Debts and Deficits are Out of Control

By Richard M. Ebeling


Understandably, the problems and politics of the moment dominate the news and attract the attention of most policy commentators and much of the public. Will there be another government shutdown, will House Democrats attempt to impeach the president, will interest rates remain low, and will there be a trade war with China? But there are longer-term problems as well, and one of them is the rising U.S. national debt due to annual government budget deficits as far into the future as the eye can see.

The Congressional Budget Office (CBO) recently issued its latest “Budget and Economic Outlook” projection, covering the next decade, 2019-29. And it is not a pretty picture. As of the beginning of February 2019, the cumulative federal government debt is approaching $22 trillion. This comes out to a per capita burden of nearly $67,000 for all those residing in the United States, and about $179,500 per U.S. taxpayer.

The CBO predicts that between 2019 and 2029, the government’s gross national debt will increase to almost $33.7 trillion because of annual budget deficits that beginning in the years immediately ahead will be over $1 trillion a year all the way to 2029 and will continue that way for every year after that to 2049 in the CBO’s much longer-term forecast.

Not that the Congressional Budget Office’s projections will be right on target. The report admits that the agency has been wrong in its past forecasts. But virtually always its error has been to underestimate the growth in the federal government’s deficits and debt. So, if its track record follows form, when 2029 rolls around and the coming 10 years are looked back on, the national-debt problem may very well be noticeably worse than the CBO is currently anticipating.

Debt Problem Is Due to Entitlement Spending

What is driving most of the debt problem is the growth in the core entitlement programs, Social Security, Medicare, and Medicaid. In fiscal year 2019, the CBO projects, Social Security spending will be $1.04 trillion and Medicare plus Medicaid spending will come to $1.17 trillion. All “mandatory” expenditures in the budget will total $2.7 trillion out of entire federal government spending of $4.41 trillion.

Thus, entitlement spending will make up more than 61 percent of all of Uncle Sam’s spending in fiscal year 2019. If we add on the legally required payment of net interest on the federal debt of an expected $383 billion, then all of these obligatory expenditures under current legislation come to $3.08 trillion, or close to 70 percent of the government’s budget. Another 15 percent of the 2019 budget represents spending on defense. The remaining 15 percent is on non-defense discretionary spending.

If the government’s spending trends continue as projected in the CBO analysis, in fiscal year 2029 mandatory spending will be $4.6 trillion out of a total federal budget of $7.04 trillion, or more than 65 percent of Uncle Sam’s expenditures. Net interest on the federal debt is expected to be $928 billion in fiscal 2029, for total obligatory spending of $5.4 trillion, or 77 percent of all spending that year.

Entitlements and Interest Costs in the Tens of Trillions

Please take note that in 2029, if the CBO is correct, just the net interest on the government’s debt will be greater than the entire expected budget deficit of $900 billion for 2019. And mandatory outlays in 2029 of $4.6 trillion will be larger than the entire federal budget of $4.4 trillion in fiscal year 2019.

Between 2020 and 2029, according to the CBO, total entitlement spending for the decade will be $36.9 trillion. Net interest on the government’s debt will total over $7 trillion of taxpayer money. Total government spending of all types will add up to $57.8 trillion, while the government will collect $46.17 trillion from all tax sources. The accumulated debt from the annual budget deficits for the 10 years will come to $11.64 trillion. This is what will make the government’s gross debt by that time nearly $33.7 trillion.

Over the coming decade, the CBO estimates, America’s gross domestic product (GDP) will increase from an expected $21.25 trillion in 2019 to possibly $31 trillion in 2029, for a 46 percent increase over the 10 years. But government spending will have gone up from $4.41 trillion in 2019 to $7.04 trillion in 2029, or a 60 percent increase.

Entitlement Spending in a Fiscal Crisis

Within these totals, the financial situation of the core entitlement programs — Social Security, Medicare, and Medicaid — will become increasingly precarious. In 2019, the CBO estimates, the Social Security Trust Fund will have a positive balance of $2.8 trillion. This will more than cover the likely $1.03 trillion in Social Security outlays for the 2019 fiscal year. But there is more to the story.

Over the decades, Social Security taxes collected have been far more than enough to cover all the payouts to eligible retirees. The annual surpluses have not been idly sitting in a “lockbox” waiting to be used in future years. No, each year’s surplus was taken by the government and used to partly cover its annual general budget deficits. IOUs, being Uncle Sam’s accumulated promises to pay himself back in the future to meet what he garnished from Social Security, were credited to the Social Security Trust Fund each year.

Uncle Sam Must Borrow to Pay for Entitlements

But already, the Social Security Trust Fund pays out to eligible retirees more than it takes in in Social Security payroll taxes. In fiscal year 2018, $855 billion was collected as payroll taxes, but Social Security outlays were $982 billion. There will be only $902 billion in Social Security taxes to cover the estimated $1.04 trillion in payouts in fiscal year 2019. This trend of larger annual retiree payouts than Social Security payroll-tax receipts will continue throughout the coming decade. In 2029, Social Security outlays will be $1.86 trillion, the CBO projects, with payroll-tax revenues of only $1.33 trillion, meaning a shortfall of over $500 billion for that year.

For the 10 years of 2020 to 2029, Social Security outlays will total $14.6 trillion, with total payroll receipts of $11.25 trillion for the decade. That is, there will be a shortfall of $3.35 trillion over the coming decade. This means that the Social Security Administration has been “redeeming” debt owed to it from the rest of the federal government to cover all its expenditures, and will continue to do so.

Uncle Sam, in other words, will have to borrow money over the years to come to pay back money it “borrowed” from its own Social Security Trust Fund to partly finance earlier deficit spending. Total Social Security Trust Fund asset balances (federal-government IOUs), which came to $2.8 trillion in 2018, will not be enough to cover all that will have to be paid out by the end of this coming decade.

The same pattern and trend is found in the Medicare Trust Fund. In fiscal year 2018, inflows came to $261 billion, with expenditures of $704 billion. In 2029, Medicare’s outlays are projected by the CBO to be over $1.5 trillion, with tax receipts of $423 billion. In fact, over the next 10 years, the CBO calculates that total Medicare expenditures may come to over $11.6 trillion, with projected designated payroll taxes to cover this of $3.7 trillion. In other words, Medicare is facing a far worse financial situation than even Social Security, with projected outlays more than three times larger than tax-revenue inflows for Medicare, under current legislation.

Some Say, “Don’t Deficit Worry, Be Spending Happy”

So what is to be done? Listening to some prominent economic-policy analysts, the answer is “Not much, and don’t worry about it.” Thus, in an article titled “Who’s Afraid of Budget Deficits: Why Washington Should End Its Debt Obsession,” Jason Furman and Lawrence H. Summers argue that America’s deficits and debt do not really matter, given their current levels and the trend they seem to be following.

They admit that, yes, there could be a point when the burden of debt becomes fiscally harmful and when private individuals and foreign governments might become reluctant to keep lending more money to the U.S. government by buying more and more Treasury debt.

But the U.S. is not anywhere near such a situation. The dollar is the world’s reserve currency, and plenty of individuals and private and public institutions desire to have a highly liquid and secure form of internationally accepted debt instrument. Plus, since the debt is all denominated in dollars, and Uncle Sam owns a dollar-creating printing press in the form of the Federal Reserve, America does not have to worry about not earning enough hard currency to pay its international debt. The U.S. government can always print up whatever amount of money it needs to pay what it owes to lenders foreign and domestic. In other words, the United States can inflate its money supply to depreciate its debt and pay it off!

But, for now, price inflation is relatively low and is expected to stay that way, and interest rates have been low by historical standards, Furman and Summers state. So there needs to be no noticeable inflation premium on nominal interest rates, and government borrowing seems not to be crowding out private investment in spite all of its deficit financing.

Wanting to Open the Government Spending Spigot

All is good in the fiscal world at present, which means there is plenty of room for the federal government to do a lot more to cover the costs of people’s health care expenses, improve America’s infrastructure, subsidize the expense of students going to college, support training programs and help to create jobs for more participants in the labor force, and spend more on “saving the planet” from climate change.

Borrow away, Furman and Summers say, and just to make it fairer, increase taxes on the rich and corporations to reduce the income inequality in America. Yes, they caution that the government should not go crazy with either deficit spending or increasing taxes; after all, there can always be too much of a good thing. But those who worry about all that government taxing, spending, and borrowing with the resulting accumulation of debt are just off the mark.

Typical of the hubris of the professional interventionist policy analyst, Furman and Summers basically advise, “Let’s spend more and more on all these nice and socially just things, but we need wise policy designers ( just like us) at the helm to steer the interventionist state on just the right fiscal course.”

How can America’s fiscal situation be out of control, they say, when government spending and taxing is so much less than that of many of the welfare states in Europe? We are just not taxing anywhere near the levels we should. Why, if it were not for earlier tax cuts, there would be no fiscal problems, they assure us.

It is, of course, a prejudice to think that because some other countries have larger and more comprehensive interventionist-welfare states than the U.S., America, therefore, is somehow backward in its government policies. It is just as easy to suggest that America is more enlightened and truer to a spirit of liberty precisely because it has not copied those more collectivist-oriented countries in other parts of the world.

No Vision of a Smaller-Government Society

Furman and Summers offer a grab bag of justifications for more and bigger government. The idea that America’s health care problems are caused by the extent to which the government already controls prices, directs services, and prevents the emergence of a truly competitive and fully privatized health care system in the United States never enters their minds. (See my article “For Healthcare, the Best Government Plan Is No Plan.”)

Nor can they seem to imagine a world in which education is privatized and market-driven in terms of size and curriculum, in place of the government’s ownership and control of lower and higher education in the United States, which has politicized it with political correctness and made it professor- and administration-driven in terms of costs and content. (See my article “Educational Socialism versus the Free Market.”)

Also, the idea that jobs and the worker skills needed for them should be determined by the marketplace of consumer demands and producer uses for various types of trained workers rather than government programs and subsidies is also outside of their field of vision. Theirs is an all-too-typical arrogance that “the experts” know what people need better than what can be discovered and decided upon by people themselves.

As for the claimed social benefits from government infrastructure spending on roads and bridges, for instance, there is a reason why American economist Francis Amasa Walker (1840-97) referred to such spending as “road socialism” in his textbook Political Economy (1883). How do we know where roads, highways, bridges, and tunnels should be built other than by market-based demands and profitability indicating where people wish to live, work, visit, and pass through?

Government monopolization of virtually all such infrastructure means that it has been imposed by social engineers, urban planners, and zoning regulators who have presumed to plan where and how we live and get about from one place to another.

Government Borrowing Always Crowds Out Private Investment

Unless we assume that we live in a post-scarcity world in which the means available to serve our various ends are in superabundance, every dollar that government borrows to cover a portion of its current budgetary expenditures takes a dollar away from a private sector use for which the resources represented by that dollar could have been applied.

Whether it shows itself in a greater or lesser rise in the rate of interest due to that government deficit financing does not change the fact that any means that has potentially competing uses and is borrowed by the government preempts its employment by private investors and other users.

To the extent that that dollar would have been utilized for a productive private investment purpose, market-driven capital formation and technological improvement have been slowed down and the longer-term standard of living in society has been thwarted from rising as much and as soon as might otherwise have been the case.

Deficits and the Illusion of Something for Nothing

Another serious downside of accepting government deficits to finance portions of government expenditures is that it creates the illusion that politicians and bureaucrats have it in their power to give voters and taxpayers something for nothing. In fiscal year 2018, the federal government spent a total of $4.1 trillion, out of which $780 billion was covered with borrowed monies.

This means that 19 percent of Uncle Sam’s expenditures were not covered by current taxes. So for every $100 of government spending, it seemed that taxpayers only had to pay $81 to get what the government was doing. “Come on in for our big-government sale! Nearly 20 percent off the total cost of everything government does for you! Hurry, hurry, be sure to vote for those who give you this something for nothing.”

The advantage of the old, pre-Keynesian notion of an annual balanced budget was that it required those running for and holding political office to more transparently inform the citizen-voters what would be the full cost of any spending that they proposed to increase or add to the overall activities of the government. The voters might still elect the candidate offering such promises, but the citizenry would have a clearer conception of the tax burden and on whom it was likely to fall to weigh against the proposed increases in government spending. The costs of bigger-spending government were more closely tied to any promised benefits.

But in an era in which government budgetary constraints are considered neither necessary nor desirable, the pandora’s box of political pandering and plundering has been opened wide. Unrestrained government spending is the playground of every politician and special interest group — left, right, and center — to reason about and wrangle over what more government could and should be spending on in the directions and the amounts that give those special interests what they want and garner the campaign contributions and election-day voters that the politicians lust after.

Years ago, Chicago-school economist and Nobel laureate Milton Friedman (1912-2006) argued that deficits, in themselves, do not matter for estimating the drag of government on people’s freedom and free enterprise. That measure, he said, is better understood as the total amount of taxed and borrowed resources combined that is syphoned off from society. Total government expenditures represents the clearer measurement of the cost of government to society.

No doubt in this Friedman was correct. But when government can resort to budget deficits to cover a significant amount of its expenditures, it creates a false impression, an illusion, that the burden of government is noticeably less than it actually is, because current taxing is less than current spending.

Out-of-Control Government Spending

As Furman and Summers admit, someday a reckoning does come, in that sums borrowed in the past come due in the form of principal and interest payments later in the future. But when government can roll over old debt coming due today and borrow even more to cover part of its current expenditures as well, the cumulative burden that will fall on future taxpayers keeps getting bigger and bigger. (See my article “Why Government Deficits and Debt Do Matter.”)

As we saw, if the CBO projections of what is to come with government finances over the next decade are anywhere near accurate, the government’s net interest payment of nearly $930 billion in 2029 will be larger than the entire budget deficit for fiscal year 2018 ($780 billion) or the deficit expected in 2019 ($900 billion).

It might be said that by 2029, GDP will be a lot larger — by 46 percent of its size now. So as a percentage of the economy at that time, $930 billion will not represent what that amount does today. Even so, nearly $1 trillion is still nearly $1 trillion. And that will still represent in 2029 a huge amount of resources that will not be available to taxpayers and private sector investors or even for other government activities for which it might have been allocated.

Don’t Raise the National Debt

What, then, is to be done? First of all, in my view, the legal cap on the amount of total government debt must not be raised. In February 2018, President Trump signed legislation lifting the debt ceiling until March 2, 2019, at which point whatever the national debt may be — somewhere above $22 trillion — becomes the new limit unless Congress votes to increase it and the president signs off.

If it is not increased, the Treasury says it can once again juggle the books until the summer of 2019; afterward, there would be no further room for fiscal fudging. By not legally increasing the debt ceiling, the federal government, de facto, would operate on the basis of a balanced-budget rule, since it could not spend any additional monies not raised through taxes.

At that point, the citizenry would find out the reality of what government costs, because either taxes would have to be increased to cover what otherwise would have been any deficit spending, or government programs selectively or across the board would have to be cut to stay within tax revenues collected. (See my article “The National Debt Limit Equals a Balanced Budget.”)

A Debate on the Size and Scope of Government

A real debate would then have to open about the nature and purpose of government, including its size, scope, and cost. This would not be easy or calm. There would be hysterics about the U.S. government defaulting on its debt, not being able to meet Social Security, Medicare, or Medicaid expenses, failing to pay out its promised subsidies to a wide variety of favored groups, not meeting the expenses of its far-flung military engagements around the world, and many other things.

But that would be the point. It would be necessary for the American citizenry to face up to all that government does and the financial burden of doing all of it at home and abroad. People would be reminded that there are no free lunches. The question of the government’s purposes and its priorities would have to be confronted in all their painful reality. (See my article “Out-of-Control Government: How, Why, and What to Do.”)

As uncomfortable as this might be, it would be better to do it sooner rather than later. In spite of being nonchalant about America’s deficits and debt, as some policy proponents like Furman and Summers try to be, government spending and borrowing has been and will continue to be seriously out of control, with dire longer-run consequences if not addressed, while addressing it would be far less of a fiscal disaster than it will be if the country is left to follow its current course.

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Richard M. Ebeling

Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina. Ebeling lived on AIER's campus from 2008 to 2009.