Total federal debt was $620 billion in 1976. Why 1976? In a recent column, Holman Jenkins referenced Jimmy Carter’s contention in a 1976 debate that “The best way to control inflation is to cut down government waste…and to let the American free-enterprise system work freely and effectively.”
Jenkins subsequently wrote that Carter had “given voice to the animating spirit of American reform that would transcend the parties over the next 20 years.” There’s no disagreeing with Jenkins about the free enterprise portion of what Carter said, but Jenkins could possibly be convinced that Carter’s comments about inflation were, if anything, backwards. That Carter misspoke on inflation, its causes, and the budgetary implications of inflation (or a lack of it), is a major driver of The Deficit Delusion, and the book’s arguably quixotic attempt to convince left, right and in between that the deficit and debt discussion is profoundly mistaken on the matter of why we have debt in the first place.
Consider what happened after Carter left office. Deficits and debt increased amid soaring federal tax receipts in the booming, Reagan 1980s. The latter was and is logical. Politicians exist to spend, they’re naturally not as careful about spending the money of others, so it makes sense that as tax revenues increased, so did deficits. It’s markets at work. What’s taking in a lot of money now, and is expected to take in more in the future, is an easy loan. Federal debt grew in the 1980s exactly because federal revenues did. Jenkins would agree that this occurred amid falling inflation.
Which was another reason for the ease with which deficits and debt increased in the 1980s. The value of Treasuries is rooted in dollar-denominated income streams. If government spending or borrowing caused inflation to rise, as in a declining dollar, this would if anything be the driver of shrinking deficits and debt. Money is ruthless, and the last thing investors would do is lend to a nation that has made it policy to devalue its currency. Rising deficits and debt signal market confidence in both falling inflation and rising government revenue that’s an effect of economic growth.
Fast forward to 2024, and total federal spending was $6.75 trillion, roughly thirteen times what it was in 1980, and about twenty times what it was when Carter argued that inflation was caused by government waste. And with total federal debt sitting at $37 trillion (and counting), debt is nearly sixty times what it was when Carter spoke. Notable here, and opposite Carter, the yield on the 10-year note is presently in the 4% range. It was 7.6% in 1976, and 11% in 1980. Which is logical.
Money is once again ruthless. Enormous amounts of debt ($37 trillion) signal powerful market confidence that the money will be paid back.
What’s important is that none of this would have happened amid a stretch of soaring inflation, simply because lenders are loathe to lend dollars that will be paid back with cheaper ones, and of greater importance, the investors who power economic growth are less prone to put money to work (investment) if returns are expected to come back in devalued dollars. None of this is to defend government spending, borrowing or Treasury’s at times flawed (including now) oversight of the dollar since 1976, but it is to say that Carter once again misspoke. That’s because governments known to routinely inflate can’t easily borrow, nor do they have the means to spend much either since devaluing governments don’t preside over the kind of growth that begets the soaring tax revenues necessary for spending.
