Deficit Hawks Ignore Greater Spending Peril
Last week Congress approved an increase of the U.S. debt ceiling to $14.3 trillion. Once the figure was announced, a lot of understandable hand-wringing ensued, including the suggestion that our federal debt could lose its AAA classification.
Without excusing for one minute federal debt raised to fund all manner of unconstitutional spending, not to mention the greater truth that the debt ceiling ignores unfunded liabilities of the Social Security and Medicare variety, the worry over our federal deficits is arguably overdone. While intimidating given its size, federal debt obscures the much bigger problem which is the level of federal spending itself.
Regarding the deficits, most readers are well aware of the numbers involved. At $14.3 trillion, the accumulated debt calculates to $40,000 per U.S. citizen. Scary numbers for sure - numbers that once again obscure other government liabilities - but the simple truth is that markets don't seem particularly worried.
Indeed, long-term U.S. Treasuries are usually the best forward-looking indicator of investor fear, but with 10 and 30-year U.S. debt respectively yielding 3.6 and 4.5 percent, it seems investors aren't terribly concerned. And when we consider that markets for Treasury debt are some of the deepest in the world, the yields are presumably a pretty efficient signal of investor calm. In that sense, those who disagree and who view bond investors as overly sanguine must know something that the broad market doesn't.
Considering the owners of our debt, much is made about the Chinese government feeding the spending addiction of our own politicians while exerting more and more control over our economic future. This makes for provocative headlines, but the reality is that far from the majority owner of our massive debt, China's share is roughly 20 percent.
More to the point, the fact that the Chinese government owns a lot of our debt is of no real consequence. Dollars are dollars, and debt is debt, so ownership of our liabilities is a distinction without a difference. With capital fungible, if not China, dollar holders elsewhere would purchase claims on future dollar-denominated debt. If anything, China's exposure to the U.S. should be seen as a peaceful positive with the rising nation less likely to have military designs on a country in which it's heavily invested.
As for the Triple A rating on U.S. Treasuries, there's a lot of talk that if the debt is downgraded, austerity is on the way. Once again this makes for provocative headlines, but what's not considered enough is how very good such a development might be. Assuming a debt downgrade that would make our debt less attractive, two positives would emerge.
For one, a downgrade would signal to investors in all manner of government debt that it is not a sure thing. If government profligacy is a problem, then a U.S. downgrade would ensure greater parsimony on the part of all governments.
Second, if a U.S. downgrade were to burn investors sufficiently, the subsequent crisis itself would happily reorient investment away from wasteful governments and, money being fungible, into the hands of individuals eager to deploy what is limited capital more wisely. Government debt defaults would surely redound to the "closed" global economy over time for a lot of previously wasteful investment seeking more productive pursuits.
All of which brings us to the very real problem of government spending on its own. In response to the latest debt-ceiling increase, Rep. John Boehner trotted out the all-too-familiar line that "This debt is being piled on the backs of our kids and grandkids with no relief in sight." Good politics for sure, but Boehner's rhetoric obscures the greater truth that spending, as opposed to debt, is very much a problem of today, and it weighs on our economy much more than deficits do.
Indeed, while it's a sad fact that investors are willing to finance our debt at low levels of interest, that they are is once again a market signal suggesting that future generations won't struggle to pay off what might at least appear insurmountable. Our deficits are big and offensive, but investors don't seem worried.
But what should worry us is the total level of spending by our federal government which serves as a massive tax on real economic activity in the present. Applying Fredric Bastiat's "seen and unseen" to nosebleed government outlays, neither the seen nor the unseen induce optimism.
The "seen" in this case is gag-inducing waste including but not limited to Cash-for-Clunkers, corporate welfare of the bailout variety, and earmarks of recent vintage such as The Brige to Nowhere. The unseen, however, concerns the Microsofts, Intels and Googles that will never see the light of day thanks to an allegedly benevolent political class so eagerly vacuuming up capital that if left alone might find its way to ventures that are worthwhile.
Unseen is how much higher our wages would be if our federal minders weren't spending over $3 trillion per year, and how very different and varied our collective employment outlook would be if our productive gains stayed in the private sector as opposed to the bloated government sector. It's said that government spending is compassionate, but what is compassionate about politicians spending money not their own?
If it's agreed that governments have no resources of their own, would readers prefer a balanced budget of $3 trillion plus, or a trillion-dollar deficit amid $1.5 trillion of spending? The answer here seems pretty simple. Since dollars are dollars, and investors don't seem concerned with the deficit, the most economically stimulative path would be to continue running deficits while greatly reducing the level of federal taxation and spending.
Put simply, deficits can be financed seemingly in perpetuity, while total spending, far from tomorrow's burden, is a problem of today, and it burdens future generations far more than deficits do for our grandchildren inheriting an economy less advanced than otherwise would be the case if politicians consumed less. Government spending is a tax, and it harms us mightily as private businesses and wage-interested workers are starved in order to feed the growing governmental beast. At risk of being repetitive, the funds handed out to special interests by Congress are yours.
In short, our concern over easily financed deficits is blinding us to the greater problem of runaway government spending. Spending is the true tax on economic productivity, and we ignore it at our peril.