I find inspiration for writing these articles from the conversations I have with people. Getting asked the same questions repeatedly gives me an impression of public sentiment. The main topic of conversation these days is concern for the economic health of the country. The federal government is spending money like there’s no tomorrow and many of the people I meet are concerned there actually won’t be a tomorrow at some point.
Financial Analogy
You’ve probably seen the analogy that compares government financing to that of a household—we just knock off a few zeroes from the numbers to make them look like a typical family budget. It isn’t a perfect comparison, but it is illustrative to make a point.
As a household, the federal government is spending $62,000 this year on a projected income of $47,900 while already being $319,000 in debt. They are borrowing $.23 for every dollar spent! Only five years ago, they were spending $40,000 on an income of $33,340 with a debt of $253,000. That’s an increase of 55% in spending, 44% in income, and 26% in total debt … in five years.
I’m old enough to remember the outcry when our national debt crossed $10 trillion in 2000. Now, there isn’t even a concern from elected officials when we approach $32 trillion! What’s even worse is that future deficits are projected to grow even larger. There is no plan for fiscal restraint. They simply raise the debt ceiling (the amount of debt they are allowed to accumulate by law) every time it’s reached—the “crisis” is simply an opportunity for political maneuvering. There is no limit in actuality.
The Problem
Interest rates are rising. The government was able to finance much of its current debt at historically low interest rates. Going forward, that situation has changed. Current debt is accumulating at higher rates ($1.4 trillion this year!) and maturing debt will be renewed at higher rates in the coming years.
Five years ago, the net interest paid on federal debt was $263 billion (7% of the budget). This year, it is projected to be $640 billion (10% of a larger outlay) for an increase of 143%! Unless something changes with current projections, there will be an irreversible debt spiral at some point where interest payments even dwarf entitlement programs.
Contrarian Views
Some say that these increased outlays by government are beneficial for individuals and businesses as more money is available for income and investment across the economy. In fact, the government can simply increase taxes and print more money so the household analogy doesn’t hold up under scrutiny. While some economic participants may have different tools at their disposal, all are subject to the same economic principles. Ignoring those principles is dangerous.
There is a limit to the government’s ability to tax money from the economy. More taxation means less money in circulation. If government spending is helpful by injecting money into the economy, taxation does the exact opposite and hurts economic growth.
Printing more money has a similar effect. More money in circulation axiomatically means greater inflation—more money chasing finite goods. Greater inflation helps those in debt (like the government) make their debts seem smaller compared to money available. In fact, many have argued inflation is the way to handle the ever-increasing government debt. The problem is that inflation has a negative effect on individuals and businesses whose wealth is depleted by the same process that mitigates debt. Inflation will also kill the economic output the government relies on for tax receipts.
The issue isn’t that the government is in debt. The government is accelerating its rate of debt accumulation with no discussion of restraint and no intent at repayment. That is another way governments are different than households—we have to actually pay back what we borrow.
I’ve laid out the problem and would love to be able to point to a solution. The only solution comes through government representation. There must be a change in thinking at some point. The rest of us can only participate in the economy as it is, not as we want it to be.
