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The Slippery Slope of Projection

About the cover



The Debt Dud

Who's afraid of the big, bad deficit?


Last month, former New Mexico governor and 2012 Libertarian presidential candidate Gary Johnson launched a "Live Free" college-speaking tour at UNM in which he warned students "a national debt approaching $17 trillion is a greater threat to their futures than Iran or North Korea will ever be."

In late March, Rep. Steve Pearce voted for the House budget resolution sponsored by Rep. Paul Ryan, saying it would eliminate the federal budget deficit within 10 years. In fact, of course, the latest Ryan plan — like the shell games that preceded it — does no such thing, relying on smoke and mirrors and dubious accounting (including repealing Obamacare but continuing to count its revenue). But let's focus on what the Second District congressman said about the deficit the Ryan plan purports to tackle: "America's growing debt threatens our economy, our jobs and our national security. Across New Mexico and across America, people are tired of Washington's reckless overspending, and they have demanded a solution. This proposal does what every American family has had to do: It cuts spending, achieves balance, and provides a plan for our future."

(Apparently deaf to irony, Pearce went on to note, "The federal budget has seen balance in the recent past. In the 1990s, Republicans and Democrats worked together to balance the budget and usher in a time of economic prosperity." He declined to mention, however, that those Clinton-era balanced budgets were driven into the red under the George W. Bush administration by tax cuts mostly for the wealthy, the disastrous Iraq war, and a recession enabled by loosened federal regulations — all of which Pearce supported.)

Meanwhile, over in neighboring Arizona, the legislature continues to advance a bill that would make gold and silver coins legal tender — just in case "hyperinflation" triggered by federal budget deficits makes paper dollars worthless. Our own Larry Lightner, in his series last year on "doomsday preppers," interviewed Grant County residents who fear a similar economic collapse under the ever-growing load of government debt.

Are we indeed mortgaging our children's futures? Is the budget deficit cramping the economic recovery? When Uncle Sam looks in the mirror, is he seeing Germany's Weimar Republic, when wheelbarrows full of money were worth less than the wheelbarrows?


There's no question the US faces long-term fiscal problems, particularly in the sustainability of Medicare and Social Security as the population ages. (Strangely, none of the deficit scolds so alarmed about these problems suggests the simple fix of raising the Social Security income cap, which currently exempts wages over $113,700. According to testimony by John Irons of the Economic Policy Institute, raising the cap to cover 90% of all earnings and eliminating it on the employer side of the tax would close about three-quarters of Social Security's projected 75-year shortfall, while affecting just 6% of employees.) But in the rest of the federal budget, deficits are declining and 10-year budget projections basically show a stable outlook rather than exploding debt.

Hyperinflation, predicted by conservative doomsayers with dates that conveniently keep sliding ever further into the future, hasn't happened. Instead, interest rates and inflation remain low, and overseas investors see the dollar as a haven. The US stock market keeps setting all-time highs.

It's not just Republicans who have been persistently wrong about the deficit's supposedly devastating effects. In early 2011, former Clinton official Erskine Bowles predicted a fiscal crisis within two years unless the plan he cooked up with ex-Sen. Alan Simpson was adopted.


Maintaining that the debt is a crippling burden on the next generation — much less that it's hindering the recovery — shows a fundamental lack of understanding about basic economics. Think about the debt the US rung up fighting World War II, which has never truly been repaid. At the end of the war, US debt as a percentage of gross domestic product (GDP) exceeded 100%. By 1950, it was still about 80% — about what is projected for 2019. Did that red ink swamp the nation in the 1950s and early 1960s? Hardly — the US economy boomed.

For the contrary case, look at today's Europe, where advocates of austerity (not unlike the Ryan budget) have actually had their way. In England, the conservative Cameron government derailed the economic recovery. The EU has lagged behind the US in recovering from the recession, and the Eurozone unemployment rate recently hit a record 12%.

Moreover, a 2010 paper by two Harvard economists that many cited as justification for austerity policies to control debt has recently been discredited. The influential paper, “Growth in a Time of Debt,” claimed to show a “threshold” or tipping point for government
indebtedness, after which economic growth sharply declines. Last month, researchers attempting to duplicate the findings finally got their hands on the Harvard economists’ original spreadsheet—and discovered a crucial Excel coding error.

In the New York Times, Nobel Prize-winning economist Paul Krugman has argued, "Debt doesn't directly make our nation poorer; it's essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren't: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. And the main reason businesses aren't investing more is inadequate demand."

True, foreigners hold a growing share of US debt — but US investors' share of foreign debt has increased almost in parallel. Says Krugman, "So the big rise in US debt hasn't been accompanied by an equally big rise in our net obligations to foreigners. And in the past few years, as the budget deficit has exploded, the trade deficit has actually been lower than pre-crisis — which says that the big recent rise in debt is very much a rise in the amount Americans owe other Americans, not a matter of selling IOUs to foreigners."


A case can be made, in fact, that since the federal government can borrow more cheaply than at almost any point in history, prudent fiscal policy should call for increasing the deficit in the near-term. Borrowing to invest in America, such as improving infrastructure and schools, is like a family taking out a mortgage for a house or a business borrowing to expand. (Our current deficit, unfortunately, grew from far more wasteful origins — more akin to taking a home-equity loan to blow on Powerball tickets or to give to your rich uncle.)

If we are indeed "stealing" from future generations, it's not by saddling them with debt. Rather, it's by failing to invest now in ways that will build a better and more prosperous America for them to inherit. The Ryan plan that Pearce voted for would exacerbate that failure, slashing taxes for the wealthiest and corporations while cannibalizing domestic spending.

And while we've applauded Gary Johnson in the past on civil liberties, his economic notions are to fiscal policy what "bloodletting" was to medicine. Maybe while he's on his college tour, the former governor could enroll in Econ 101.



David A. Fryxell is editor of Desert Exposure.



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