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Scott Grannis provides some refreshingly clear and cogent thinking about why it’s not repaying the swelling national debt that necessarily by itself creates a problem for the U.S. economy; rather it’s the government’s increasing spending on unproductive programs in the first place, financed with increasing levels of national debt, that creates the real problem for the economy. Here’s a slice:
“Debt becomes problematic when the money borrowed is put to unproductive use, because that leaves the borrower without the resources to repay the loan, and that will eventually disappoint the lender. Most of the money that Uncle Sam has borrowed in recent years has not been put to productive use, and that is a big problem, because the economy has not grown sufficiently to pay back the debt. The federal government has borrowed trillions of dollars in order to 1) send out checks to individuals who are retired, unemployed, disabled, and/or earning less than some arbitrary amount; 2) pay salaries to millions of bureaucrats, 3) subsidize bloated state and local governments, and 4) subsidize corporations engaged in activities (e.g., wind farms, ethanol production) that would otherwise be unprofitable. The money was essentially wasted, since it wasn’t used to create new sources of revenues with which to service the debt in the future.
“The burden of our debt binge is already upon us because we have borrowed trillions of dollars to support consumption, rather than new investment. What matters in the future is how productively we spend the proceeds of future bond sales, not how we pay off the bonds we’ve already sold. We can make progress on the margin if we can reduce federal spending relative to the size of the economy, since that in turn will reduce the amount of the economy’s resources we waste. Allowing the private sector to increasingly decide how to spend the fruits of its labors will likely improve the overall productivity and strength of the economy, because the private sector is most likely smarter about how it spends its own money. We’ve got to get the government out of the way if we are to move forward.”
And here’s some additional clear thinking on the national debt from Greg Mankiw, writing in the NY Times:
“Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.
That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis.
Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.”
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