around $11.3 trillion. Just to count a tenth of that total a dollar per second, you’d have to start thousands of years before the wheel was invented. One trillion seconds equals about 31,710 years.

To count a dollar per second of what some economists think the national debt could grow to after programs designed to stimulate the economy get added to the bill––$42 trillion–– you’d have to start about the time fire was discovered by what scientists call human ancestors 1.4 million years ago.

As hard-to-fathom as these figures are, they are fueling quite a debate about the fate of the American economy. Will the programs even work in the first place? How will adding to an already gargantuan national debt affect future generations? And what about the dreaded “I” word––inflation?

Currently, inflation is not as frightening as it could be, Maj. Travis Habhab, U.S. Military Academy finance and economics instructor and officer-in-charge of the Finance Investment Club, said, because salaries tend to increase along with prices.

Inflation, simply stated, is an increase in prices and is caused by an increased money supply. It sometimes is measured without including the price of energy or food because energy prices fluctuate so frequently and food prices are so dependant upon energy costs.

The national inflation rate in 2008 and so far this year is hardly measurable at less than 1 percent, Habhab said. The average inflation rate for several years before that was around 3 percent per year. For military personnel, annual salary increases have outpaced inflation for the last several years. Troops received a 3.9 percent pay raise Jan. 1. A proposed 2.9 percent salary increase is being considered for next year.

The economy currently is sagging because Americans are not spending as much money as they have in the past. To help solve the problem, the government attempts to increase consumer spending by increasing the money supply, which lowers interest rates. This increased money supply typically sparks inflation.

“As the economy starts getting better, inflation can become a problem instead of recession,” Habhab said. “Inflation could be a sign when the recession starts going away, or it could be a sign the economy is having different problems.”

Habhab does not expect inflation to cause problems in the American economy. Just as lowering interest rates can lead to inflation, raising them can help control inflation. Inflation becomes problematic when prices significantly rise more quickly than salaries, he said. An example is last year’s gas prices that peaked at a record national average of $4.11 a gallon for regular, according to AAA. In New York, gas prices hit as high as an average of $4.31 for regular––also a record.

“Gas prices last summer rose so quickly, paychecks didn’t keep up,” Habhab said. “So, each Family had to look at how much driving they wanted to do, whether they should carpool, that kind of thing.”

Gas prices have fallen since then and currently sit at an average of $2.48 for regular in New York, according to AAA. That’s an average of 28 cents more than a month ago. Though higher gas prices can cause a pinch in the wallet, they could be a sign the economy is improving, Habhab said.

“As consumers buy more goods and the demand for products increases, there is more demand for transportation (and oil), which increases gas prices,” Habhab said. “As there is more demand for products, there is more demand for transportation,” Habhab said.

Other signs the economy could be improving include an increase in housing prices, expanding businesses and several months of steady increase on the stock market. An increase in new businesses being listed on stock exchanges also could be a sign of an improved economy, Marshall Carter, chairman of the board of directors of the New York Stock Exchange Group and USMA class of 1962, said during a spring visit to West Point.

“The real key of knowing when we might be getting out of this is when it goes from a trader’s market to an investor’s market,” Carter said, explaining today’s market suits traders rather than investors trying to grow wealth. “You’ll know it’s an investor’s market when there is a backlog of (new business stock) coming on the market and when we start to see the gains stick.”

The stock market has been steadily increasing for the last two months.

“Whether stock prices will continue to rise or not, I’m not really sure,” Habhab said. “It’s a sign the economy is not getting worse, not necessarily that it’s getting better.” One negative trend that could continue even as the economy improves is unemployment, Habhab said. Unemployment in the United States currently is about 9 percent––an increase over the 5.8 percent this time last year. Some economists fear unemployment could increase to as much as 10 percent before it improves because it takes time for businesses to recoup losses to a recession and begin recruiting new employees, Habhab said.

To help speed that process, a collection of legislation known as the stimulus package has been put into place. The point of the stimulus package is to strengthen the economy by increasing spending. Part of the stimulus package is designed to help consumers spend more money. Another part involves increased spending by the government including billions of dollars in infrastructure improvements, extra law enforcement and education, among other things.

The estimated bill authorized by Congress for the stimulus package is around $800 billion. Several state governments have argued the package will cost trillions in lost revenue over time. Federal taxes were lowered in March to help workers keep more of their paycheck in hopes the extra money would be spent and help stimulate the economy. For most workers, state withholdings automatically were lowered along with federal withholdings, meaning a loss of revenue for federal and state governments. This could mean big debt.

“To spend this much money, you have to get it from somewhere,” Maj. Carl Wojtaszek, a USMA economics instructor, said. “When you are spending a lot more money than you are taking in, you have to borrow the rest. The government will have to pay the money back either through a tax increase or by decreasing the size of government in order to have tax revenue to pay down the debt.”

The problem is if taxes increase, paychecks often do not increase to make up the difference, unlike with inflation, Wojtaszek said. But, he doesn’t expect a significant tax increase any time soon.

“Nobody wants to pay more taxes, so (lawmakers) tend to put the burden on people who can’t vote (future generations),” Wojtaszek said.

He cited Social Security as an example. The first recipients of Social Security did not pay into it, and the program likely won’t be stopped because people who have paid into it will expect to receive from their investment.

But, there is no indication any increase in taxes will necessarily take place at all. Debt can be paid by using other debt, much like using one credit card to pay off another. The current $11 trillion national debt is manageable, in theory, because $14 trillion worth of goods and services are produced within the United States annually, Wojtaszek said. And the fact the debt exists is a good sign.

“In theory, (national) debt is not a bad thing,” Maj. Joe Kim, a USMA economics instructor, said. “Someone is still lending the money. Other countries have faith our economy will remain intact.”

American spending habits have changed since World War II, leaving the national savings rate at 1-3 percent, Wojtaszek said. Unlike in generations past when national debt was funded by Americans through bonds and other programs, current bills are paid by borrowing money from banks and other countries. But, turning to other countries for financial relief creates a litmus test of U.S. economic health.

“Foreign buyers feel it is safer to put their money in our economy than in their own country,” Wojtaszek said. “The question is when does the debt become so big, people lose faith and don’t want to lend us money?”

Habhab said there needs to be a focus on reducing debt, but for now, the debt that would take eons to count dollar by dollar still “is not an issue of an end to the American economy.”