HomeBudget & Tax NewsFast-Growing National Debt Threatens to Unleash Economic Disaster

Fast-Growing National Debt Threatens to Unleash Economic Disaster

The Congressional Budget Office has recently issued a federal “Budget Outlook Update” for the next ten years in the context of the government’s fiscal condition in the face of the coronavirus and Washington’s spending spree. The message: the deficit for fiscal year 2020 is huge, and the national debt is getting bigger, faster than had been projected before America’s lockdowns that brought much of the economy to a halt.

Normally, serious recessionary downturns are the result of central bank monetary mismanagement that generates unsustainable investment and housing booms and bubbles through money, credit and interest rate manipulation. Eventually, the credit expansion house of cards comes tumbling down as various sectors of the economy discover the need for a rebalancing of resource, labor, and capital uses in the face of numerous mismatches between supplies and demands.

The Government Directly Caused the Downturn of 2020

There were many signs that ten years of nearly zero interest rates and a large expansion of bank credit were setting the stage for an eventual “correction” in the economy. However “inevitable” this might have been at some point, there was no indication at the beginning of 2020 that a serious recession was on the immediate horizon. No, what happened in the first half of 2020 had one source and cause only – the coercive commands of the federal and the state governments ordering people to stay at home, limit their shopping trips to politically-approved “essentials,” and not to go to work, as all part of a counterproductive and damaging attempt to stop the spread of the coronavirus.

Instead, its most important outcome was to wreak havoc on not just the U.S. economy, but much of the world’s economy, as well, as most other governments imposed similar compulsory clampdowns on the citizens of their countries.

With shock and disbelief politicians, political pundits, and most of the news media seemed totally surprised and confused by the idea that telling people not to leave their homes, not to buy goods and services, and to stay away from their places of employment might actually bring the economy to a seemingly grinding halt with falling production and rising unemployment. (See my articles, “To Kill Markets is the Worst Possible Plan” and “Leaving People Alone is the Best Way to Beat the Coronavirus”.)

During the first quarter of the year, U.S. Gross Domestic Product (GDP) declined by 5 percent (at an annualized rate) and then by a whopping 30.7 percent in the second quarter of 2020 (at an annualized rate). Economywide unemployment, after being around 3.5 percent in January 2020, rose to nearly 20 percent later in the spring, and was still 8.4 percent in August, as measured by the Bureau of Labor Statistics.

Trillions of Dollars in Government Spending and Growing Debt

Democrats with vote-getting glee and Republicans more out of fear of seeming to be flint-hearted in an election year decided to open the floodgates of government spending with trillions of dollars of borrowed money. Many in the media and among the pundits discovered the supposedly “Modern Monetary Theory” (MMT), which soothingly assured that government neither had to tax to have money to spend nor worry about building up more debt from increased deficit spending.

As long as there is production and employment slack in the economy it’s all “positive,” – jobs and output at no meaningful cost to anything or anyone in society. If “scarcity” were to return and prices in general were to start to rise, then taxes could be used to sop up the “excess” spending causing the price inflation – and especially on “the rich” to help equalize income and wealth in the process. More employment, income, and output are just a few turns away of the handle of the monetary printing press (or its mouse click computer equivalent).

In those “normal,” faraway days of January 2020, the Congressional Budget Office projected that the federal government would run up debt and a budget deficit of “merely” $1.1 trillion dollars in its fiscal year that ends on September 30, 2020. But in its early September update, the CBO says that Uncle Sam’s current fiscal year will end with a budget deficit of around $3.3. trillion, or three times as large as originally anticipated.

The U.S. national debt is now over $26.7 trillion, with the CBO projecting that the federal government’s gross debt will be over $37.4 trillion by 2030. Between now and 2030, the CBO estimates that a total of more than $3.4 trillion will have been spent on the interest on that accumulated debt, which will be slightly more than all the tax revenue collected by the federal government in the fiscal year of 2018. Those interest payments will have to be funded out of taxes collected or even more borrowed money in order to keep debt under control.

Keynesian Illusion of Free Lunches with Unemployment

What needs to be understood is that there are no free lunches – even when there seems to be a significant amount of “idle resources” and unemployed labor. The old-fashioned Keynesians and their Modern Monetary Theory descendants insist that if there are out-of-work people and output capacity not operating at “full employment,” there are little or no costs if the government borrows unused money sitting in the financial markets or if the central bank just creates more units of that money for the government to spend. Where is the “opportunity cost” of something being foregone, they ask, if the production and the labor put to work has not been at the expense of something that was already being done, instead?

In “normal” times, the response to this traditional Keynesian and MMT argument is to point out that if there is widespread unemployment, rather than looking to some imaginary deficiency of “aggregate demand,” the focus should be on any supply-side price and wage rigidities that are preventing the return to a market-based full employment through appropriate changes in the structures of money wages and prices, and accompanying reallocations of labor and capital to reflect the reality of actual market supply and demand conditions across the economy.

Wrong prices and wages prevent successful, ongoing coordination of consumption desires with production plans. All that the Keynesian and general macroeconomic focus on “aggregate” demand and supply, and output and employment “as a whole,” succeeds in doing is diverting understanding and attention from the microeconomic relationships and patterns upon which a functioning market economy is dependent. (See my article, “The Myth of Aggregate Demand and Supply”.)

Deficit Spending Misdirects Reemployment of Resources

In the current situation the less than full employment of labor and industry has been due to the direct commands of government at the state and federal levels. If production is halted and consumers are told not to shop and buy, clearly “demand” in general will decline, income earned and earnable also will be less due to reduced sales for final consumption goods, and coerced don’t-go-to-work, stay-at-home orders curtail the ability to have the salaries to pay household bills.

Fully free the “supply-side” of the economy from the heavy hand of government restrictions and prohibitions, and the market will soon restore the needed employments to purchase what income-earners want to buy. This “market solution” to the unemployment situation also assures that productions and jobs restored will tend to reflect the actual consumer-based patterns of demand to bring “supplies” back into proper balance with those “demands.” (See my articles, “There will be No Recovery Without Production” and “How Lockdowns Shattered the Structure of Production”.)

Hidden beneath the Keynesian macroeconomic surface of “aggregate” demand and supply is, also, the fact that when government spends taxed or borrowed or “created” money, it is not simply demanding some amorphous “output.” It is spending those taxed, borrowed or created dollars on specific goods and services, that increases the relative demands and profitability of particular industries and employments. The government spending, in other words, generates a particular and specific pattern of demands and employments, which by necessity are dependent for their continuation on the government continuing to demand and spend period-after-period additional sums in particular ways.

And further up the supply-chains, the industries and jobs generated that feed into the sectors of the economy upon which the government has increased this greater spending are equally dependent on its continuation if their productions and employments are to be sustainable. It is, therefore, not a matter of reaching some macro-measured “full employment,” and then dialing down the government spending. Once the government does so, demands, profits and employments created by how the government has been spending deficit-funded dollars will be threatened with cutbacks or collapse.

It is not simply a matter of how much additional employment and output is “created” by government deficit spending. It is more important for what people have been reemployed and production has been set going again. Has full employment been restored by market-based demands, supplies and prices, or by an artificial pattern of demand and spending induced by government expenditures?

At a time when “sustainability” has become a catchword in issues of public policy, it can very reasonably be applied to the issue of sustainable employments and productions reflecting actual market demands and supplies versus patterns of demand and resource use heavily dependent on artificial and politically-driven spending patterns introduced by politicians and bureaucrats serving ends and purposes very different from real consumer choices. (See my article, “Macro-Aggregates Hides the Real Market Processes at Work”.)


[Originally posted at the American Institute for Economic Research (AIER) website.]

Richard Ebeling
Richard Ebeling
Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel.


Please enter your comment!
Please enter your name here

- Advertisment -spot_img

Heartland's Flagship Podcast

Read this report

PROOF Trump's Tax Cuts Workedspot_img
- Advertisment -spot_img

Most Popular

- Advertisement -spot_img

Recent Comments