The U.S. government’s national debt recently surpassed $22 trillion dollars. This is greater than the entire annual GDP of the United States.
The national debt will get more attention in the coming weeks because the arbitrary debt ceiling will soon be back in effect. The whole debate over the debt limit is a political show, but at least it draws some attention to it.
The debt isn’t the most important issue. Personally, I think the most important issue is foreign policy because a large number of lives are stake. But even from an economic standpoint, war is incredibly wasteful, and we (Americans) would be much better off economically if the U.S. government wasn’t constantly waging war in foreign countries.
One could argue that the Federal Reserve is the most important issue. If you connect the dots, you quickly realize that the U.S. empire would not be able to exist without the Fed or some kind of government control over the money supply. If you didn’t have the Fed to digitally print money and fund the massive deficits, then it would be much harder to wage war.
Even strictly staying within economic issues, the national debt is not the most important issue. Still, it is refreshing to hear some talk of the big picture as opposed to hearing about the latest scandal or culture wars.
The unfunded liabilities are far greater than the national debt. Some estimates exceed $200 trillion. These are government promises that will not be kept in the future. It is impossible. The big ones are Medicare, Medicaid and Social Security. The Fed could massively inflate, but this in itself is a default. The biggest default will come in the form of the age at which people can collect.
When the American public is polled about issues, most Americans will say they are concerned about the national debt. But it is like a guy saying he is concerned about being overweight while he stuffs his face with Twinkies. Talk is cheap.
The national debt is an important issue to the American people until you start proposing massive tax hikes and/ or massive spending cuts. (I don’t even think massive tax hikes would “solve” the national debt, but sometimes that is put out there as an option.)
Most people say they are against the debt until it is one of their favorite federal programs being cut. When Americans are asked what to cut in order to balance the budget, they will typically say we should cut foreign aid. Ok, so that is maybe $30 billion, at best, out of the trillion-dollar deficit. Now let’s figure out the other 97% that has to be cut.
Maybe conservatives will say we should cut funding to Planned Parenthood. Maybe those on the political left will say that we should cut funding for any pursuit of people smoking marijuana. Both sides would be right, but they can’t even agree enough to actually do it. And again, it is a drop in the ocean of the federal budget.
Total Spending Matters
I really don’t care about the deficit and the accumulating debt if federal spending is not changed. I would rather have lower taxes and a higher deficit than having a balanced budget with higher taxes.
In fact, I would be in favor of funding the entire federal budget using debt because it would quickly reduce overall spending. At some point, the debt and inflation would become bad enough that interest rates would rise and the Fed would be forced to scale back or face massive price inflation.
Sometimes we hear that government spending and deficits are unlimited because the Fed can create an unlimited amount of money. But there are limits, assuming the Fed does not want hyperinflation, which I don’t think the Fed members want. It would destroy their own power.
It is hard to see now, but the federal government will eventually be forced to cut overall spending. This may or may not happen in nominal terms, but it will definitely happen in real (inflation adjusted) terms. The annual deficit can’t just keep going higher and higher. And what happens when we hit a recession and tax collections go down?
For fiscal year 2019, the federal government alone (not including state and local) is projected to spend at least $4.4 trillion. Divide that by about 127 million American households. The average family is paying about $35,000 per year for federal spending. This is not all in direct taxes, but the government is spending these resources one way or another. If you take total government spending including state and local, then the average household is paying nearly $60,000 per year.
If we want to increase our living standards substantially, then overall government spending needs to be reduced.
Forget Future Generations
When talking about the debt, it is common to hear the cry for future generations. We are told that we cannot leave this debt burden to be paid by our grandchildren. But make no mistake about this. We are paying for the debt right here and right now.
Every dollar spent by the government, whether it is through taxation or debt, is a dollar of resources that is being consumed and misallocated. It makes us poorer as a whole.
So whether the government spends $4.4 trillion with a balanced budget or a huge deficit, the politicians and bureaucrats are still using up $4.4 trillion of resources. It is one giant misallocation, with some being worse than others.
Future generations do end up paying in some way. Future generations can just write off the debt and stiff the bondholders, but they are still hurt anyway because of the reduced growth in living standards.
Imagine if, in the 1800s and 1900s, there had only been 0.1% annual growth in the West instead of the 2% or more that was typically seen. Even if we had current growth of 5%, we would be living like it was something like 1840. There would have been very low compounding growth. We are the beneficiaries today of high growth rates of the last two centuries.
If government spending were dramatically cut right now, then most Americans would benefit. Their children and future grandchildren would also benefit. There would be some politically connected people who would be worse off in the short run.
Over the long run, even most people who currently get subsidized (on net) by the government would be better off. They would be the beneficiaries of higher living standards. It is much the same way that the middle class has smartphones that didn’t exist a couple of decades ago. We own cars that didn’t exist 120 years ago.
Unfortunately, most people don’t understand the economics of it all. They can only see what is right in front of them. The government will secretly take $35,000 from a family and then pay them off with $15,000 and a bunch of future promises. Even if they got $35,000 in services back, it would still be a misallocation.
At least with the high deficits, there is hope that the government will one day be forced to significantly cut spending. Despite the lack of economic understanding out there, the laws of economics still exist. At some point, the public will stop funding the deficits, and the Fed will be forced to stop funding them or else face much higher interest rates and eventually hyperinflation.It doesn’t seem possible now, but we will eventually get a reduction i