National Debt

Mark Thornton (0:02)

Hello, and welcome to another episode of the Minor Issues Podcast. I'm Mark Thornton at the Mises Institute. Well, an update on the stocks versus fertilizer contest. The S&P 500 is up 11.45 percent year to date. But fertilizer or manure, as represented by the ETF MOO or MOU is up 14.66 percent year to date. So manure is still leading. Today's topic is on the national debt, because the national debt is a tangible marker in history for human misery. Nations that run up an unsustainable level of government debt, inevitably find themselves in economic distress, often punctuated by war and high rates of price inflation. Now, in American history, this relationship is highlighted by the hardships of the Revolutionary War Debt, the Civil War Debt, and World War II Debt. When Americans enduring rationing and economic controls, that basically mimicked the poverty of the Great Depression. Until, of course, peace was restored, along with a modified gold standard, and the country benefiting from the transitioning of millions of people back from the military into productive employment, unleashing the post-World War II prosperity. We can contrast those bad situations, where the national debt was very low, or even zero, such as during the Annabelle era, the late 19th century, the 1920s, in the post-World War II period, when wages and standards of living grew at a brisk, consistent pace, and prosperity abounded. My purpose as an economist is to illuminate the ways in which national debt occurs and what negative forces this creates, given that business investment is the primary driver of higher wages, technological improvements, and a higher standard of living. The current national debt in the US and many other nations can be viewed as a giant scam by my generation to rip off younger and future generations. National debt in the US and many Western economies now far exceeds the 90% of national debt to GDP threshold identified by economist Carmen Reinhart and Kenneth Rogoff as the entryway into an economic black hole.

Currently, total federal debts are now approaching $50 trillion. And note that the common figure for gross federal debt is currently closer to $41 trillion, or $363,000 per taxpayer. The US net present value of all future federal unfunded liabilities is fast approaching $150 trillion. And if GDP underperforms over the next two decades or so, massive expansion of both figures will follow.

When the government extracts resources from an economy, it not only reduces production and impoverishes the taxpayer, but also creates deadweight losses through second best distortions, and potentially enormous compliance costs. On the government side, there's, of course, huge red tape costs from the bureaucracy. Naturally, productive tax-paying classes dislike taxes. Running a national deficit reduces the immediate tax costs of government, while the national debt represents the cumulative accounting for these annual deficits. This policy decision to borrow rather than tax is popular with net taxpayers, politicians, the bureaucracy that gets paid, and the various special interest groups that benefit. Deficits and larger national debt today encourage voters to support politicians and political parties that promise even more spending without equivalent taxation. Now, while a few individual politicians might protest that, the Democratic and Republican parties are in complete bipartisan agreement in supporting spending beyond our means and almost every penny of every dollar that's spent by government, Republicans might actually be worse in this respect, given their proclivity for starting expensive foreign wars or military adventures. These military adventures highlight a massive unnoticed cost of all government spending of any kind. All government expenditures, whether paid by taxes or by debt, go into GDP calculations just like your paycheck or your electricity bill. The difference is that your earnings and your expenditures are determined and valued in the marketplace. You must decide if your job is worth the effort or if a purchase is worth it. No such market test exists for government expenditures. Even when the government spends money on wages and medications or electricity, politicians and bureaucrats make those choices, which are essentially their own consumption decisions, and they are not spending their own money.

Simon Kuznets, the founding father of National Income Accounting and Economist, recognized this fundamental flaw in accounting for government spending. Kuznets offered several criticisms against including government expenditures in GDP, but the political desire to inflate the headline number eventually won out. Now, beyond the theoretical flaws, I view most government expenditures offering little real or tangible value to citizens based on the justifications given for the policies they fund and the alternatives that exist in voluntary action.

Now, this is certainly including the costly wars in Afghanistan and Iraq, both of which cost trillions of additional debt. And the deadweight loss from government borrowing is enormous, particularly because it disables the taxpayer check on new government spending and priority. The single biggest loss from government debt is capital consumption and crowding out of private credit. Primarily, business investment and secondarily, home mortgages. Business investment provides the funds for expansion, capital expenditures, payroll and accounts receivable. On the street, this investment translates into more goods and services, more jobs and higher wages. More business capital makes workers more productive, shifting the marginal product of labor curve to the right.