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Piling on Debt Is Not the Answer
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 Economics
Couldn’t agree more but what do you think the solution is? The politicians are merely a reflection of the polity which clamors for more and more yet steadfastly refuses to pay for it. We are the problem.
Another thought: as bad as the US is, it’s not even in the top 10 in terms of debt to GDP ratio.
https://tradingeconomics.com/country-list/government-debt-to-gdp
All good points. It’s as if nobody was in charge which happens to be true but it gives us insights into what groups are driving it. It isn’t folks who earn by producing and trying to save and invest. It isn’t old wealth who live off stocks and bonds. I think it’s mostly young, very smart, poorly and narrowly educated, over paid folks who run or staff giant falling cost companies such as Google or Amazon, probably senior bureaucrats and some politicians who earn their living by milking the system and produce little of value. Of course it includes the super wealthy like Soros, who exploit opportunities stupid polices produce. Its fed and multiplied by ignorant professors who run college classes, and the kids they miseducate not to mention passive folks who believe televisions talking heads . Can it be corrected? If we had time we might, but it’s not at all clear to me, given the nature of China and their growing power and wealth, whether we have the time. So we have to try to figure out what to do rather quickly. Where to start? Well first we must not elect Biden. Then we need to get serious about school choice, deep bureaucratic cuts and we cannot raise taxes enough to cover the medium term, so we need to get used to financing government increasingly through debt and just simplify and lower taxes. Interest rates will spike which is better than inflation but if we lower and simplify taxes the economy will respond very rapidly. The fact is debt isn’t the problem its the size of the non productive sector, millions not producing and too few able to save.
I think this is the single most important financial crisis of our time, and the public, as well as our politicians, have gone into a trance where it is all magically forgotten. One ominous day in the future, some investors are going to look at U.S. Treasury Bonds and say “these are not worth buying anymore.” Then all Hell will break loose. The first hammer to drop will be that the 100 million (yes, that’s right!) Americans receiving Welfare payments will suddenly be cut off. Paradoxically, that could be a good thing because people will frantically rush out to look for jobs, instead of living off the labor of others.
I agree with this except I think the absolute size of the debt is a problem by itself also. Though the “non productive sector” may be the reason we got here in the first place, since 2/3 of all our Federal Spending is on Entitlement Programs.
Perhaps stop the insane spending? Somebody has got to take charge despite the public’s lack of concern.
Most of the politicians bought into Keynesian economics back in the 1930s, while trying to get out of the Great Depression, then built up the myth that that’s what got us out of it, and we should keep doing so forever.
Keynes had a point – but his actual theory was that a government should build up a surplus during good times, and use it to cushion the economy when things went bad, or spend it on things like wars and disasters. Under his original idea, we would have walked into the COVID lockdowns with a nice big pile of cash, with the ability to spend a bunch of money for an extended period without effort.
Unfortunately, that “build up a cushion” idea went out the window post-WWII. Keynes even pointed out that he no longer thought his own idea was a good one, because the government wouldn’t stop deficit spending.
As a side note: I walked into the COVID shutdown in March with five months of cash on hand. As of right now, due to the COVID “bonus,” I have six months of cash on hand.
Funny how just a few short years ago the ultra-frugal Speaker wouldn’t even toss a few $B in pocket change at the President’s border wall and now she throws $ Trillions around like it was nothing.
Stop right there. I stopped listening to this disreputable whore back during the passage of Obamacare. No doubt Pelosi could crank up the old machine and get them to tell us that a $3T stimulus would actually bend the cost curve down. COROLLARY: Trusting the CBO is not the answer either.
People keep pretending that CBO is accurate and scientific – but their job is to take very specific questions from politicians, crunch the numbers, and reply with “assuming these claims, this is what would happen.”
So if a politician wants “how much tax income will we get if we increase taxes by ten percent, assuming no other effects,” the CBO won’t even talk about the Laffer Curve.
No doubt we are totally screwed. The only problem is that cause and effect is so far apart nobody cares to look. It reminds me of those people I know that keep borrowing and spending until they go bankrupt just to do it again and again and again.
In our country sooner or later the piper will demand to be paid. The gods of the copy book demands it. I just hope I am out of here before that happens. Sad is it not that we are getting to the point of time where death is preferable to what is loaming over the horizon?
Who’s going to “take charge?” Not Trump. He’s promised not to touch entitlement spending and that’s been an easy promise for him to keep.
I’m afraid you’re right.
Yup. But even setting Trump aside, the Republican Party is only unified on cutting spending when we are out of power. When we have the White House and at least one house of Congress, it’s a lonely Republican who will stand up and say this is nuts, we’ve got to live within our means. At least that is the case federally; many states in Republican hands actually balance their budgets.