(Page 2 of 2)
So the feds and the states increase spending during the bad times, to help people out. And they increase spending during the good times, to reward constituents and set themselves up for the next elections.
It's pretty easy to understand how massive amounts of debt screws up finances at the state level: They run out of people to tax (or taxes to hike), their ability to borrow gets downgraded, etc. Eventually, they start taxing their residents more for fewer services. Nobody's happy, people and businessess move. The feds, of course, can keep printing money or coordinating with the Federal Reserve to increase the money supply. So the string is a lot longer, especially if you're the biggest economy on the planet. Inflation may or may not happen quickly (or at all) and interest rates may or may not go up. There's a serious debate happening now as to whether inflation, predicted by virtually every conventional economic theory, is occurring or not. Interest rates, both for the government and for the diminishing number of consumers who can secure credit, are pretty damn low, in defiance of age-old fears about running large and persistent deficits. At least for the moment.
So what's the harm in the feds spending like there's no tomorrow, especially when people are still hurting in terms of jobs, wages, and the like? There are many harms - we're saddling future generations with debt squandered even before they were born, for instance. Imagine being stuck with your parents' credit card bills for vacations they took and cars they bought (and sold) back in 1970. Feh.
But for the sake of brevity, let me focus on just one serious problem with running perpetual deficits and racking up huge debts at the federal level: Countries whose governments that carry debt loads of 90 percent or more of their economies for prolonged periods squeeze down long-term economic growth, the one thing everyone agrees is central to improving living standards.
As Veronique de Rugy wrote in the October issue of Reason:
In a recent National Bureau of Economics working paper called “Debt Overhangs: Past and Present,” economists Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff show that in 11 of the 26 cases in their sample, countries in which debt exceeded 90 percent of GDP for at least five years did not experience an increase in interest rates.
But stable interest rates are not a sign that these countries are in good shape. Economic growth in the 26 cases was 1.2 percentage points lower than in other periods, “the average duration of debt-overhang episodes is 23 years, and it produces a ‘massive’ shortfall in output that is almost one-quarter less, on average, than in low-debt periods.” In other words, the fact that bond markets are blasé about high levels of debt in countries perceived as safe tells you very little about how well they are doing. It certainly should not be mistaken for a signal that the government can borrow more without risk.
How many of us will be consigned to live out our futures in that Phantom Zone of missing economic growth?
All to pay for, what, military adventures that have done precious little to reduce the world's supply of suffering? Or for expanded drug benefits for already-wealthy seniors? For a war against weed that has turned the Home of the Free into history's greatest jailer nation?
Back when he was running for president, Barack Obama used to talk about how "we have to break that cycle of debt":
We've lived through an era of easy money, in which we were allowed and even encouraged to spend without limits; to borrow instead of save....
Once we get past the present emergency, which requires immediate new investments, we have to break that cycle of debt.
That used to be part of his basic stump speech in fact. Now the president has gone from talking about cutting $2.50 in spending for every $1 of new revenue in September 2012 to pushing $4 in new taxes for every dollar of spending cuts. That's all part of his "balanced approach" to government finances.
But if the cause of growth-killing debt and deficits is increased spending - and it is - the solution is to cut spending. As the November 2010 issue of Reason detailed, we've done it before as a country (after World War II) and other advanced economies have done so are recently as the 1990s. Last year, De Rugy and I even laid out an easy way of doing it through small year-over-year cuts that amount to little more than holding spending constant in real terms.
It wouldn't even be particularly difficult. And surely it beats the alternative, which is slicing 25 percent off economic growth over the next couple of decades.
It's a standing joke that everything we do at every level is "for the children." Who among us wants to look at every fourth child walking the streets and tell them, "Sorry kid, it just wasn't your century?"