Posts tagged with: government debt

In the discussion of whether the problem with our national public debt is a question of receipts, outlays, or both, I linked to a helpful set of graphs from Anthony Davies, an economics professor at Duquesne University. This data shows that even though a variety of tax rates have changed a great deal over the years, the federal government has basically taken in receipts within the range of 16-20% of GDP over the post-WWII era. If you haven’t looked at this presentation before, you should do so now.

And today, Grove City economics professor and AU faculty lecturer Shawn Ritenour links to another chart, which compares these receipts against historic federal outlays (or spending). He notes (and refutes) Joe Weisenthal’s contention that “any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data.”

But I think if you look at the history of receipts and outlays a bit closer, you’ll see that the variance in receipts over the last decade are well within the historical norms. But the variance in outlays over that period isn’t outside the norms, either, in the sense that it continues a disturbing trend after 1970. (The data for current and future years is estimated and gleaned from sources here.)
There used to be some correlation between the red and blue lines. But not in today’s Washington.
Again, given this historic perspective, I think it’s hard to blame the blue line for the current debt levels. Keep in mind too that since these figures are a function of GDP, as the economy grows, other things being equal so too does the spending and receipts of the federal government.

In addition to the larger versions of the graphs clickable above, you can download this set of graphs in PDF form here, and visit our “Principles for Budget Reform” page to read more related commentary.

My editorial, “Intergenerational Ethics and Economics,” appears in the latest issue of the Journal of Markets & Morality (more details about that issue here). In this short piece I explore some of the implications and intergenerational consequences of public debt. For this I take my point of departure with the much-discussed “A Call for Intergenerational Justice,” but I also point out the importance of considering opportunity cost and how that concept has been applied in an analogous conversation about climate change. Focusing particularly on the current generations of workers, however, I observe:

Younger workers have not had as much time in the workplace to earn wages, collect benefits, and save, as those who have been working for decades and are nearing or have already entered retirement. As we learn from what has been called the “miracle of compounding interest,” small deductions of available capital at earlier points in time have major consequences for long-term growth.

In a recent piece for City Journal, Nicole Gelinas reflects on the federal government’s move to take on troubled securities from private firms. She writes,

The politicians we elect have three choices—the same choices they had four years ago. They can admit that this debt isn’t worth much and allow the financial sector to bear the consequences. They can hope that the Fed tries to use inflation to raise the price of everything else, making the debt seem a lighter burden in comparison. Or they can maintain their silence, letting the financial sector take another half-decade or more to make enough money on new ventures so that it can finally admit what it should have admitted back in the fall of 2007: bad debt is never good. At least the Fed acknowledges this strategy: it says that it’s using “time” to manage toxic securities and “minimize disruption to the financial markets.” But prolonging government control of financial markets just prolongs investors’ uncertainty.

Her conclusion underscores what I contend in the editorial about the importance of opportunity cost and the intergenerational effects of (in)action: “As the Fed notes, the cost of this policy isn’t measured in dollars but in something more precious: time. Washington’s refusal to confront the debt problem is costing millions the most productive years of their lives.”

Also in the current issue of the journal, James Alvey explores “James M. Buchanan on the Ethics of Public Debt and Default.” Buchanan has a good deal of interest to say on these questions, and Alvey concludes that “Buchanan’s favorite policy agenda, constitutional/legal limitations on public spending, deficits, and debt, needs to be revisited.”

In Crisis Magazine, Acton Research Director Samuel Gregg has a new article that looks at how Catholics reflect on a wide range of financial questions ranging from the federal government’s fiscal woes to consumer debt to a fragile banking system.

Today one looks in vain for Catholic thinkers studying our debt and deficit problems from standpoints equally well-informed by economics and sound Catholic moral reflection. We don’t, for instance, hear many Catholic voices speaking publically about the moral virtues essential for the management of finances such as prudent risk-taking, thrift, promise-keeping, and assuming responsibility for our debts — private or public.

Instead, one finds broad admonitions such as “put the interests of the poor first” in an age of budget-cutting. The desire to watch out for the poor’s well being in an environment of fiscal restraint is laudable. But that’s not a reason to remain silent about the often morally-questionable choices and policies that helped create our personal and public debt dilemmas in the first place.

One Catholic who has proved willing to engage these issues is none other than Pope Benedict XVI. In his 2010 interview book Light of the World, Benedict pointed to a deeper moral disorder associated with the running-up of high levels of private and public debt. The willingness on the part of many people and governments to do so means, Benedict wrote, “we are living at the expense of future generations.”

In other words, someone has to pay for all this debt. And clearly many Western Europeans and Americans seem quite happy for their children to pick up the bill. That’s a rather flagrant violation of intergenerational solidarity.

Read “Debt, Finance, and Catholics” on the Crisis Magazine website.

In this week’s Acton Commentary, “Do Less with Less: What the History of Federal Debt and Tax Leverage Teaches,” I reflect on how the federal government has lived beyond its means for decades. This reality is especially important to recognize as we approach Tax Day this year as well as in the context of debates about how to address the public debt crisis.

There are many who think we need to raise taxes in order to close the historic levels of deficit spending. In theory I would consider raising taxes as a viable option, or at least preferable to continued deficit spending, since it would at least make the real cost of government more visible. Roughly 40% of what the government spent last year was beyond what it took in.

But without structural connections between increased taxes and balancing the budget, there’s nothing at all to give us hope that the government wouldn’t simply continue to leverage the greater revenue into greater deficit spending. In this vein I note the conclusions recently updated by Richard Vedder and Stephen Moore, that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

Calvin College philosophy professor James K. A. Smith doesn’t take this reality into account, I don’t think, when he recently argued that the current situation calls for raising taxes, both on the rich and the middle-class. Thus, he writes,

But only a lazy, unimaginative take on this would assume that “low taxes” is a given. So sure, one strategy to reduce debt would be to slash spending, which inevitably happens on the backs of the poor and vulnerable, particularly women and children.

The alternative to such an unattractive option as Smith sees it is to raise taxes, particularly on the rich. Smith thus points to the idea that America needs to adopt a “graduated tax like most other North American countries.”

The fact is, though, that the US already has a progressive tax system, and indeed places a much higher relative burden on the top decile of household incomes than other developed nations.

One of the next big fights will be over raising the debt ceiling, as Smith points out. Perhaps we can link balanced budgets with increases on the debt ceiling (something more feasible than passing a balanced budget amendment). The idea would be that we only increase the debt ceiling on the condition balancing the annual budget, and that we only think about raising taxes to balance that budget if we actually commit to balancing it.

Simply raising taxes won’t do anything but give the federal government more money to leverage into higher levels of deficit spending.

A new commentary from Acton Research Director Samuel Gregg. Sign up here to get the latest opinion pieces delivered to your email inbox on Wednesday with the free weekly Acton News & Commentary.

Deficit Denial, American-Style

By Samuel Gregg

Until recently it was thought the primary message of the 2010 Congressional election was that Americans were fed up with successive governments’ willingness to run up deficit-after-deficit and their associated refusal to seriously restrain public spending.

If, however, the results of a much-discussed Wall St Journal-NBC News poll released on March 2 indicate what Americans really think about fiscal issues, then much of the country is clearly in denial – i.e., refusing to acknowledge truth – about what America needs to do if it doesn’t want to go the way of many Western European nations.

While the poll reveals considerable concern about government debt, it also underscores how unwilling many Americans are to reduce those welfare programs that, in the long-term, are central to the deficit-problem.

Here are the raw facts. America’s federal social security program has become the largest government pension scheme in the world in terms of sheer dollars. It is also by far the federal budget’s single greatest expenditure item.

According to the Office of Management and Budget, “human services” ― Social Security; Medicare; Health-expenditures; Education, Training, Employment, and Social Services; Veterans benefits; and the euphemistically-named “Income Security” (i.e., unemployment-benefits) ― were consuming 4 percent of America’s GDP in 1949. By 1976, this figure had increased to 11.7 percent. In 2009, it was consuming 15.3 percent of GDP.

During the same period, human services began consuming a steadily-increasing size of federal government expenditures. In 1967, human services spending was 32.6 percent of the federal budget. By 2009, this figure had increased to 61.3 percent. It is predicted to rise to 67 percent by 2016. In 2010, 75 percent of human services spending was on Social Security, Medicare, and Income Security ― in short, the core welfare state.

These disturbing numbers make it clear any serious federal deficit reduction must involve spending-cuts to federal welfare programs. That doesn’t mean other areas of government-spending should be immune from cuts. But the deficit simply can’t be properly addressed without a serious willingness to reduce welfare-expenditures.

And yet despite all the passionate rhetoric from Americans about the need to diminish government-spending, the Wall St Journal-NBC News poll suggests that fewer than 25 percent of Americans favor cutbacks to Social Security or Medicare as deficit-reduction measures. As the Wall St Journal’s own commentators noted: “Even tea party supporters, by a nearly 2-to-1 margin, declared significant cuts to Social Security ‘unacceptable.’

Unacceptable? Think about that word. Do large numbers of Americans really believe there is something morally evil about significant reductions to welfare-spending under any circumstances? Since when – apart from Greece and other models of fiscal rectitude – have welfare payments assumed the status of an absolute right subject to no qualification? Have we really gone so far down the path of economic-Europeanization?

Granted, the same poll suggests much larger numbers of Americans are willing to raise the retirement age to 69 and means-test social security. But is that the best Americans are willing to do?

Spain’s unreconstructed-1960s-lefty Socialist government has just lifted Spain’s retirement-age to 67. Unsurprisingly, that won’t fully kick-in until 2027, long after Spain’s political class and their tame voting constituencies have met their Maker and no longer need to live off their children’s futures. But can Americans who proclaim their attachment to free enterprise and personal responsibility really do no better than left-wing Western Europeans?

Back in 2007, the journalist Robert J. Samuelson summarized the situation perfectly. “Most Americans,” he wrote, “don’t want to admit that they are current or prospective welfare recipients. They prefer to think that they automatically deserve whatever they’ve been promised simply because the promises were made. Americans do not want to pose the basic questions, and their political leaders mirror that reluctance. This makes the welfare state immovable and the budget situation intractable.”

Presidential campaigns are invariably accompanied by a great deal of posturing. It would be helpful, however, if some serious candidates for the nation’s highest office in 2012 – Republican or Democrat – would use their moment in the spotlight to educate Americans about what’s at stake.

One former American vice-president once reportedly insisted, “Deficits don’t matter.” Unfortunately, there is mounting proof he was wrong. After examining data on 44 countries over approximately 200 years, two economists recently found evidence suggesting that developed nations with gross public debt levels exceeding 90 percent of GDP (i.e., America) find that their medium-growth rates fall by one percent, while average growth declines by an even greater proportion.

That’s worrying because while deficit-cutting matters, wealth-creation matters even more if we are to dig ourselves out of our fiscal hole. America now seriously risks seeing its burgeoning welfare costs suffocating the productive sector of the economy that makes social welfare possible in the first place.

Incidentally, it won’t be the rich who suffer. It will be the poor. In their laudable concern for the weakest among us, Americans ought to remember that and start matching political rhetoric with consistent fiscal action.

Dr. Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

Blog author: jballor
Wednesday, March 9, 2011
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In this week’s Acton Commentary, “Back to Budget Basics,” I argue that the public debt crisis facing the federal government is such that “All government spending, including entitlements, defense, and other programs, must be subjected to rigorous and principled analysis.” This piece summarizes much of my analysis of various Christian budget campaigns over the last week (here, here, and here).

There are things that are more or less central to the primary task of government, and our spending priorities should reflect that relative proximity. Things like defense spending, whether or not these funds could be spent better and more efficiently, are central to the role of the federal government. Various kinds of social spending, whether or not they are good and effective, are not clearly so central.

I cite the example of Abraham Kuyper as a model to follow in attempting to outline the various responsibilities of social institutions, especially the church and the government, with respect to poverty. Kuyper first says that any resort to government aid for the poor is “a blot on the honor” of Jesus Christ. This relief is first and foremost a task for Christians, not the government. But he also adds that if and when Christians fail in their charitable callings, the State must intervene, “quickly and sufficiently” (snel en voldoende). The “sufficiency” of this response lies at least in part in its ability to address the need and move on, stepping in quickly, addressing the problem sufficiently, and stepping back out.

We have gotten to where we are in this country in part, at least, because private and Christian charity did not fulfill its mandate, at least not completely. But the whole point of “sufficient” government intervention is to be a stop-gap, a last and temporary resort, that provides space for other institutions to step back in and resume their basic responsibilities. It is thus not a permanent and primary purpose of government, particularly at the federal level, to provide direct material assistance to the poor.

My fear is that the social spending at the federal level has moved far beyond intervening “quickly and sufficiently,” and has increasingly crowded out other subsidiary institutions from meeting needs more locally and less centrally. What we need now is not to privilege such government intervention as a fixture of our society, but to reinvigorate and empower other institutions to relieve these burdens from the government. Otherwise government intervention often becomes an obstacle to, rather than a servant of, true justice.

Last week’s issuance of “A Call for Intergenerational Justice: A Christian Proposal on the American Debt Crisis” has occasioned a good bit of discussion on the topic, both here at the PowerBlog and around various other blogs and social media sites.

It has been interesting to see the reaction that my comments about the Call have generated. Many have said that I simply misunderstood or misread the document. I have taken the time to reread the document and do some reassessment of the entire debate. Unfortunately this has raised more questions than answers for me thus far.

Gideon Strauss, CEO of the Center for Public Justice, has kindly offered to help us sort out some of these concerns. He’s in Grand Rapids later this week and has generously agreed to a public discussion in an open mic, informal setting we’re calling, “Opposing Views: America’s Debt Crisis and ‘A Call for Intergenerational Justice.’”

Details are below and at the Facebook event page. We plan to record the event and make it available for those who aren’t able to join us. But if you are, come along and bring your questions.
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I posted some initial thoughts on “A Call for Intergenerational Justice: A Christian Proposal on the American Debt Crisis,” which was released by the Center for Public Justice and Evangelicals for Social Action yesterday.

I’ve been engaged in what I think are largely helpful conversations on this document in a number of venues in the meantime. Gideon Strauss challenged me to look at the document again, and reconsider my criticisms, and I have been happy to do so.

For instance, I voiced the concern that the core budgetary problem that must be addressed concerns entitlement spending, and I judged that the Call does not sufficiently address that concern. Gideon pointed me to a piece by Michael Gerson, a signer of the Call, that makes precisely this point: “Debates on discretionary spending are important. Our government should not waste money on ineffective programs. But discretionary spending is a sideshow, even a distraction, from the main governing task: getting entitlement spending under control so it does not crowd out all other government spending.”

I also made a related point that we should not be juxtaposing cuts in, for instance, defense spending with those on other discretionary areas, including social programs. As Gerson writes, these debates are largely a “sideshow.” And so Gideon also pointed me to today’s editorial about the Call, which makes a number of important points, not least of which is that “It would be simplistic to portray the present challenge as a simple matter of ‘guns vs. butter’ and to overemphasize the contribution that prudent reductions in defense spending, however necessary, would make to the current debt crisis.”

One further point of concern I voiced is that “what we’re missing here is a really principled and vigorous view of what the government’s legitimate role is in the world and in relationship to a variety of concerns: defense, social welfare, international development, and so on.” Gideon pointed me appropriately to the CPJ “Guideline on Government.”

These are all good and necessary documents for understanding the proper interpretive context for the Call, and I’ll admit, they weren’t the first things I thought of when attempting to understand the petition. I still wonder, though, why some of these things couldn’t be made more explicit in the document itself? If Gerson is right, that debates over discretionary cuts of whatever programs are really a distraction, why not make the focal point of the Call entitlement reform in a more central and explicit way?

And I do think there are other relevant interpretive contexts for understanding the Call. Jim Wallis, Shane Claiborne, and a host of others have been involved over the last days and weeks in a “What Would Jesus Cut?” campaign that bears many similarities to “A Call for Intergenerational Justice.” Much of the material surrounding that campaign does seem to focus on fights over discretionary cuts, even to the point of contrasting military and social spending.

Jim Wallis said, for instance, “On a television program yesterday evening, I said that I want those who now propose major cuts to critical low-income family support programs to say, out loud, that every item of Pentagon spending is more important to our well-being and security than school lunches, child health, and early education programs.” He goes on to highlight particular social spending programs that should be immune to potential cuts.

I don’t think that kind of rhetoric is helpful at all, and is more of what Gerson might call a “sideshow.” But it is important because there is so much continuity between the “What Would Jesus Cut?” campaign and the “Call for Intergenerational Justice.” A significant number of signers of the Call, including Wallis and Claiborne, also are behind WWJC. And even the language about cutting budgets “on the backs of the poor” is reiterated with respect to the Call. Signer Jonathan Merritt writes that the Call means “we cannot balance the budget on the backs of the poor.”

So while the CPJ documents Strauss points to are certainly relevant to understanding the Call, I submit that the “What Would Jesus Cut?” campaign is also relevant. And here we might have a hint at why some of the more substantive theoretical questions regarding the role of the state in the provision of various social goods is not examined in more detail in the Call itself: the signers don’t have a unified view on this principled point. The CPJ Guideline on Government is a good starting point, but I find it highly doubtful that it would be assented to by all of the signers of the Call.

So perhaps there really is more than one way to read this document, and it can be put to various uses by various constituencies. This ambiguity, combined with my own doubts about what it actually does substantively say, are enough for me to refrain from signing it, even while I most certainly do agree with the sentiment that the current debt burden is unsustainable, both fiscally as well as morally, and continue to respect the work of many of those who have signed it.

On Public Discourse, Acton Research Director Samuel Gregg looks at fiat money and how today it “represents the end of a long process of development whereby governments have used their power of legal tender to use money to pursue various policy goals.”

This brief excursion into economic history hints at some of the deeper economic—not to mention moral—problems associated with fiat money. One is, as noted, the greater ease with which it permits governments to devalue currencies, thereby reducing the wealth of those with assets denominated in that currency. This surely constitutes an injustice to those individuals and businesses that have saved and behaved in a fiscally responsible manner while simultaneously letting the fiscally imprudent off the proverbial hook.

This underscores the second problem associated with fiat money: its facilitation of systemic moral hazard throughout entire economies. Moral hazard describes those situations whereby people are encouraged to take excessive risks because of the implied assurance that someone (usually the state) will bail them out if the enterprise or investment fails. From this standpoint, fiat money’s very existence arguably encourages the development of moral hazard throughout every sector of the economy. The high level of the U.S. federal government’s public deficit, for example, is at least partly premised on the unspoken supposition that the Fed (which is, after all, a government institution that operates within legal parameters set by Congress and whose members are nominated by the President) can simply print more money in paper or electronic form if creditors become worried that the U.S. government’s borrowings cannot be covered by anticipated taxation revenues, foreign borrowings, and its existing resources. This in turn encourages more people and governments to buy U.S. government debt in the form of bonds, which permits more deficit-spending, thereby encouraging a cycle of ever-spiraling public debt.

Read “Fiat Money and Public Debt” on Public Discourse.

Acton Research Director Samuel Gregg contributed the article here, one of two Acton commentaries published today. Sign up for the free, weekly email newsletter Acton News & Commentary to receive new essays, book announcements and the latest news about Acton events.

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Money, Deficits, and the Devil: A Cautionary Tale

By Samuel Gregg D.Phil.

Sometimes the best economists aren’t economists.

One of the most famous plays in Western history was penned by the German writer Johann Wolfgang von Goethe (1749-1832). His two-part drama, Faust, is considered one of the greatest works of German literature. This complicated and sometimes disturbing text tells the story of a young scholar, Faust, who enters into a pact with the devil, Mephistopheles. In return for Mephistopheles’ services to help him realize his ambitions, Faust wagers the devil his soul.

Throughout the play, Faust asks Mephistopheles to help him achieve several ostensibly good ends. But each time he summons up the devil’s power, Faust gets more than he bargains for. In one scene, for example, Faust finds himself living as the landlord of a prosperous estate. His tranquility is disturbed only by an elderly couple who holds a freehold enclave on Faust’s land. Faust asks Mephistopheles to displace them. The devil fulfils his request, but in a way unanticipated by Faust: the elderly couple’s house is incinerated and the couple murdered.

At the beginning of part two, however, the play makes a surprising excursion into economics. Accompanied by Mephistopheles, Faust attends the court of a ruler whose empire is facing financial ruin because of profligate government spending. Rather than urging the emperor to be more fiscally responsible, Mephistopheles—disguised, revealingly, as a court jester—suggests a different approach, one with disturbing parallels to our own age.

Noting that the empire’s currency is gold, Mephistopheles maintains there is surely plenty of undiscovered gold underneath the earth belonging to the emperor. Thus, he argues, the emperor can issue promissory notes for the value of this yet-to-be-found gold, thereby generating fresh monetary resources for the government and solving its debt problems.

Not surprisingly, the emperor and his treasurer are delighted with this idea. It means the monarch can avoid making hard economic choices while simultaneously providing the empire with desperately needed currency. Mephistopheles subsequently deluges the court with paper money, and Faust is praised by emperor and commoner alike.

The results, however, are not what are expected. First, the issuance of paper money does not solve the emperor’s spending problems. Instead the ruler and his court become even more extravagant, knowing they can always print more paper money to cover their ever-growing expenses. Second, the devil has subtly but fundamentally changed the basis of the empire’s currency. Instead of being rooted in the solidity offered by a tangible and valued asset, the currency is now based on flimsy paper promises. Thus long-term monetary stability and powerful restraints on extravagant government spending are sacrificed for short-term gain.

Goethe finished writing the second part of Faust in 1832. Modern economics was then only emerging from its infancy. Yet Goethe’s insights go to the heart of some of our most intractable long-term economic problems.

One concerns the impact of fiat money. Technically speaking, fiat money is a currency that a government declares to be legal tender, even though it has no intrinsic value. Throughout history, fiat money has been the exception rather than the rule. Most currencies have been based on physical commodities, particularly gold. By contrast fiat money is ultimately based upon enough people having faith that a given currency will be accepted for the purpose of economic transactions.

Such faith, however, is easily shaken. The euro’s recent tribulations are a good example of what happens when people begin losing their faith in a fiat currency. The expression “as good as gold” underscores the confidence people have always attached to commodity-backed currencies, especially in difficult economic times.

The second problem concerns the temptation faced by governments as they struggle to solve their deficit problems. In 2009, America’s federal government posted a $1.4 trillion deficit. That’s 10 percent of U.S gross domestic product, a level not witnessed since World War II. Given a choice between cutting spending, borrowing, or inflating the money-supply, the third option appeals to many politicians. Moreover, like Goethe’s emperor, it’s exactly what many Western governments did between 1945 and 1980: short-term relief was bought at the expense of long-term fiscal stability.

But perhaps the biggest lesson from Goethe’s Faust is that self-deception is intrinsic to all foolish acts. Whenever governments choose comforting economic illusions over difficult economic truths, then, like Mephistopheles, they will employ dubious means such as state-engineered inflation or public-sector indebtedness to make ill-conceived economic policies seem less burdensome to those who will in the long term eventually have to pay the price.

There is, some might say, something demonic about that.

Dr. Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, the prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.