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The consequences of the Great Policy Blunder – shutting down our economy in a futile attempt to escape a viral pandemic – are numerous and devastating. Widespread unemployment, cratering GDP, educational disruption, escalating overdose and suicide rates, and increased racial tensions are just part of the penalty we are paying for decisions made.
But when the dust has settled and we’re in the New Normal, whatever that is, we’ll have to deal with the most lasting of all the self-inflicted wounds – the broad economic destruction that will be the result of piling onto our debt load.
Politicians seem oblivious to the fact that those are real dollars being spent to mitigate the effects of the lockdown. The CBO pegs the additional debt so far at $2.7 trillion since last October.
The federal debt, for the first time since WWII, is about the size of the entire American economy. $30 trillion totals are projected within the near future.
Since the beginning of the century, American politicians have been kicking this can down the road. But debt must be reckoned with eventually. The longer we put it off, the more painful it will be.
Yet Americans aren’t all that concerned. Pew Research reports that in June, just 47% thought the deficit a “very big problem,” down from 55% two years earlier.
Oddly, concern about the debt rises with age. Among Americans 65 and older, 58% deem it a “very big problem” compared with 33% of apparently clueless 18 – 29-year-olds, whose future is at stake.
Americans have normalized trillion-dollar annual deficits, which once sparked concern but in the Trump era are virtually expected. We’ve seen the same dreary scenario time after time, with Democrats demanding more spending and Republicans arguing them down some but then caving again.
The hapless response to the viral pandemic was first to cripple the productive economy and then to counter the economic effects with – more debt-fueled spending. $3 trillion was shoveled out, including head-scratchers like unemployment payments far exceeding pre-COVID levels and $1000 checks to income-eligible Americans, including dead ones and nursing home residents.
When the near doubling of annual federal spending failed to solve either the fiscal or medical crises, House Democrats had the answer: spend $3 trillion more! This level of inanity may have been a mere negotiating ploy, except Speaker Pelosi rejected the $1.3 trillion counteroffer on the grounds of “that’s not enough.”
We’ve reached a point where our options are becoming constricted. The Federal Reserve has lowered interest rates to near zero and vows to keep them there for several years. This makes debt service more affordable and gooses equity markets as investors flee debt.
But ultra-low interest is like a narcotic. It makes you feel better but can kill you eventually.
First, it punishes thrifty savers who are forced into more volatile investments that may not be suitable for them. Worse, easy money prolongs wasteful government spending and speculative investments rather than productivity-boosting innovation. The result is a “debt trap,” in which central banks accumulate so much unproductive government and private debt that raising rates would produce an unthinkable economic catastrophe. Doing nothing perpetuates the cycle.
More taxes, especially on high earners, are widely thought to be part of the answer. But taxes always raise less money than forecasted because they stimulate tax avoidance behavior. High and steeply graduated tax rates also transfer assets from wealth creators to the government, thus limiting potential economic growth, not a good idea if you’re trying to increase revenue.
Historically, governments deep in debt eventually expand the money supply and pay their obligations with funny money. But this is the most dangerous of the options. It punishes all in a vicious cycle of rising prices, staggering interest rates, widespread shortages, and falling standards of living.
The optimal solution would be to reduce spending. But once-proud Americans have become fond of Big Government.
All beneficiary groups aggressively defend their “entitlements.” Politicians advocating even modest fiscal reforms are fiercely demagogued. Elections turn into promising contests. The beat goes on.
Ignoring reality is never a good idea in the long run. We’re wasting time while the hole gets deeper.Published in