Debt, Deficits, and Delusions

Though debt can be a good thing (borrowing for appreciating or productive assets, for example), it can be a harsh master.

A century ago (before Keynes, for the Econ nerds reading this) people thought national debt was akin to personal debt. Though sometimes necessary or useful, our frugal ancestors, channeling the austere advice of Ben Franklin, thought that debt was generally a bad habit that could lead to bankruptcy.

That view has changed in the past century, both individually and politically. For decades, pundits have justified debt, and scoffed at those who make the analogy between household and national debt, labeling it the “household fallacy.” They claimed that just because frugality is good for a household does not mean it's good for a state.

It is almost as if we have a national credit card that has unlimited rollover abilities: we can pay for a fighter jet, a solar subsidy, or a Social Security check, and borrow the money and never pay it back. And we don’t feel the pinch: either we have our kids and grandchildren pay it back, or we have the Federal Reserve purchase the debt—it’s “monetized.” 

Just about everyone agrees, in principle, that our accumulation of debt is worrisome. It’s become a bit like candy or French fries; yes, we should really, really cut back.

Some day.

That day has arrived, unfortunately; the binging really has to end, and if it doesn’t end because of our collective discipline, the discipline will be imposed on us.

I remember when the government’s debt hit $1 trillion; today it’s over $33 trillion, or about $100,000 per person, or $400,000 per family of four. And each person, on average, only pays $4,500 per year in federal taxes.

It’s easy to see how this is unsustainable. Historical experience shows that all empires have collapsed because they went bankrupt: they overextended spending on both warfare and welfare, debased their currency, and collapsed when citizens withdrew their allegiance. When paying taxes isn’t worth it, tax avoidance causes revenues to plummet and the empire to collapse.

We have a non-partisan group (called the “Congressional Budget Office” or CBO) whose task is to give Congress accurate forecasts for expected future spending and revenue, and therefore deficits and debt. And how are those forecasts? They’ve made 170 forecasts for debt. Of those 170, 170 have been wrong. And of those 170 wrong forecasts, 170 of them underestimated the federal deficit. 

At least they are consistent.

I sense there might be a problem here. Good businesses under promise, and over deliver. Yet even the non-partisan government agencies overpromise and underdeliver. And those “surprise” deficit levels hurt economic growth.

The United States used to have real annual growth rates in income that were about 4% per year. That dropped to 3.13% in the 1950 to 2020 time period. The same CBO that underestimated deficits projects that GDP growth will drop to something like 1.63% from 2020 to 2050.

Those “small” drops cause cascading gaps over time. Let’s crunch some numbers, starting with the rough per capita income of individual Americans today: 

It would be nice to return to those 19th century growth rates of income: after all, in a couple of generations, the average person’s income increases 16-fold at 4% rates; at our current growth rates, it will go up just a bit more than three-fold, with the difference in average income between the faster and the slower growing economy being $639,000 per year per person!

Why the decrease in growth rates?

Blame debt. 

It’s not only debt. Falling birthrates will be a large problem for the US (and other countries!). We’re not quite sure what they’ve fallen to, but it might be as low as 1.55 children per woman. 

Rising regulation that stymies productivity also hurts growth. 

But all debt needs to be serviced; and when you are paying higher interest on more debt, particularly debt that comes from spending on non-productive goods, you will have less investment and lower growth. 

The solution for this awful trifecta of rising debt and regulation and falling birthrates? Realistically, it’s almost like a return to an earlier era, with larger families, less regulation, and balanced budgets. Yes, during those “good old days” we were poorer. G. Michael Hoph’s novel says it well: “Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.”

So, perhaps we’re in for some hard times? 

Hoph’s “strong men” isn’t a reference to Mussolini, or males; it’s a reference to admirable individuals who care about more than themselves, and, often through their ideas and their example, create positive change: George Washington comes immediately to mind. 

And where are these individuals? They already exist, a remnant, “waiting in the wings,” so to speak. And it’s our job to both cultivate and to recognize them.