More Government Debt as Far as the Fiscal Eye Can See
The U.S. government will, again, face an official debt limit starting on August 1, 2021, unless Congress once more raises the limit on what Uncle Sam can borrow.
For the last two years, the federal government has been legally at liberty to borrow any amount of money necessary to cover its deficit spending under the Bipartisan Budget Act of August 2019. Unless Congress extends this Act or raises the official debt limit, starting on August 1, 2021 Uncle Sam will only be able to spend what he takes in, in taxes. The thought of living within a balanced budget sends a frightening shiver down almost every politician’s spine.
In its July 2021 report on the “Federal Debt and the Statutory Limit,” the Congressional Budget Office (CBO) explains that at the time the Bipartisan Budget Act was passed in the summer of 2019, the Congressionally approved debt limit stood at $22 trillion. The Act specified that that debt level would come back into effect as of July 31, 2021, plus any and all additional debt accumulated between those two dates. As of June 30, 2021, the federal government had added an extra $6.5 trillion of debt over the previous two years, bringing the outstanding national debt to over $28.5 trillion.
Through various budgetary gimmicks similar to those used by the U.S. Treasury in the past when the debt ceiling has been reached and before Congress has lifted that limit to a higher level, the CBO estimates that the Treasury has enough cash on hand and the potential for internal account juggling to keep spending more than will be taken in as taxes until October or November, or about halfway through the first quarter of the 2022 federal budget year that begins on October 1, 2021. After that, the president and the Congress would have to operate within the collected tax revenues.
Clearly, this is a fate worse than death to those in the halls of political power who win and hold government office by promising to various constituent groups that they will happily spend other people’s money on them if only they will contribute dollars for election campaigns and cast their ballot for them on Election Day.
Trillions of Deficit Dollars and Even More to Come
In the 2020 federal government fiscal year that ended last September 30, 2020, total government spending came to $6.55 trillion, with total tax revenues of $3.42 trillion. The budget deficit for the last fiscal year, therefore, came to $3.13 trillion, equaling almost 15 percent of U.S. Gross Domestic Product (GDP). Of course, it could be said that 2020 was an exceptional year due to the Coronavirus crisis and the devastating effect that the government shutdowns and lockdowns had on the economy, and the extra government spending that attempted to counteract the economic recession caused by the draconian restrictions that the federal and state governments had willfully imposed on the lives of everyone in the country. (See my article, “Government Policies Have Worsened the Coronavirus Crisis”.)
For the current 2021 fiscal year that ends on September 30th, the federal government outlays will come to even more, totaling $6.85 trillion, with projected total tax revenues of $3.84 trillion, and another budget deficit of over $3 trillion. For the upcoming 2022 fiscal year, the CBO projection is for $5.54 trillion of federal spending and estimated tax revenues of nearly $4.4 trillion, still leaving a budget deficit of $1.15 trillion.
Looking over the next ten-year period of 2022-2031, the Congressional Budget Office, in its July 2021 Updated Budget and Economic Outlook report, anticipates $1 trillion-a-year deficits for almost each fiscal period. Over the next decade, the government in Washington, D.C. will spend over a total of $63.4 trillion, and collect in taxes a sum totaling more than $51.3 trillion. Due to the deficits incurred each year to cover the gaps between annual expenditures and taxes collected, the total addition to the national debt will come to nearly $12.1 trillion. So, by the end of the government’s 2031 fiscal year, the national debt will stand well over $35 trillion.
Debt Interest Costs and the Fiscal Burden of Entitlements
The CBO also highlights the fact that 45 percent of all that additional accumulated debt between fiscal year 2022 and 2031 will be monies that the federal government will have had to borrow to pay the interest on the national debt. That is, the federal government will be adding about $5.4 trillion to the government’s total debt just to finance the interest charges on all the existing national debt accumulated over the earlier years and decades.
Out of that total of $63.4 trillion of federal expenditures over the coming decade, the CBO calculates that more than $45 trillion of it will be outlays on “mandatory” or “entitlement” spending, or 71 percent of all spending. Around 35 percent of these “mandatory” outlays will be on Social Security and 45 percent on health care expenditures (Medicare, Medicaid, etc.), alone.
“Discretionary” defense spending for the coming ten years will make up 18 percent of government expenditures. Before fears are expressed about American national defense being “starved,” in 2019 U.S. defense expenditures came to $778 billion. The combined defense spending by the eleven closest defense-spending countries around the world came to $761 billion. That is the U.S. spent three percent more on defense spending than all of those other governments put together (China, India, Russia, the UK, Saudi Arabia, Germany, France, Japan, South Korea, Italy, and Australia).
Fiscal Churning is Really Mostly About the Redistributive State
Current projections suggest that U.S. GDP may total $21.5 trillion at the end of 2021. That means that between 2022 and 2031, based on the CBO estimates, the federal government will spend the equivalent of three of this year’s GDP. And over 70 percent of all that government spending will be on the redistributive “churn;” that is, taxing large numbers of “Peters” to transfer all that money to a sizable and growing number of “Pauls.” All those “Pauls,” therefore, who have that degree of direct dependency on government spending for significant portions of their standards and qualities of life.
But it should be kept in mind that the CBO, in its past forecasts, has frequently underestimated the actual growth in government spending and borrowing. Thus, given current and expected mandatory “entitlement” spending under existing legislation, plus, the present pushes for increases in that spending in the years ahead, these numbers are only likely to get even larger, given contemporary political and ideological trends among both Democrats and Republics, among “progressives” and “conservatives.”
Total Spending as a Measure of Governmental Burden
Nobel economist Milton Friedman (1912-2006) often emphasized that what mattered when looking at government fiscal policy is not whether that government covers its expenditures through taxes or by borrowing, but, instead, by the total amount of the country’s income and resources that are taken and used by that government. Suppose that there was a government that spent $2 trillion and maintained a balanced budget by taxing the citizenry an equivalent amount versus a government that, instead, spent $3 trillion, but only taxed its citizens $2.5 trillion by making up the rest through deficit spending by borrowing a half trillion dollars. Which government would be the more fiscally burdensome on the citizens of that country?
If the government taxes the citizenry, the dollars collected, and the real resources those dollars have buying power over in the marketplace, are transferred from private sector hands to the hands of Uncle Sam, who then decides what they will be used for.
But this is no less the case when the government borrows dollars in financial markets to cover part of its expenses in excess of collected taxes. Instead of a private borrower borrowing those dollars and using the real resources those dollars can buy in the marketplace for investment, capital formation or other purposes, the government borrows them and uses the real resources that can be bought with them for its own politically-oriented goals and ends.
Either way, the total amount of the income and resources of the society transferred out of private hands and into the hands of the government is represented by the total spending by that government, even if only part has been taxed and the rest has been borrowed.
America’s Earlier Unwritten Fiscal Constitution
However, while it may be true that whether the government taxes or borrows the taxpayer-citizens are poorer by that total amount, it is nonetheless the case that government following a balanced budget rule versus a budget deficit expedient has a huge political difference on the institutional ease or difficulty of government growing over time.
Nearly 45 years go, James M. Buchanan (1919-2013), and his colleague, Richard Wagner, wrote a book on Democracy in Deficit (1977). They pointed out that during the first 150 years of the United States, the federal government followed what they referred to as an “unwritten fiscal constitution.”
There is nothing in the U.S. Constitution that requires the government to annually balance its budget. Such a balanced budget “rule” for managing the government’s spending and taxing was considered a way to assure transparency and greater responsibility in the financial affairs of government.
It was argued that a balanced budget made it easier and clearer for the citizen and the taxpayer to compare the “costs” and “benefits” from government spending activities. Since each dollar spent by the government required a dollar collected in taxes to pay for whatever the government was doing, the citizen and taxpayer could make a more reasonable judgment whether they considered any government spending proposal to be “worth it” in terms of what had to be given up to gain the supposed “benefit” from it.
The trade-off was explicit and clear: any additional dollar of government spending on some program or activity required an additional dollar of taxes, and therefore, the “cost” of one dollar less in the taxpayer’s pocket to spend on some desired private-sector use, instead.
Yearly Balanced Budgets and Budget Surpluses After Emergencies
Or if taxes were not to be increased to pay for a new or expanded government program, the supporter of this increased spending had to explain what other existing government program or activity would have to be reduced or eliminated to transfer the funds to pay for the new proposed spending.
There was an exception to this balanced budget rule, and that was a “national emergency” such as a war, when government might need large amounts of extra funds more quickly than they could be raised through higher taxes.
But it was also argued that once the national emergency had passed, the government was expected to manage its finances to run budget surpluses, taking in more than it spent each year. The surplus was to be used to pay off the accumulated debt as quickly as possible to relieve current and future taxpayers from an unnecessary and undesirable burden.
Amazingly, in retrospect, this actually was the fiscal rule and pattern followed by the United States government throughout the nineteenth century and into the twentieth century until the Great Depression in the 1930s.
The Keynesian Call for Budget Deficits to “Stimulate” the Economy
However, starting with the 1930s, this unwritten fiscal constitution was permanently overturned as part of the Keynesian Revolution that originated with the publication of John Maynard Keynes’s, The General Theory of Employment, Interest, and Money (1936). It was argued that the government should not balance its budget on a yearly basis. Instead, the government should balance its budget “over the business cycle.” Government should run budget deficits in “bad” years (recession or depression) and run budget surpluses in “good” years (periods of “full employment” and rising Gross Domestic Product).
This new “rule” of a balanced budget over the business cycle became a generally accepted idea for fiscal policy among many economists and government policy makers. However, there has been one major problem with this alternative conception of the role and method of managing government spending and taxing: During the 76 years since the end of the Second World War in 1945, the U.S. government has run budget deficits in 64 of those years and had budget surpluses in only 12 years.
Hence, as Buchanan and Wagner referred to it, “democracy in deficit.” With the elimination of the balanced budget “rule” as the guide for fiscal policy, it has been possible for politicians to create the economic illusion that it is possible to give voters “something for nothing” – a “free lunch.”
The Fiscal Illusion of Giving Voters Partly “Something for Nothing”
Politicians have been able to offer more and more government spending to special interest groups to obtain campaign contributions and votes in the attempt to be elected and reelected to political office.
They can offer benefits in the present in the form of new or additional government spending, but they no longer have to explain where all the money will come from to pay for it. The “costs” of that deficit spending is to be paid for by some unknown future taxpayers in some amount that can be put off discussing until that “some time” in the future.
Thus, politicians can supply benefits in the present – “now” – to targeted groups whose votes are wanted on Election Day, and avoid answering how the money will be paid back (with interest) because that can be delayed until the future – a period later in time, years ahead, when someone else may hold political office and will have to deal with the problem.
The Moral Dimension of Government Debt Financing
There is an additional moral dimension to the issue of government deficit spending and its resulting accumulation of debt. This was a theme especially addressed by James Buchanan.
Normally, when a private individual or enterprise undertakes debt financing of some portion of his current expenditures, the legal obligation to pay back the contracted principle and interest falls upon the borrower. If he defaults or passes away before repayment of all that had been borrowed, creditors have a lien on the borrower’s positively valued assets.
The “benefits” of having the use of a greater sum of money in the present than his own income would enable him to spend, and imposes on the borrower a “cost” of an obligation to pay back the loan out of his future income and assets. The cost and the benefit are linked together within the same person.
It is not the same, Buchanan argued, in “The Deficit and Our Obligation to Future Generations” (1987), with government deficit spending and repayment of accumulated debt:
“If I borrow $1,000 personally, I create a future obligation against myself or my estate in the present value of $1,000. Regardless of my usage of the funds, I cannot, by the act of borrowing, impose an external cost on others. Unless I leave positively valued assets against which my debts can be satisfied, my creditors cannot oblige my heirs to pay off their claims.
“By contrast, suppose I ‘vote for’ an issue of public debt in the amount of $1,000 per person. I may recognize that this debt embodies a future tax liability on some persons, but I need not reckon on the full $1,000 liability being assigned to me. If I leave no positively valued assets, the government’s creditors can still enforce claims on my progeny as members of the future-period taxpaying group.
“Further, the membership in the taxpaying group itself shifts over time. New entrants, and not only those who descend directly from those of us who make a borrowing-spending decision, are obligated to meet debt, interest and amortization charges.
“In sum, the institution of public debt introduces a unique problem that is usually absent with private debt; persons who are decision makers in one period are allowed to impose possible financial losses on persons in future generations. It follows that the institution [of government] is liable to abuse this and overextend its borrowing practices. There are moral and ethical problems with government deficit financing that simply are not present with the private counterpart.”
Government debt is a way to impose part of the cost of what special interest group voters and politicians want “today” on those who “tomorrow” will have to be taxed to pay back the borrowed money.
Even if a current recipient of such governmental deficit spending largess is, himself, one of the future taxpayers, he is usually likely to have received a greater benefit than his personal portion of the future tax burden. Suppose that he is a farmer, for instance, who receives “today” $100,000 from the government for not growing a crop. When “tomorrow” comes and taxes have to be raised to pay back that $100,000 to the creditors who lent that sum to the government, that particular farmer’s additional tax burden will be a small fraction of that total amount.
To continue with the same example, many farmers who may have benefited from agricultural price-support programs decades ago have passed away. The burden of paying back whatever portion of that farm price-support spending originally financed by deficit spending now falls upon others who may not have even been born at the time the recipient received this special privilege from the government.
What is the ethics, James Buchanan asked, of a fiscal system under which incentives exist and come into play that enable the current generation of taxpayers and recipients of government programs to shift part of the burden to pay for them to future generations? Is that a culturally and economically healthy legacy to leave to our children and grandchildren?
The Importance of Balanced Budgets and Debt Limits
This is why it would be desirable to incorporate a balanced budget amendment into the U.S. Constitution. It would not guarantee that government did not tax and spend more. But it would impose a greater clarity and transparency to the fiscal dimension of government decision-making that would make it far more difficult for those offering other people’s money in exchange for votes to do so without having to also explain who would be paying for the favors and privilege given to some, and how much they would have to pay.
Imagine if members of Congress and the President had to tell their constituents that this year’s $3 trillion of deficit spending was going to have to be covered, instead, by an increase in taxes by that amount. Or, another way of putting this, there was to be a per capita increase in taxes of almost $9,100, given the slightly more than 330 million people in the United States. Or, since only about half that number in terms of households pay taxes, each household’s per capita tax burden would be increasing by around $18,000 this year to balance the budget. And that, similarly, the $12.5 trillion of CBO projected additional debt over the next 10 years would be avoided by sufficient increases in taxes to make the national debt no worse than it stands right now in 2021 at about $28.5 trillion.
No talk about “taxing the rich” would be able to hide the fact that even if such a tax increase were to fall disproportionately more on the “one percent” income bracket, that a very wide band of the American middle class would still see their tax obligations rise significantly. It would be very clear, very soon, that the government-provided “free lunches” are, in fact, very costly.
In lieu of adding such an amendment to the Constitution, the next best thing would be for the Congress not to raise the federal debt limit. I have no illusions that the members of either major political party in Congress have the courage or the self-interest to do so. But the fact is that if Congress were to ever have sufficient pressure from voting constituents to just say, “NO,” that very act would impose a balanced budget on the federal government. Once Uncle Sam had reached the hard debt limit after all his internal accounting finagling, he would then only be able to spend what he had taken in, in taxes, given any “rollover” in refinancing existing debt that came due.
For this to be ever possible, there will have to be a strong educational and political campaign to reawaken an understanding among the public that deficit spending is merely a sleight-of-hand that siphons off wealth and resources from private uses in the present no less than if taxes had been increased in the here and now, and shifts the cost of doing so to the same or different voters in the future who will be obligated to make good on what was borrowed and spent in the past that is currently our present.
Such an effort should be considered an essential element in the intellectual battle for an eventual repeal and retrenchment drive that can begin to reverse the size and scope of Big Government, to start the process of restoring and improving upon a society of freedom grounded in individual rights and economic liberty.
[Originally posted on American Institute for Economic Research (AIER)]