The $37 trillion national debt will not be paid for by America’s middle class. How we know this is the $37 trillion in debt itself, along with the accepted truth that soon enough $37 trillion will be $50 trillion, and up and up and up.
The national debt is poised to soar to $50 trillion and beyond not because the rich aren’t taxed enough (left), Democrats spend too much (conservatives), not enough entitlement reform and taxes that are too low (libertarians), and not enough tax revenue because of tax rates that are too high (supply side happy talkers).
Academic in their viewpoint, the warring ideologies haughtily ignore market signals with their emotional pronunciations. The markets keep telling them they’re mistaking debt cause and effect.
Take conservative Manhattan Institute scholar Jessica Riedl. In a recent interview, Riedl asserted that “Neither political party is suicidal enough to tell middle-class voters that their taxes and benefits must also contribute heavily to reining in runaway deficits. So we comfort ourselves with the wishful thinking that millionaires and billionaires can take the entire burden off our hands. But beyond the empty rhetoric, you will never see a specific, fully scored proposal to eliminate most of the long-term deficit by taxing the rich—because mathematically, it's just not possible.” Riedl might agree that market signals point to a different future.
That's because if investors thought that the U.S. middle class would eventually be on the hook for the debt, then there would be no debt. Borrowing doesn’t just happen, rather it’s an effect of market confidence in the incomings of the borrower in the present and future. And as middle class earnings attest, the taxation of them doesn’t rate big borrowing.
If still in doubt, just ask yourself how much borrowing power the typical middle earner has in the private sector of the present, all while speculating on future borrowing power. Remember this with Riedl’s fears top of mind: lenders that would quickly close their borrowing windows to middle earners in the private sector don’t suddenly become blithe when it’s the government borrowing against the taxable earnings of middle earners in the future. Which suggests yet again that if the middle class faced a high-tax future, there would be very little national debt.
Still, Riedl makes the correct point that at least for now, there’s not enough millionaire and billionaire wealth in the U.S. to pay off the debt. That’s so true, but it’s a truth that glosses over what market prices convey in the present. In the present they're a look into the future.
Which is just a comment that the capacity for the innovative to create wealth in the present is fraction of what it will be in the future, as is the number of billionaires and would-be trillionaires a fraction of what it will be in the future. As is made plain in The Deficit Delusion, we’re not too far from the explosion of 1-man “unicorns.”
Americans quite simply haven’t scratched the surface of their wealth-creating potential, which is why Treasury yields continue to decline as the national debt goes up. The incomings to Treasury from America’s rich are small today relative to what they will be, thus explaining the allegeded debt anomaly.
Which is the point. The middle classes will not be on the hook for the debt. They don’t earn nearly enough to pay off what is sadly going higher thanks to debt analysis that near monolithically focuses on nominal debt syptoms, as opposed to the much tax revenue problem.
