Asheville – Chris Edwards at the Cato Institute called attention to the Congressional Budget Office’s report, “An Update to the Budget and Economic Outlook: 2021 to 2031.” These reports are compiled regularly to provide policymakers a 10-year outlook on the impact of existing tax rates and Congressionally-authorized spending. There are many ways to measure the national debt; federal government debt is defined as funds owed foreign and domestic creditors.
Edwards noted in 2001, the debt reached $3.3 trillion. In 2011, it rose to $10.1 trillion, and this year, it is at $23.0 trillion. The CBO projects, all other factors equal, it will reach $35.8 trillion in 2031; but with the Democrat budget resolution, it would reach $40.1 trillion.
To help innumerate policymakers with their fathoming, Edwards provided some color. For example, the average household’s responsibility for the current debt is $179,082, but under the Democrat spending plan, it would become $288,047.
This debt, he explains, is not like a mortgage, where the purchaser has a home as a hard asset for his debt. Rather, it is like running up debt on a credit card. Making things worse, only 5% of the federal government’s spending is used to purchase hard assets, like roads and military equipment.
The Committee for a Responsible Federal Budget went into greater detail about the Democrat spending plan. Over the next ten years, it would mandate an additional $3.5 trillion in spending for the bipartisan Infrastructure Investment and Jobs Act, and include $263 billion in discretionary spending and $390 billion for debt service.
In 2015, Edwards wrote another article, “The Problems with Federal Government Debt.” In short, since much of government spending takes the form of subsidies and benefits, it causes economic distortions and, necessarily, reduced output. Illustrations include crowding out of for-profit activities, paying disincentives to work, and subsidizing overproduction.
Because government collects taxes to pay for its uneconomic activities, it distorts the economy twice. If taxes are high enough, they will factor into peoples’ decisions about how to work, invest, and consume. People will choose to work in areas about which they are less passionate or even engage in product-less rent-seeking activities like lobbying to save a buck.
Wrote Edwards, “Economists estimate that the deadweight losses from each one dollar increase in federal income taxes is roughly 50 cents, including about 10 cents for the added compliance or paperwork costs.” Similarly, Edgar Browning, in Stealing from Each Other, wrote, as a rule of thumb, it takes $3 in taxes to provide $1 in benefits.
By borrowing instead of taxing, politicians are emboldened be looser with their spending habits, since it’s been easy to convince voters that the money is free. When payback time comes, government narratives of having to cut this or that essential service but for a tax increase capture the imagination so much more than talk about paying abstract debt service. Furthermore, the economist James Buchanan likened government borrowing to chopping up the orchard for firewood.
Regardless, the FY2022 Senate Budget resolution would allow federal spending and debt to reach record shares of GDP (gross domestic product) by 2026 instead of 2031. Over the next ten years, federal spending would average 23.4% of GDP, as opposed to 22.0% without the spending plan. For comparison, the historical average is 17.3%.
The federal debt is another matter. It is currently 103% of GDP. Under the Democrat spending plan, it would rise to 119% in ten years. For context, Edwards notes this is more than the debt incurred for World War II and more than triple the debt from the Civil War and World War I. A difference, he observes, is that former administrations were intent on paying off war debt.
If debt held by the states is added to the federal debt, then government debt in the United States is currently 141% of GDP. Edwards queried the Organization for Economic Co-Operation and Development’s database and found this was not so hot compared to a global average of 100%.
At this point, one may be tempted to think about Greece. In 2010, Greek authorities suggested they might default on their massive debt, a move that would have destabilized the entire Eurozone. At the time, it was not uncommon to hear Americans make disparaging remarks about the lazy Greek people living off government benefits, when, in fact, the Greek population was aging, with 20% over 65 and 50% of households relying on pension income.
Regardless, Greece was bailed out by various European authorities as well as private investors. They loaned Greece €380 billion, only €41.6 billion of which have been repaid to date; Greece is expected to be making payments into the 2060s.
Included in the loan was €240 billion from the European Union and the International Monetary Fund awarded with the provision that Greece would adhere to austerity measures, which forced the government to raise taxes, reduce spending, and reform its pension system so beneficiaries would contribute more and get less. The Greek economy shrunk 25%, tax collections decreased, unemployment increased, and people started rioting.
Referring to the situation today in America, Edwards observed, “Rising debt may trigger an economic crisis with soaring interest rates and falling output. Greece’s debt crisis a decade ago created long-lasting damage, and the country’s real income per capita is still down one-quarter from its pre-crisis level. America’s government debt today is about the same size relative to GDP as was Greece’s before its debt crisis.”