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Politicians Ignore the Looming Debt Iceberg

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We libertarians are often accused of “worshiping” the Constitution, but that charge is false. Although we don’t care one bit for the “living Constitution” theory that leads only to the expansion of state power, it does not follow that we think every idea in the written Constitution is ideal. The document is flawed, as many Americans, the Anti-Federalists, argued during the debates over ratification.

I would like to focus on the first of the enumerated powers of Congress found in Article I, Section 8: To borrow money on the credit of the United States.

No doubt it seemed like a good idea to many at the time. The drafters worried that in a time of emergency, tax revenues might be in-sufficient for the government’s perceived needs and therefore Congress should be able to borrow money to cover the shortfall.

The power to borrow, however, was seen to be fraught with danger by far-seeing Anti-Federalists. Consider this passage written by “Brutus” (most likely Judge Robert Yates of New York) in January of 1788:

Under this authority, the Congress may mortgage any or all the revenues of the union, as a fund to loan money upon, and it is probably, in this way, they may borrow of foreign nations, a principal sum, the interest of which will be equal to the annual revenues of the country. — By this means, they may create a national debt, so large, as to exceed the ability of the country ever to sink. I can scarcely contemplate a greater calamity that could befal this country, than to be loaded with a debt exceeding their ability ever to discharge.

Brutus was certainly prescient in saying that it was “unwise and improvident” to give the government unrestricted borrowing power.

Naturally, federal politicians soon decided to use their borrowing power, mainly to finance wars they chose to undertake: the War of 1812, the Mexican War, the Civil War, the Spanish-American War, World War I.

It is impossible to know, but perhaps the war enthusiasts would not have prevailed if Congress could not have borrowed to cover the war expenditures. The opponents of those wars might have caused the “hawks” to back down if they had been able to say, “So if you want your war, vote for the necessary increase in taxes or cut out other federal spending.”

Having to live within your means is a strong brake on reckless behavior, both personal and governmental.

Up through World War I, at least, after the end of hostilities, politicians would begin to retire the accumulated debt. Calvin Coolidge was the last president to do so. During his term in office, the national debt was reduced from $22.3 billion to $16.9 billion.

Since Coolidge, unfortunately, the national debt has steadily increased. The government borrows for its ongoing war costs, but also for everything else it does. Beginning with Herbert Hoover, the federal government has borrowed incessantly to help pay for the vast array of programs politicians want to spend money on. Their spending exceeds the government’s tax haul every year. In fact, it exceeds it every second, as evidenced by the National Debt Clock at Sixth Avenue and 44th Street in New York City. If you stop and look, you see that the amount of debt goes up constantly, and currently approaches $18 trillion.

So, from the Coolidge low in 1929, the national debt has increased more than a thousandfold.

That figure, however, is just the tip of the debt iceberg that looms ahead. Among the many people who have made that point is Cato Institute scholar Jagadeesh Gokhale in his book The Government Debt Iceberg (published by the Institute of Economic Affairs). By his calculations, the federal government has unfunded spending commitments to older people and future generations that’s at least seven times the amount of official public debt. Social Security, Medicare, and other entitlement programs that past politicians enacted dwarf the amount “we” have already borrowed and will necessitate much further borrowing.

Sen. Rob Portman, writing in the July 21, 2014, Wall Street Journal conveys a sense of just how much more. “The Congressional Budget Office’s more realistic ‘alternative baseline,’ which assumes Congress continues current policies, projects new debt at $10 trillion over the next decade, followed by $100 trillion over the subsequent two decades.” At some point short of that, it is likely that “the credit of the United States” will be exhausted and people here and abroad will give Treasury debt offerings the cold shoulder.

Sad to say, most politicians react to our gargantuan debt the way an alcoholic reacts to being told he has a drinking problem: “No, I don’t. I’m in control. I can stop whenever I want to.” Hardly any politician correctly understands the magnitude of the problem, and most are in utter denial.

No escape

A typical evasion from “liberal” politicians is to say that the national debt is really not a problem at all because “we only owe it to ourselves.” That facile retort ignores the consequences of diverting real, scarce resources away from market-determined uses and into politically determined spending. Borrowing for the cost of boondoggles (wars, welfare, needless infrastructure, etc.) makes us poorer, no matter who lent the government the money for them. Such government borrowing enables some people to consume more for the present, but at a cost to others. Gokhale explains,

Current social insurance policy paths … that involve resource transfers from future generations to those alive today are likely to stimulate private consumption spending, reduce private saving, and make current national consumption higher than could be financed had current generations been compelled to spend out of their own resources. Today’s boost in consumption will be reversed when future generations enter economic life and must pay higher taxes or tolerate reduced social insurance benefits to pay for the excess benefits to today’s (and past) retirees.

Government borrowing to finance its mostly wasteful and counterproductive spending thus has severe but hidden economic consequences. It causes people to save and invest less in the private sector, which is the source of productivity and innovation. At the same time, it encourages a mindset among many people that undermines their drive to work because they believe that the state can and will take care of their needs: retirement income, medical expenses, food, and so on. The “let’s borrow to live it up today” mentality is just as damaging at the national level as at the individual level.

On the other hand, most “conservative” politicians, such as Senator Portman, pay lip service to the need to do something about the debt before it crashes down. The problem with them is that they are not willing to do more than talk about the debt and merely suggest minor palliatives such as “reform of Social Security and health entitlements.” Any such reforms would at best reduce the size of the iceberg marginally and future politicians would always be tempted to buy votes by proposing to restore the promised benefits to their “rightful” 2014 levels.

Furthermore, most conservatives won’t even support elimination of egregious instances of corporate welfare, such as the Export-Import Bank, much less take an ax to far-larger spending on the military.

In short, our political culture seems to prevent us from escaping from a collision with the debt iceberg.

That may seem like a merely theoretical problem to most Americans, who seem to believe that part of our supposed “exceptionalism” is the ability to avoid economic reality. They should think about recent bloody riots in Greece, another country that kept on promising more and more to people without having the ability to pay. The Greeks borrowed to the limit. When they could borrow no more, the state could not pay people all it had promised and riots broke out.

Gokhale calculates that in order to stabilize our fiscal situation, either taxes would have to be doubled, or Social Security and Medicare benefits cut to only 10 percent of the promised levels. Either course would lead to upheavals, so politicians will keep kicking the can down the road.

Bad things will happen in the United States when the government finally runs out of credit.

Giving Congress the power to borrow was a mistake in 1789. It told the politicians, “You can spend more than you collect and make irresponsible promises for future handouts, and make up the difference by putting the citizenry in debt.” Americans have been paying for that mistake ever since.

I don’t think it would do any good to suggest amending the Constitution now to remove that power. Even if, miraculously, such an amendment were ratified, federal politicians would ignore it. Nothing would be done about that because the mass of the population is hooked on federal spending of one kind or another. The politicians cannot raise taxes sufficiently to pay for it all, and trying to do so would only make matters worse.

The collision with the iceberg is inevitable.

This article was originally published in the November 2014 edition of Future of Freedom.

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    George C. Leef is the research director of the John W. Pope Center for Higher Education Policy in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.