Debt Explodes into Dangerous Territory

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The amount of debt owed by the US government has risen to the highest levels ever recorded.

More importantly, as the chart above shows, it is the highest debt ever in relation to the size of the economy. In peacetime, it now exceeds the peak of World War II.

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Notice that over time, debt surged during wartime, and declined thereafter. The problem now confronting us is that debt is unlikely to decline this time as it has in previous periods.

There are several reasons why this is likely to be the case.

Wars end eventually, even long ones, and expenditures naturally fall. But most of the deficits we see are not caused by war but by politically popular social expenditures. Almost three quarters of the budget is now social transfers and interest payments. True, trimming the defense budget would help slow the trend, but it would not be sufficient to reverse it.

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Social welfare programs don’t end like wars. People become hooked on “free money”, programs that they believe will be paid by someone else. Politically, it has proven impossible to take away benefits once provided. Thus, social spending grows exponentially and does not end with an armistice, rather in complete collapse.

The really big social programs are Social Security and Medicare/Medicaid. These are age driven, not need driven. One qualifies for a state-run pension and health care simply by reaching the appropriate age.

As long as the population is growing, this can work. In the early 1950s, when Social Security was relatively new, there were about fourteen people working versus one recipient. This continued to be the case as the peak years of the baby boom (1957) lay ahead.

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But now the numbers have all gone haywire. Older people are living much longer than actuaries anticipated and we have gone from 3.4 children per woman in 1957 to less than 1.7. Over the next 10 years, the largest portion of the Baby Boom will head into retirement.

The ratio of worker to recipient will fall below 3:1. The level of taxation on young workers will have to be so high to keep benefits in place that politicians will take the painless way out, i.e., borrow the money.

In terms of medical expenditure, the older you are, the more you are likely to spend. And when you are spending some one else’s money and when doctor and patient are separated from cost awareness, there is little restraint on spending.

After wars, people want to get back to normal. But with a social welfare system, benefits are normal and no one wants to go back to no benefits. Voters have adapted to the transfers from government and reshaped their lives around them. Civilians and military personnel do not shape their lives around military service, which is temporary in most cases, and war itself concludes with a winner or a loser.

Not only is it unlikely that voters will vote for reduced benefits, they are likely to vote for more. Notice today’s politicians offer constantly more programs: free healthcare, free college education, credit guarantees, new expenditures for climate change, reparations and recently, pandemic expenditures.

There were no pandemic expenditures for the 1918 Spanish flu or for the epidemics in 1958 and 1968. With no vote and no debate, we have added a new entitlement.

Our political parties were more balanced in past history. Generally, one party wanted bigger government, the other smaller government. One wanted more expenditures, the other less.

As our system was designed, these factions played opposition to each other and retarded wild expenditure. Today, both parties are big spending parties.

We also had institutional mechanisms. Government had to redeem currency in gold, and thus was restrained, in how much they could both borrow and print. Our central bank, the Federal Reserve, was supposed to own either gold or government bonds. Now it is purchasing corporate bonds and municipal bonds.

In fact, the Fed since the late 1980s has increasingly intervened in each business and spending cycle by purchasing debt itself, which has allowed the Congress to avoid making tough decisions about budgetary expenditure. The FED has been the enabler to the Congressional spending drunk.

By forcing rates downward to zero, the Fed has allowed the annual interest cost to decline, so the Congress is free to keep spending and borrowing, without the restraints of the market place (rising interest rates) intruding into their festivities.

While suppression of rates allows the government to borrow more, at the same time, it also destroys the safe rate of return for investors and causes money to be misallocated in the private sector. Interest rates function as economic traffic signals, directing capital to the correct destination. We can’t go into detail on this latter point, other than to say if you think low rates don’t have a downside cost, you are kidding yourself.

Besides the sheer financial difficulties, such indebtedness has a moral dimension. Unless all the debt is inflated away (a process itself that has created chaos in the past), the debt must be paid for by the young, a shrinking number of young people in the next generations.

They are taking on huge burdens designed by today’s political leaders, that they have no knowledge of and certainly did not consent to. Taxation without representation by English monarchs’ pales in comparison to the generational transfers being engineered by today’s leaders. To live well today, and screw the kids, is immoral. To do so without their knowledge and consent, is undemocratic.
This is what is so truly scary about the chart above. The momentum for greater and greater spending, greater and greater debt, is built into our political machine. Unfortunately, it is a machine that seems to be gaining control over its operators. It is a runaway train now that seems to have burnt out its institutional brakes.

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