The Congressional Budget Office’s (CBO) February 2023 report, Budget and Economic Outlook, 2023-2033, documents just how serious the fiscal dilemma is facing the United States. In a nutshell, the federal government’s debt is on a dangerous trajectory, future annual budget deficits are huge as far as the eye can see, and the “entitlement programs” — Social Security and Medicare/Medicaid — are heading toward financial unsustainability.
In other words, the chickens are coming home to roost. For decades, the policies of the American interventionist welfare state have been placing the country on a path of economic disaster. Beginning with Franklin D. Roosevelt’s New Deal policies in the 1930s and then reinforced and intensified by Lyndon Johnson’s Great Society agenda in the 1960s, the United States has been on a road of fiscal folly.
From limited government to the expanding state
Throughout the nineteenth century and the early decades of the twentieth century, the U.S. government was relatively small, fairly nonintrusive, and mostly restrained in budgetary matters. The CBO’s Federal Debt: A Primer (2020), contains a diagram showing federal government debt held by the public from 1790 up until early 2020 and then projected to 2030. From the establishment of the federal government under the new U.S. Constitution until the early 1930s, only twice did the government’s debt approach an amount equal to almost 40 percent of Gross Domestic Product (GDP). This occurred during the American Civil War of the 1860s and during America’s participation in the First World War in 1917 and 1918.
Before the Civil War, government debt was practically zero, with the government in Washington, D.C., running balanced budgets or modest budget surpluses to pay off small amounts of debt accumulated during the War of 1812 and the Mexican War of 1846–1848. Following the end of the Civil War in 1865, the government’s policy was, again, to run balanced budgets or surpluses each year, so that by the beginning of the twentieth century, the national debt was below 10 percent of the GDP of that time.
Government spending and borrowing increased noticeably during the Woodrow Wilson Administration (1913–1921), which included the deficit spending to cover a good part of World War I expenses. But, again, in the 1920s, during the Warren Harding and Calvin Coolidge administrations, budget surpluses reduced the national debt back down to about 20 percent of GDP.
All that changed, however, with the interventionist policies of the Herbert Hoover administration following the stock-market crash in late 1929, and then even more so following Roosevelt’s arrival in the White House in March 1933. Both Hoover and FDR ran large budget deficits in the name of “fighting” the Great Depression through “activist” government spending. The national debt exploded with the government’s expenditures during the Second World War, when it reached about 110 percent of GDP by 1945.
The CBO’s federal debt diagram becomes a bit confusing following World War II, because by the 1960s, the national debt had fallen back to around only 30 percent of GDP. This did not mean that the federal government had stopped its deficit spending and gotten back to balancing its budgetary books. In fact, during the 78 years since the end of the Second World War, the federal budget has had only 12 years of surpluses (in the 1950s and 1990s) and 66 years of budget deficits.
It is just that the budget deficits were modest enough in the 1950s and early 1960s that the national debt grew less than the U.S. economy was growing, as measured by GDP. Though government’s slice of the national economic pie was getting larger each year as an absolute amount, it was growing more slowly than the GDP pie was increasing; hence, the deficits to partly cover this growth in government spending were small and slow enough to result in the national debt becoming a smaller percentage of GDP over most of the 20 years after the Second World War.
LBJ’s Great Society programs helped open the floodgates
But all this changed with the Great Society programs and the Vietnam War in the second half of the 1960s and the first half of the 1970s. First LBJ and then Richard Nixon were determined to assure the American people both “guns and butter,” that is, growth in domestic government spending and the monies to fund the Vietnam War, with national debt once again growing faster than the increases in annual GDP due to larger budget deficits. It is not too surprising that by the 1970s, Americans saw the highest annualized rates of price inflation as measured by the Consumer Price Index — 11 percent in 1974 and 13.5 percent in 1980 —than had been experienced since the Civil War, more than a century earlier. The Federal Reserve had turned on the monetary spigot to help fund all the deficit spending.
Even during the eight years of the Ronald Reagan Administration in the 1980s, the deficit spending kept pushing up the national debt to well over 45 percent of GDP by the time George H. W. Bush became president in 1989. This was only temporarily reversed when in the mid-1990s a Democrat president, Bill Clinton, under pressure from a Republican-held Congress, declared that the era of big government was over.
This resulted in four years of modest budget surpluses. Some Keynesian economists were deeply frightened at the time, fearing that the national debt actually might be paid off and the Federal Reserve would no longer have U.S. Treasury debt instruments to buy up in the financial markets as a means of creating money in the banking system and the economy as a whole. Oh, the horror! Alas, those Keynesians had nothing to fear. When George W. Bush became president in 2001, the national debt stood at $5.8 trillion. When Barack Obama entered the White House eight years later in 2009, the debt was up to almost $12 trillion. When Obama finished his eight years as president, the national debt had increased to practically $23 trillion. Only four years of Donald Trump as president increased the national debt to over $29.6 trillion. And with less than three years of Joe Biden in the White House, the national debt is way over $31.6 trillion, and growing.
America facing more debt and bankrupt programs
In the federal government’s 2022 fiscal year (which ended on September 30, 2022), the Biden administration spent more than $6.2 trillion, while taking in $4.9 trillion in tax revenues, leaving a $1.3 trillion budget deficit last year. In its latest Budget and Economic Outlook report, the CBO estimates that 10 years from now, in fiscal year 2033, the federal government will spend around $9.8 trillion, take in $7.1 trillion in tax collections, and have a budget deficit of $2.7 trillion. Over half of that borrowed $2.7 trillion will be used just to pay the interest on the accumulated national debt.
By 2033, due to the annual budget deficits, the national debt will have increased by an additional $20.3 trillion, bringing the total national debt to well over $51 trillion, and still counting! The national debt held by the public will equal nearly 120 percent of GDP.
And it gets worse. In the Congressional Budget Office’s 2022 Long-Term Projection for Social Security (December 2022), the CBO estimated that by 2035, the Social Security Administration (SSA) will not be able to meet all of the agency’s obligations to eligible recipients under current legislation. Since around 2006, Social Security outlays have been greater than Social Security taxes collected from the U.S. labor force. The difference has been made up by the SSA cashing in U.S. government Treasuries that had accumulated on its books during earlier decades when there were Social Security surpluses that were used to fund part of the larger, overall federal deficits.
By around 2034, all of those Treasury securities will have been cashed in. After that point, under current legislation, only monies collected by the SSA from the working population may be used to pay retirees. Benefits would then have to be cut by almost 25 percent. In other words, suppose your Aunt Minnie had been receiving $1,000 a month from SSA. A month will arrive when she opens the mail and finds that her Social Security check is only $750.
Federally funded Medicare and Medicaid and related government health and medical programs face the same fiscal folly. In fiscal year 2022, total federal expenditures on these health-care programs came to $1.6 trillion. In fiscal year 2033, under current eligibility legislation, this spending will have increased to over $3 trillion, or double what it is today.
Overall, total “mandatory” or “entitlement” spending will increase from $4.6 trillion in fiscal year 2022 to around $6.6 trillion in 2033, for an overall increase in these core welfare-state programs by more than 43 percent.
Defense spending and foreign holdings of U.S. debt
In fiscal year 2022, U.S. defense spending came to $816 billion. Under congressional approval, legislated defense spending in fiscal year 2023 will be around $891 billion. The CBO projects that defense expenditures are likely to be $1.15 trillion in fiscal year 2033, or a nearly 30 percent increase over the next decade.
This, of course, does not include the continuing costs of funding the military expenditures of the Ukrainian government for however long its war continues with Russia. Nor does this contain the higher Defense Department–related spending that might arise if the United States is drawn into a conflict between communist China and Taiwan. This also does not include the possibility of some other foreign interventionist adventures that the Washington global central planners might find it “impossible” to avoid in the name of the “national interest” and the cause of “global democracy.”
As of December 2022, according to the United States Treasury Department and the Federal Reserve, more than $7.3 trillion of the current $31.6 trillion in U.S. government debt is held by lenders abroad. That means that 23 percent of the national debt is held by foreign investors. Japan holds $1.076 trillion, followed by communist China in the amount of $867.1 billion. The European Union countries, together, hold over $1.2 trillion in U.S. Treasuries, with the United Kingdom holding $654.5 billion more. Four of the Persian Gulf-region oil-exporting nations (Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq) hold a combined total of $262 billion of U.S. government debt.
If a global financial crisis or economic panic resulted in any significant amount of this U.S. debt that is held abroad being dumped on the international markets, the fallout, in principle, could be immense.
A country’s political history through its fiscal policies
During the First World War, Austrian-born economist Joseph A. Schumpeter (1883-1950) published an essay on “The Crisis of the Tax State” (1918). He said:
The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life…. 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 knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else….
[T]he budget is the skeleton of the state stripped of all misleading ideologies…. 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.
For more than 100 years, America has been moving in a direction away from the spirit of individual liberty, self-responsibility, and freedom of choice inside and outside of the marketplace, including freedom of association in, especially, the economic affairs of everyday life. When this set of ideas still prevailed among a large majority of the people of the United States during most of the nineteenth century, government, by logical extension, had limited duties in the affairs of almost everyone. Government’s role was, primarily, to enforce a legal system premised on the principle of every person’s right to their life, liberty, and honestly acquired property.
Of course, in reality, even during the heyday of nineteenth-century laissez-faire, government did more than this, especially at the local and state levels, though already the federal government was providing various privileges, favors, protections, and subsidies to special interests in association with those in positions of political authority. It is only in comparison with the huge interventionist-welfare state of our own time that the nineteenth century seems so free from the intrusive hand of the state.
Many were the successful attempts to abridge freedom of speech and the press, freedom of movement, and freedom of association and trade in parts of the United States in the decades before the Civil War, particularly when it involved the proslavery mobs wanting to suppress abolitionist voices calling for the end to the human bondage prevailing in the southern states. Even murder would be given a blind eye by judges and juries when it came to acquitting those who killed advocates of freedom. Even after slavery had ended, evil men used the state to enforce segregation laws restricting or prohibiting the freedom of association between people simply due to the color of their skin.
However corrupted the reality of the American experience may have been compared to the ideals expressed in the Declaration of Independence and instituted in the Constitution, it nevertheless remained the case that throughout most people’s everyday life, government was hardly present and left people pretty much alone to guide and manage their own affairs as they thought best in voluntary associations with their neighbors and market partners around the corner or half way around the world.
Self-responsible people means limited government
When the first edition of The World Almanac was published in 1868, the offices and departments of the federal government covered only one page in the entire volume! It listed the president, the vice-president, a handful of executive cabinet positions, and the ambassadors representing the United States in various foreign countries. The government debt in 1868 came to a bit more than $2.6 billion (less than $80 billion in inflation-adjusted 2023 dollars).
However, over the next several decades, political currents began to change. This was seen and warned about by those still dedicated to the idea and ideal of liberty.
For instance, in 1887, J. Laurence Laughlin, who founded the economics department at the University of Chicago, compared the American philosophy of individual freedom with the growing European philosophy of political paternalism in his Elements of Political Economy:
Socialism, or reliance on the State for help, stands in antagonism to self-help, or the activity of the individual. The body of people certainly is the strongest and happiest in which each person is thinking for himself, is independent, self-respecting, self-confident, self-controlled, 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 a better man for having done it…. The man who hews out his own path gains power by so doing, and becomes self-reliant, sagacious, foresighted, and ready for further advance…. He knows that two and two make four….
If, on the other hand, men constantly hear it said that they are oppressed and down-trodden, deprived of their own, ground down by the rich, and that the State will set all things right for them in due time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of 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 danger of enervating results flowing from dependence on the State for help should cause us to restrict the interference of legislation as far as possible…. The right policy is 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.
The dangers about which J. Laurence Laughlin wished to warn only continued to grow in the last decades of the nineteenth century and throughout the twentieth century.
Incremental interventionism has led to big government
It was easy for many to ignore or discount these dangers. Let’s not take the principle of liberty to an extreme. Are there not some in society who need the helping hand of government to overcome the misfortunes of life? Are there not people who abuse their wealth and economic position in society at the expense of the ordinary “little guy?” Of course, let’s have private enterprise, but let it be “socially aware” private enterprise under “reasonable” government regulations and redistributions of income and wealth. Surely, there is a “balance” between personal liberty in all things and partial paternalism to smooth out the rough edges of laissez-faire.
It has been the appeal and apparent plausibility of incremental intervention and redistribution that has created, decades later, the reality of the current giant governmental machine that oversees, controls, regulates, restricts, insists, dictates, and determines so many aspects of our personal, social, and economic life. Once this paternalist philosophy of man and government gains hold it makes nearly inevitable the expanding size and scope of political involvement in society that we see today.
The more government is expected to do, the more it must siphon off the income and resources owned by and belonging to private individuals to apply them to the growing number of “social purposes” assigned to those in political authority. It may seem a long and complex train of events, ideas, and polices that lead from J. Laurence Laughlin’s fears of European paternalism taking hold in the America of the 1880s to President Biden in 2023 insisting that come hell or high water, there will be no cuts in entitlement programs because they are part of what makes modern America. But the path that America has followed has led from there to here.
Welfare states have no limits and swallow up society
Part of the reason is that there are no natural checks or limits on the interventionist welfare state once it has taken root and has come to be politically and culturally accepted as “necessary” and “inescapable” in a modern society. This was emphasized by the German free-market economist Wilhelm Röpke (1899–1966) in A Humane Economy: The Social Framework of the Free Market (1958):
The dangers of the welfare state are the more serious because there is nothing in its nature to limit it from within. On the contrary, it has the opposite and very vigorous tendency to go on expanding…. By its continuous expansion, the welfare state tries to cover more and more uncertainties of life and ever wider circles of the population, but it also tends to increase its burdens; and the reason why this is so dangerous is that while expansion is easy and tempting, any repeal of a measure later recognized as hasty is difficult and ultimately politically unfeasible….
The welfare state not only lacks automatic brakes and not only gathers impetus as it moves along, it also moves along a one-way street in which it is, to all intents and purposes, impossible, or, at any rate, exceedingly difficult to turn back. What is more, this road undoubtedly leads to a situation where the center of gravity of society shifts upward, away from genuine communities, small, human, and warm, to the center of impersonal public administration and the impersonal mass organizations flanking it. This implies growing centralization of decision and responsibility and growing collectivization of the individual’s welfare and design for life.
In a small companion volume, Welfare, Freedom, and Inflation (1964), Röpke pointed out that the growing dependency of more and more people on the welfare state is the opposite of what should be wanted in a free society: self-supporting and self-responsible citizens, rather than wards of the state:
It is all too often forgotten that anyone who is serious about human dignity should measure progress less by what the State does for the masses than by the degree to which the masses can themselves solve the problem of their rainy days out of their own resources and on their own responsibility. This, and only this, is worthy of free and grown-up persons, certainly not constant reliance on the State for assistance which … can, in the last analysis, come only out of the pockets of the taxpayers themselves or from an enforced restriction in the standard of living of those whom inflation really hits. Alternatively, is it really progress if we classify more and more people as economic wards to be looked after by that colossal guardian, “The State”?…
Would it not be much more progressive if more and more members of the broad masses were permitted to reach the status of economic “grown-ups,” thanks to rising income resulting from their own labor?… The yardstick of our accomplishment will be how far we succeed in widening the field of individual provision and mutual assistance … and not the least of our achievements will be out triumph over the very real danger that man may be reduced to the status of an obedient domesticated animal in the State’s big stables, crammed together with other similar animals … fed by the [political] patron.
Only belief in liberty and radical repeal can end the fiscal crisis
At the end of the day, the only way the hazardous road of welfare-statist fiscal folly can be exited is a radical end to the very rationales and institutions upon which the paternalist state now exists. It may be replied that this is too extreme. Instead it is believed that we must find a way to cut down the interventionist welfare state, to introduce a series of compromise measures that avoid the fiscal disaster America is moving toward with its unending deficits and mounting national debt, on top of burdensome levels of taxation that undermine the incentives and abilities for work, saving, and investment.
But, in reality, there can be no halfway houses, some middle-way between a fully free market society and political paternalism. If the institutions are left in place, then once the fiscal crisis atmosphere subsides, the same policies and the same ideas behind them will pick up where they had left off, and the fiscal rollercoaster will begin its ride again. Only by abolishing the government departments, bureaus, and agencies through which the system of political paternalism operates, and only by releasing all those employed in these parts of the government to find “honest work” in the private sector, can the paternalist danger be finally removed.
Accompanying this, or, indeed, preceding it, must be a radical change in ideas about the meaning and importance of personal liberty, truly limited government, and the value and essentialness of open, competitive, free markets, along with the voluntary institutions of civil society through which “social problems” may find their “solutions” without the power and coercion of the state.
This is, of course, no easy task. It requires determination, articulation, persuasiveness, and, most importantly, courage in the face of others and their arguments against the restoring and refinement of the classical-liberal society of free human beings. But if America is to be saved from the fiscal disaster toward which it is clearly heading, there is no other way.