Let's Put to Bed the 'America Is Bankrupt' Myth

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To read economic and political commentary with any kind of frequency is to be bombarded daily - and hourly for that matter - with breathy articles about a United States groaning under deficits that surely signal bankruptcy, Social Security checks that eventually won't clear, and of course a looming financial crisis. A recent New York Times column by noted deficit scold David Stockman naturally referenced America's "desperate" financial situation.

Much of this commentary is well written, it's certainly popular, but it's also total nonsense.

To understand why we must first consider the marketplace for U.S. Treasuries, which is the deepest in the world. As sentient beings all, no doubt most of us can remember similarly scary commentary about the U.S.'s bankruptcy going back at least to the early ‘80s, but anyone who acted on all the scaremongering through short sales of U.S. debt was wiped out, and in a substantial way.

And that's the first problem with the bankrupt narrative; specifically that the deepest, most informed markets in the world disagree. If U.S. finances were really as bad as the commentariat suggest, and have been suggesting for decades, Treasuries would be in freefall.

Indeed, be it an individual, a company or a country, truly bankrupt entities can't borrow at low rates of interest. By virtue of being insolvent and unable to pay back debts, bankruptcy causes borrowing rates to rise, and in a very big way. That U.S. Treasury continues (sadly) to borrow large amounts of money, and that investors line up for the privilege to purchase the debt, tells us that those who regularly dine out on the bankruptcy concept should temper their rhetoric.

To understand why they should, it has to be remembered that large as the Treasury's debts are, basic economic models whereby the U.S. economy grows in the 3% range show that over time the debt could be paid off with ease. So if the debt is what concerns people, the simple answer is to unshackle the individuals (reduced tax rates and regulations, free trade, and a stable dollar) who comprise the U.S. economy, and in allowing the productive to produce, revenues necessary to pay off government debt that we worry too much about will be easily paid off.

About the above, it should be said that any tax plan, be it lower or higher rates (both can work) used to goose revenues, should be looked at with skepticism. Politicians irrespective of party always spend the revenues that reach them, so the better long-term plan is to cut tax rates so low that revenues actually decline, and do this in concert with spending decreases that bring the federal government within its constitutional limits. We don't have a revenue problem, we have a spending problem.

Of course some who buy into the bankruptcy argument, and there are many, also argue that a crisis awaits for the size of our national debt growing as a percentage of the U.S. economy. Their muse in this regard is a recent and very worthwhile book by economists Carmen Reinhart and Kenneth Rogoff, This Time Is Different, in which Reinhart and Rogoff note an historical correlation between country debt reaching 100% of GDP, and default.

The problem with using the above-mentioned history is that the United States is not just any country. Filled with arguably the greatest collection of minds and entrepreneurs in the world (the number would be even larger absent a silly American aversion to immigration), debt that forces other countries to default can't fell a country stocked with such amazing wealth producers.

Figure Japan's national debt is presently 220% of its GDP (92% in the U.S.), but there doesn't exist any market evidence of Japan being on the verge of default; Japan's problems a combination of protectionist policy in the U.S. that forced a massive deflation on the country, along with an aversion to failure that props up companies that should have been allowed to fail. This is in no way meant to excuse ridiculous levels of spending in both Japan and the U.S. (the spending itself weighs on economic growth), but it is to say that the history of defaults can be deceptive.

What's missed in all of this bombastic commentary about deficits, spending and bankruptcy is what's the crisis, and what's the cure. Rather than argue that the looming crisis for the U.S. is the day that investors tire of U.S. debt, the scaremongers in our midst should reorient their narrative.

Indeed, the true crisis at present is all the government spending which signifies capital waste and destruction, and what that tells us about the myriad Microsofts, Googles and Intels that never saw the light of day thanks to our federal government consuming so much limited capital. Similarly the crisis is an individual one when we consider the millions of Americans who might be doing things that are actually stimulative to the economy and to their self esteem were they not working for the government.

In short, the crisis is decidedly not the day when investors turn the other cheek to the issuance of government debt. Instead, the crisis we're experiencing is in the here and now as an ever expanding government and its gargantuan need for capital smothers true entrepreneurialism, and the productive jobs that entrepreneurs create.

America is not bankrupt, and it's not close to being that way. But rather than fear the "bankruptcy" day that never seems to come, it's time to change the discussion to the greater truth that the U.S. was a nation founded on limited government, and if we return to just that prosperity will be our reward, along with freedom from all the silly articles about America being broke.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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