Rationality and Irrationality in the Debt-Ceiling Issue

A sign at a bus shelter shows the U.S. national debt, in Washington on Jan. 20, 2023. Mandel Ngan/AFP via Getty Images

Commentary

Well, here we go again: For the next few months, we'll be witnessing what I call “the debt ceiling dance”—the same old back-and-forth rhetorical sallies (Republicans: “We need to cut some spending"; Democrats: “Raise the limit unconditionally”).

The ritual of the debt-ceiling dance is well known because we’ve been through it many times before. There may be some modest compromises—such as flimsy, soon-to-be-broken promises to limit spending increases. Ultimately, however, Congress will authorize the federal debt to be increased from its current statutory limit of $31.4 trillion. Uncle Sam has to keep paying his bills or the entire financial system will seize up, inflicting incalculable economic damage.

The decades-long contest over the debt ceiling has been between two conflicting principles: one moral, the other political. For most of American history, both parties accepted the moral tenet that it was unjust, repulsive, and abusive to spend money on ourselves today and expect our children to pick up the tab. Thomas Jefferson referred to it as “swindling futurity on a large scale.”

For more than a century after our republic’s founding, presidents and Congresses generally shunned budget deficits except in times of war. Eventually, however, the moral taboo about deficit spending gave way to the competing dynamic of political expediency. Starting with Presidents Herbert Hoover and Franklin Roosevelt in the 1930s (and egged on by that exceedingly clever but spectacularly wrong political economist John Maynard Keynes), deficit spending in the name of boosting the economy became a new political orthodoxy.

From the end of World War II until 1968, the federal budget either had a small surplus or small deficit. Then, President Lyndon B. Johnson’s “guns and butter” policies (simultaneously waging military operations in Vietnam while launching an expensive war on poverty at home) inaugurated an era of chronic deficits.

The first time the accumulated national debt exceeded $1 trillion was during President Ronald Reagan’s first term. Reagan made a deal with Democratic Speaker of the House Tip O’Neill. In exchange for funding the military buildup that helped to precipitate the implosion of the Soviet Union, domestic spending was increased, too (more “guns and butter”).

I recall writing an article expressing my shock and dismay when the federal deficit reached $4 trillion at the end of George H.W. Bush’s presidency in 1992. The trend toward ever-larger federal deficits and debt paused during President Bill Clinton’s second term, when several annual budgets were in surplus thanks to Clinton’s pragmatism and the inspired vision and leadership of Republican Speaker Newt Gingrich. The 1990s featured a fiscal “perfect storm” to wash away red ink: The end of the Cold War led to defense spending cuts; the welfare reform of 1996 slashed welfare expenditures and increased the number of taxpaying workers; the Roth IRA legislation of 1997 induced millions of Americans to pay taxes on their private retirement funds upfront; and the “Greenspan put”-fueled stock market bubble gave Uncle Sam a windfall of capital gains revenue. Sadly, except for capital gains revenue, those were all one-off phenomena. Then 9/11 happened, and we’ve been swimming in red ink ever since.

Under President George W. Bush, the national debt practically doubled from roughly $6 trillion to roughly $12 trillion. Under President Barack Obama, it rose by another roughly $8 trillion. In the six years of Presidents Donald Trump and Joe Biden, it has risen from about $20 trillion to the current $31.4 trillion—more than 9 percent per year. Considering that the U.S. gross domestic product has been struggling to increase by 3 percent per year over the past decade, we’re on an unsustainable fiscal path.

How did we get to this point? Major reasons include:

(1) The creation of entitlements. More than half of federal spending—Social Security, Medicare, Medicaid, welfare—consists of entitlements. Spending increases for these programs are automatic, requiring no annual appropriations by Congress. For example, Social Security payments, which were roughly $1.2 trillion in 2022, will increase by 8.7 percent (annual cost of living adjustment) in 2023 to about $1.3 trillion.

(2) Americans are addicted to debt. Perhaps that’s a bit harsh, but there’s no denying that the “consume today and pay for it later (maybe)” ethos is prevalent among individuals, businesses, and government.

(3) The inherent flaw of democracy. We now live in an era in which a majority of Americans tacitly, if not openly, believe in Santa Claus government. Uncle Sam is viewed as a bestower of financial favors that can be had at the bargain price of one’s vote. In such a system, people vote for the Santa Claus politicians who give them things and vote against the Grinches—the meanies who levy taxes to pay for the goodies. All the incentives drive politicians to engage in increasingly profligate deficit spending.

In short, the political rationale for increasing the national debt has been unstoppable. The issue of intergenerational justice has been trampled underfoot. But what the big spenders in government and their millions of cronies in the private sector (both corporate and individual special interests) are blind to is economic rationality. The “you vote for me and I’ll send goodies to you” paradigm can’t continue indefinitely for the simple reason that we don’t have unlimited wealth. The big spenders seem to be under the delusion that there are no real limits to their spending plans. That belief is a denial of reality.

As millions of Americans discovered (quite painfully) during the housing bust of 2007–10, you can live beyond your means by taking on debt as long as you can “tote the note”—that is, as long as you can make regular interest payments on the money you borrowed. Writ large, the same principle holds true for Uncle Sam.

Currently, in its attempts to rein in inflation, the Fed has been hiking interest rates. This increases the carrying cost of the national debt. Precise figures about current monthly Treasury payments of interest on the federal debt are hard to come by, but considering that debt payments have to be made on more than $31 trillion dollars, tens of billions of dollars of federal revenues have to service that debt. That leaves less money for other federal spending, which, in the absence of higher revenues, increases the annual budget deficit and the accumulated national debt even more—an ominous cycle. That’s how a Santa Claus government goes broke. Of course, the Fed could create more trillions to keep the game going, but massive inflation causes its own set of economic hardships, as we’ve seen so vividly in the past couple of years.

How long will it take for the national debt to reach its ultimate limit, that is, the amount at which the cost of servicing the debt puts such a dent in federal cash flow that jarring economic and financial retrenchments must take place? I don’t know. Nor do I know how fast the national debt will rise to $40 trillion or $50 trillion or how long it will take for the annual interest expense on that debt to rise to, say, $2 trillion. Given the accelerating trend of the national debt, it shouldn’t surprise us if that date with destiny occurs sooner rather than later—in years rather than decades.

In 2023 alone, the size of the annual budget deficit could surprise on the upside. As mentioned above, Social Security alone will cost roughly an extra $100 billion this year. Tens of billions more are being spent on Ukraine. And tens of billions more (some estimates exceed $100 billion) will be needed to pay the rapidly rising interest costs of the federal debt. That’s on the spending side only. On the revenue side, if Biden’s plan to pardon hundreds of billions of dollars of college debt goes through, that will swell the flow of red ink. And if the Fed, in its attempt to quell inflation by jacking up interest rates, produces a recession (and consumer demand is already starting to fall), then tax revenues will decline. To say that the federal fisc is in a precarious predicament is a whopping understatement.

In the short run (several decades), the political rationale for deficit spending and more national debt has prevailed. In the long run, however, it leads to economic calamity. I wonder if the pain of that coming calamity will produce a rebirth of the moral principle that debts should never get out of hand, that they should never unfairly burden younger people who didn’t vote for the deficit spending, and that people should live within their means and only incur debts that they’re able and willing to repay in a reasonable period of time. We shall see. But for now, the big spenders are blindly speeding toward the fiscal abyss.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.