Ethan Yang -March 17, 2021 @ American Institute for Economic Research
Michael Tanner’s book Going for Broke was published in 2015 and unfortunately, his message has become more urgent as time has passed. It should be no surprise to anyone that the United States government has reached new levels of debt after spending trillions of dollars to combat Covid-19. According to the US Government Accountability Office,
“As of Sept. 30, 2020, the federal debt was $26.9 trillion—up $4.2 trillion from last year, due largely to the government’s COVID-19 response.”
At the time of this writing the debt has now passed $28 trillion. Even more worryingly, the Wall Street Journal reported in September of 2020 that,
“The Congressional Budget Office said Wednesday that federal debt held by the public is projected to reach or exceed 100% of U.S. gross domestic product, the broadest measure of U.S. economic output, in the fiscal year that begins on Oct. 1. That would put the U.S. in the company of a handful of nations with debt loads that exceed their economies, including Japan, Italy and Greece.”
With the US economy slowly reopening and Covid-19 increasingly under control, now would be a good time to start to think about the elephant in the room, which is the ever-increasing national debt that has only accelerated in recent years.
US Debt 101
Tanner’s book starts off by explaining the basics of how the US federal budget operates and how it accumulates debt. Debt in and of itself is not a bad thing. Oftentimes going into debt may be necessary to make forward-looking investments or to navigate through tough times such as a war or a pandemic. The US government in particular accumulates debt when its expenses outweigh what it takes in from taxation. Rather than raising taxes, it fills that gap by accumulating debt to fund its programs by selling securities to private and public buyers. These buyers could be private citizens, corporations, foreign governments, and state or local governments. It would then fulfill those securities with interest.
The problem comes when fiscal discipline fails to return once the problem is solved, which is exactly how the government spends money. There’s always something new that politicians decide is worth going into debt over and spending more of the public’s money. There are few incentives to stop overspending and countless incentives to keep spending more and more. Tanner writes,
“Economists debate the exact relationship between the size of government and economic growth, but few would argue that government can consume an unlimited proportion of the national economy without it having a significant impact on the economy.
For example, Harvard’s Robert Barro found that “public consumption spending is systematically inversely related to economic growth.”
Accumulating large debts hurts the economy in a number of ways. Not only does it increase the need for taxation but oftentimes the government programs created by expanding debt are counterproductive. This idea is embodied in the economic term known as crowding out, which Investopedia explains
“One of the most common forms of crowding out takes place when a large government, such as that of the U.S., increases its borrowing and sets in motion a chain of events that results in the curtailing of private-sector spending. The sheer scale of this type of borrowing can lead to substantial rises in the real interest rate, which has the effect of absorbing the economy’s lending capacity and of discouraging businesses from making capital investments.”
Government spending and debt in effect displace productive private sector spending, which in turn slows progress and innovation. Tanner notes that,
“Liberian economist James Guseh found that every 10 percent increase in the size of government led to a 0.74 percent decline in economic growth in democratic mixed economies and a slightly larger 1.11 percent decline in democratic market based economies.”
This statistic has also been reproduced by a number of other economists. Large debts not only slow economic growth but could also cause acute harm such as increased interest rates along with higher inflation, higher taxes, increased likelihood of an international loss of confidence, and decreased political independence from countries that hold our debt, such as China. Oftentimes the reasons why the debt increases are not productive causes either. Tanner notes that,
“Government social welfare programs, for instance, encourage dependency, discourage work effort, and create disincentives for family formation. Government retirement programs crowd out private savings and can leave retirees with lower levels of retirement benefits than they might have received from investing that money privately.”
Tackling the growing debt problem means not only getting our financial house in order but cutting back on counterproductive social programs that are often poorly designed and insulated from competition. A failure to do so will not only set the country up for a slowly degrading economic future but also a potential debt crisis.
The Need to Cut Spending
The federal budget is divided into mandatory and discretionary spending. Discretionary spending is the most flexible and can be changed through the Congressional appropriations process during the drafting of a budget. It includes funding for most government functions we would think of such as the military, the police, regulatory agencies, transportation, infrastructure, research, and so on. Mandatory spending refers to entitlement programs that can only be amended by changing the law that mandated the spending, hence the name. Tanner writes that from the year 2000 to 2015,
“Nominal nondefense discretionary spending has increased by 80 percent, and defense spending has risen by 112 – even after the sequester-imposed reductions in 2013.”
Government programs continue to grow more and more expensive with little observable increase in quality or innovation. However, the elephant in the room is not discretionary spending but mandatory spending, which comprises over two-thirds of the federal budget. Spending on all ends continues to grow and grow with no end in sight. Tanner writes that
“Under the more realistic alternative fiscal scenario, by 2050 federal government spending will exceed 36 percent of GDP. Adding in state and local spending, government at all levels would be consuming around 51 percent of everything produced in this country. Beyond 2050, spending continues to rise to levels that would cripple the economy.”
Essentially, this is the slow death of the market economy, crushed not by lockdowns or the cunning of a deadly adversary, but by the gradual expansion of the state through otherwise benign democratic procedures.
Politicians often attempt to sell the public two flawed methods to solve the growing debt problem. The Left proposes that taxes should be raised to reduce the debt and fund programs. This is flawed because we do not have a taxation problem, but a spending problem. In order for tax hikes to actually address the debt, spending must be cut as well or else we are simply feeding the beast. The Right often talks about spending cuts, but only to discretionary spending which is a drop in the pond. Completely ending foreign aid for example would only eliminate 1 percent of the budget. Cutting funding to groups like Planned Parenthood and the Corporation for Public Broadcasting would free up around .0002 percent of the budget. These discretionary budget trimmings are not only ineffective but deceptive political promises that seem to only leverage concerns about the debt to further partisan objectives.
Entitlement Reform
Entitlements are taking up over two-thirds of the budget while encountering little political will to confront them. These are all the sensitive and highly defended government programs like Social Security, Medicare, and Medicaid. Tanner writes that by 2050 it is possible that these three programs alone could consume up to 15.5 percent of annual GDP and possibly 90 percent of federal revenues.
Social Security is often considered the third rail of politics but just about everyone understands that the younger generation today will not have access to a solvent public retirement fund at the rate things are going. The book notes that the Social Security Administration stated,
“By 2033 the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.”
The current system is not only financially unsustainable, it’s also a Ponzi scheme where those who pay into the system, working-age people, support those that collect the entitlement payments in a never-ending cycle. Although it may be advertised as a public retirement fund, those who pay into the system today will never actually get to use the money that they were required to pay in.
Tanner writes that one reform to answer this problem of solvency would be to switch to personal savings accounts where the money working people put in will actually be saved for them and not used in a general fund. Furthermore, such savings should be able to be invested in private equity markets which would further increase the funds available over the long term.
Medicare reform is another important entitlement issue that needs to be tackled. Tanner notes that some estimates have Medicare drowning in a sea of red ink with unfunded liabilities that could be worth more than $89 trillion today. Not only is it expensive and unaffordable, but the system itself is also counterproductive.
Tanner cites studies that show that higher Medicare spending does not result in better quality healthcare, Medicare does not provide better healthcare for the elderly than private insurance, and that 30 percent of current healthcare spending is wasted. Furthermore, people are living longer and longer, which raises the level of expenses per individual.
Some of Tanner’s proposed reforms include raising the age of eligibility and implementing a voucher system that would give more choice to patients and encourage competition amongst providers to lower costs.
Medicaid reform is another important entitlement issue that must be addressed to confront our rising debt. Not only is its cost rising by the billions every year, but it fails to deliver quality healthcare to low-income individuals. Bureaucratic inefficiencies and low reimbursement rates contribute to patients being turned away at rates higher than if they were privately insured. Tanner notes that a study in the New England Journal of Medicine found that mothers of children with serious medical conditions were denied an appointment 66 percent of the time when they mentioned their child was on Medicaid. This statistic is representative of Medicaid’s soaring cost that not only fails to deliver quality service but also turns out to be counterproductive.
Tanner notes a number of structural reforms to stop the ongoing strategy of only throwing more money at the problem. Some of those include a voucher system that would encourage more choice and competition and a switch to a block grant system which would encourage state-level experimentation that could increase efficiency while reducing costs.
Key Takeaways
Although the US debt has been rising for decades, the past few years, especially 2020, have seen the debt soar to new heights in a frightening time frame. Although proponents of Modern Monetary Theory may cheer on increased spending as proof that deficits do not matter, even they realize that this cannot go on forever unrestrained.
Tanner’s book provides sustainable and sensible solutions over the tired political talking points delivered by those who seem to only care about the debt as far as it benefits their agenda. The US government’s debt is soaring like never before and promises to only bring economic stagnation if not outright disaster. Looking past Covid-19, we should strive to implement bold reforms to our costly but important entitlement programs to truly deliver on fiscal stability. These reforms may not be popular or easy but there is no doubt that they will be necessary.
Ethan Yang
Ethan joined AIER in 2020 as an Editorial Assistant and is a graduate of Trinity College. He received a BA in Political Science alongside a minor in Legal Studies and Formal Organizations.
He currently serves as Local Coordinator at Students for Liberty and the Director of the Mark Twain Center for the Study of Human Freedom at Trinity College.
Prior to joining AIER, he interned at organizations such as the American Legislative Exchange Council, the Connecticut State Senate, and the Cause of Action Institute.
Ethan is currently based in Washington D.C.
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