The national debt will continue to soar. Bank on it.
See Holman Jenkins’s column from last week for evidence. He wrote in the Wall Street Journal that “The U.S. won’t deal with its looming debt problem except with ad hockery – inflation, spending cuts, tax hikes, de facto claw-backs of government benefits via waiting lists and declining service quality.” Here's a case that the ad-hockery won’t work.
For one, it’s not just that U.S. Treasuries are the most earned income streams in the world and that the markets for them are by extension the most informed in the world. In addition to being deep and informed, Treasury markets look ahead as far out as thirty years. Jenkins writes of a “looming debt problem,” but the 30-year doesn't reflect Jenkins's pessimism.
Jenkins doesn’t require telling that politicians exist to spend, which is why spending cuts will similarly do nothing to shrink the debt. They would just free up dollars for politicians to direct to other programs, or all new ones. No act of spending restraint ever shrinks government.
That’s why claw-backs and declining service quality are similarly difficult to countenance. See above. Short of politicians burning up the money saved, it’s going to find its way to other congressional priorities that will grow and grow. Medicare began as a $3 billion program…
Those siding with Jenkins might reply that money saved through spending cuts, claw-backs, reduced service quality, or even entitlement reform could be used to just pay off the debt itself. But even if so, debt paid will merely give Congress more room in the present and future to borrow as needed. This is particularly true given the growing consensus on the left and right that old programs like Social Security, Medicaid and Medicare are most problematic for them “crowding out” new federal spending plans today. Say it again that any near-term spending restraint or debt payments will quickly set the stage for future spending surges on programs with much greater room to grow.
Inflation? It’s no doubt true that a major devaluation of the dollar (one that makes President Trump’s backwards worship of currency weakness appear tame) would shrink the debt, but Treasury yields aren’t presently predicting that outcome.
Instead, and very logically, Treasury yields have declined as borrowing has risen. Jenkins would surely agree that money is ruthless. Since it is, the U.S.’s soaring debt must be an effect of soaring trust that funds borrowed will be paid back with ease. Taking ruthless money further, if devaluation were the expected plan in the marketplace, there would be much less debt.
What about the tax hikes Jenkins mentioned? More tax revenue to reduce the debt...No chance. As evidenced by ever-increasing federal debt alongside falling yields over the last 45 years, the markets are already telling us Treasury is taking in too much tax revenue now, and much worse, it will take in quite a bit more in the future.
Debt is an effect of market trust in the future incomings of the borrower. It’s what we see routinely among individuals and businesses, and it’s true for government too. Despite this, more tax revenue is regularly bruited as the answer to the debt.
No wonder the national debt continues to rise. No one is addressing why there’s debt: too-much-tax-revenue-now, with markets expectations of much more in the future. See forward looking Treasury yields. Herculean waste, deficits and debt are the symptoms of investor confidence that tax revenues will soar. We can’t fix a problem that no policy solution addresses.
