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America’s Fiscal Debt Bomb Caused by the Welfare State



The news is filled with the everyday zigzags of those competing against each other for the Democrat and Republican Party nominations to run for the presidency of the United States. But one of the most important issues receiving little or no attention in this circus of political power lusting is the long-term danger from the huge and rising Federal government debt.

The Federal debt has now crossed the $19 trillion mark. When George W. Bush entered the White House in 2001, Uncle Sam’s debt stood at $5 trillion. When President Bush left office in January of 2009, it had increased to $10 trillion. Now into seven years of Barack Obama’s presidency, the Federal debt has almost doubled again.

And it is going to get much worse, according to the Congressional Budget Office. On January 26, 2016, the CBO released it latest “Budget and Economic Outlook” analysis for the next ten years, from 2016 to 2026.

Continuing Deficits and Growing National Debt

The economists at the CBO estimate that the Federal budget deficit for the fiscal year, 2016, will be $544 billion or $105 billions more than Uncle Sam’s budget deficit in fiscal year 2015. And each year’s budget deficit will continue to be larger than the previous year from here on. Indeed, the CBO estimates the Federal government’s annual deficits will once more be over $1 trillion starting in 2022 and thereafter.

Between 2016 and 2026, the Federal debt, as a result, is projected to increase by a cumulative amount of almost $9.5 trillion, for a total national debt of around $30 trillion just ten years from now.

The reason for the continuing ocean of Federal red ink is the fact that while government revenues are projected to be around 49.5 percent higher in fiscal year 2026 ($5,035 trillion) than in fiscal year 2016 ($3.376 trillion), government spending will be over 63 percent more in fiscal year 2016 ($6,401 trillion) than in fiscal year 2016 ($3,919 trillion).

Understanding the Fiscal History of America

The famous Austrian-born economist, Joseph A. Schumpeter (1883-1950), once wrote an article on, “The Crisis of the Tax State” (1918). He said the following about a country’s fiscal history:

[A country’s] budget is the skeleton of the state stripped of all misleading ideologies – a collection of hard facts … The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which its results are put … The view of the state, of its nature, its forms, its fate [are] seen form the fiscal side …

The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who know how to listen to its message here discerns the thunder of world history more clearly than anywhere else … The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life.

A hundred years ago, around 1913, before the beginning of the First World War, all levels of government in the United States – Federal, State, and local – taxed and spent less than 8 percent of national income, with the Federal government absorbing less than half of this amount.

By 1966, Federal outlays alone took 17.2 percent of Gross Domestic Product and are projected to rise to 21.2 percent in 2016 and will to 23.1 percent of GDP by 2026. Over the fifty years between 1966 and 2016, government outlays as a percentage of GDP increased by nearly 24 percent, and will be growing more over the next decade.

The Welfare State Drives the Deficits and the Debt

What can America’s fiscal history, as Schumpeter suggested, tell us about the direction and drift of government over the last half-century and looking to the future? Perhaps not too surprisingly for both supporters and critiques of the welfare state, it has been and is being driven by the continuing expansion of the “mandatory spending” of the redistributive “entitlement” programs.

In 1966, the intergenerational redistribution program known as Social Security absorbed 2.6 percent of GDP; in 2016, it will suck up 4.9 percent, for a nearly 90 percent increase. And by 2026, Social Security spending will represent 5.9 percent of GDP, for a 20 percent increase over the coming decade. (See my article, “There is No Social Security Santa Claus.”)

Major Federal-funded health care programs (Medicare, Medicaid and related programs) siphoned off a mere 0.1 percent of GDP in 1966; in 2016 this will have increased to 5.6 percent of GDP, a more than 500 percent increase over fifty years. By 2026, the CBO estimates, these Federal health care programs (now including ObamaCare) will take 6.6 percent of GDP, for a nearly 18 percent increase in the next ten years. (See my article, “For Healthcare the Best Government Plan is No Plan.”)

Summing over all of these and related mandatory entitlement spending programs, in 1966 the redistributive welfare state absorbed 4.5 percent of the nation’s Gross Domestic Product; in 2016 this will be 13.3 percent of GDP, and 15 percent of GDP in 2026. Or a 317 percent increase over the fifty years between 1966 and 2016, and an additional 13 percent increase between 2016 and 2026.

Due to all of the deficit spending to finance this redistributive largess over what the government collects in tax revenues to fund it, interest on the Federal debt will increase from 1. 4 percent of GDP in 2016 to 3.0 percent of GDP in 2026, or more than a 100 percent increase in the interest cost on the national debt over the next ten years as a percentage of GDP.

Welfare state spending plus mandatory interest payments on the Federal debt now absorbs around 60 percent of everything Uncle Sam spends.

For a point of comparison in this tilted direction of government spending, all non-entitlement spending represented 11. 5 percent of GDP in 1966, and will be down to 6.5 percent of GDP in 2016 and is projected to be 5.2 percent of GDP in 2026. This represents a decrease as a percentage of GDP in non-entitlement spending of 45 percent over the last fifty years, and another 20 percent decline as a percentage of GDP over the coming decade.

Now in absolute terms all government spending has grown over the last fifty years. But what America’s fiscal history highlights, looking over the half-century that is behind us, is that it is the dynamics of a growing domestic welfare state that is fundamentally driving the country’s financial ruin.

The Force of Collectivist Ideology and Political Privilege

This has been coming about due to two fundamental and interconnected factors at work: First, the ideology of a right to other people’s wealth and income, and, second, the democratization of political privilege.

For more than a century, now, the older American political tradition of classical liberalism, with its belief in individual liberty, economic freedom and constitutionally limited government, has been slowly but surely eroded by the “progressive” ideal of political, social and economic collectivism.

These dangers were already present in the late nineteenth century with the rise of the socialist movement, and its then appearance on this side of the Atlantic. “The workers,” however, were not the vanguard of socialism in either Europe or America. It was mostly intellectuals and political philosophers who arrogantly dreamed dreams of new and “better worlds” designed and planned according to what they considered a more moral and “socially just” society. (See my article, “American Progressives are Bismarck’s Grandchildren.”)

It’s Not Your Fault and Others Owe You

Over the decades, for a century now, the socialist criticisms of capitalist society have eaten away, little by little, the understanding, belief in, and desire for a truly free market society. Your pay seems to be too low in comparison to what you think or have been told you deserve? It must be due to the exploitation and unfairness of profit-making businessmen.

You’re afraid that you might not have the health care you want or the retirement money you think you’ll need, surely it must because “the rich” have squandered their unearned wealth on things other than what “the people” really need. Your child cannot go to the topnotch college or university you would want them to attend for your offspring’s future? That can be cured along with those other injustices by taxing or regulating those who have more than you, and who don’t deserve it.

The social game is rigged; nothing is your fault, it is all due to those who have more than you, and who don’t pay their “fair share” to fund what “working people” like you need and have a “right” to.

When such thinking is repeated enough, time-after-time over years and, now, generations, a large number of people in our society implicitly take it all to be true. If only government has sufficient taxing and regulating authority, the world can be made better for “the many” against the greed and social disregard of the few (the “one percent.”)

Losing the Spirit and Practice of Individualism

The dangers in all this was warned about long ago, for instance, by J. Laurence Laughlin, an economist who was the founder of the economics department at the University of Chicago. In his 1887 book, The Elements of Political Economy, Laughlin said:

Socialism, or the reliance on the state for help, stands in antagonism to self-help, or the activity of the individual. That body of people certainly is the strongest and the happiest in which each person is thinking for himself, is independent, self-respecting, self-confident, self-controlled and self-mastered. Whenever a man does a thing for himself he values it infinitely more than if it is done for him, and he is better for having done it …

If, on the other hand, men constantly hear it said that they are oppressed and downtrodden, deprived of their own, ground down by the rich, and that the state will set all things right for them in time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of all self-help?

They begin to think that they can have commodities which they have not helped to produce. They begin to believe that two and two make five. It is for this reason that socialistic teaching strikes at the root of individuality and independent character, and lowers the self-respect of men who ought to be taught self-reliance …

The right policy is a matter of supreme importance, and we should not like to see in our country the system of interference as exhibited in the paternal theory of government existing in France and Germany.”

What Professor Laughlin feared and warned about nearly 130 years ago has increasingly come to pass with the social attitudes and political desires and demands of too many of our fellow countrymen. European collectivism invaded and continues to conquer America’s original spirit and politics of individualism.

The Rise of Democratized Privilege

The other force at work in bringing about our growing fiscal socialism is what I would suggest calling democratized privilege. Before the rise of democratic governments in the nineteenth century, the State was seen as a political force for exploitation and abuse. Under monarchy, kings and princes used their taxing and policing powers to plunder their subjects for their own gain as while as for the benefit of the aristocrats and noblemen who gave allegiance, obedience and support to the monarch. Power, privilege and plunder were for the political few at the expense of the many in society.

At first the call for democratic government was to place limits on the powers of kings and their lords-of-the-manor supporters, so to restrain political abuses that threatened or violated individuals’ rights in their lives, liberty and private property.

But with the rise of socialist and welfare-statist ideas as the nineteenth century progressed, there emerged a new ideal: a welfare-providing government for “the masses.” The view came to be that government was no longer a fearful master needed restraint and limits. No, democratically-elected government was now conceived as “the people’s” servant to do its bidding and to provide it with benefits.

People hoping to gain favors and privileges from new democratic governments formed themselves into groups of common economic interests. In this way, they aimed to pool the costs of the lobbying and politicking that was required to obtain what they increasingly came to view as their “right,” that is, to those things to which they were told and demanded they were “entitled.”

No longer were redistributive privileges to be limited to the few, as under the old system of monarchy. Now privileges and favors were to be available to all, heralding a new age, an Age of Democratized Privilege. More and more people are dependent upon government spending of one form or another for significant portions of their income. And what the government does not redistribute directly, it furnishes indirectly through industrial regulations price and production controls, and occupational licensing procedures.

Government Dependency and Resistance to Repeal

As dependency upon the State has expanded, the incentives to resist any diminution in either governmental spending or intervention have increased. All cuts in government spending and repeal of interventions threaten an immediate and often significant reduction in the incomes of the affected, privileged groups.

And since many of the benefits that accrue to society as a whole from greater market competition and more self-responsibility are not immediate but rather are spread out over a period of time, there are few present-day advocates of a comprehensive reversal of all that makes up the modern welfare state, and most certainly not in an election year.

While it may not be the center of political discussion and debate in this election year, the dilemma of ever-worsening government deficits and expanding national debt is not going to go away.

It will have to be, eventually, faced and confronted. But as Joseph Schumpeter pointed out to us, the fiscal history of a country tells us the underlying ideological and cultural currents at work that pull a nation in a particular direction.

The real dilemma is not whether this or that government program can be cut or reduced in terms of how fast it is growing at present and future taxpayers’ expense. The real challenge is to reverse the political and cultural trends toward more and growing fiscal redistributive socialism.

This will require a strong and articulate revival of a culture and a politics of individualism. It is, ultimately, a battle of ideas, not budgetary line items.

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    Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).