3 days ago
Jim Nowlan: Our politics focus on what to do ‘for' voters. That threatens the economy.
'Ask me how much I love my grandkids' begs a bumper sticker. Maybe not so much. Federal government debt, which the grandkids will have to support, now amounts to at least $275,000 per household, headed to a projected $380,000 in 10 years, according to the Congressional Budget Office.
The problem lies in a powerful, fundamental principle of politics: Politicians like to do things for the voters (as in new spending), but not to them (as in new taxes to pay for the outlays). The tax package in the 'big beautiful bill' is a prime example. When government revenue lost by tax cuts is not equaled by reductions in government spending, the default action is simply to 'pay' for the difference with increased debt.
In his magisterial 'The Rise and Fall of the Great Powers,' Yale University historian Paul Kennedy warned that runaway debt could threaten the stability of our nation's financial system. He cited a doubling of the U.S. debt between 1980 and 1985, from $900 billion to $1.8 trillion. In today's dollars, that latter figure would represent about $5.5 trillion. At present, the federal debt is $36 trillion, according to the Federal Reserve Bank of St. Louis.
Oft-quoted economist Mark Zandi seems to reflect his profession in observing that the amount of debt American governments hold isn't so much the problem; however, paying the nearly $1 trillion in interest on the debt each year crowds out what could be equivalent spending today for people programs and defense.
But, the economists add quickly, we should indeed worry about the lack of discipline by policymakers who keep larding on more debt. China and other foreign governments hold most of our debt. Having no love lost for Donald Trump, holders of our debt could decide to hold less of it, or to demand higher interest rates for the increased risk. Not good. Or, we could go the way of Argentina, where runaway inflation since World War II has prevented that resource-rich, well-educated nation from coming close to its potential.
As we have read, the recent tax and spending bill is projected by the Congressional Budget Office to increase debt by $3 trillion. I project it will be much greater than that, because of two other principles, or tricks.
Old Trick 1: Put the goodies up front and then sunset them long before the 10-year time frame used for projecting consequences of the bill.
For example, 'big beautiful' grants some tax breaks this year that expire soon, to wit: The new deduction for seniors; the expanded deduction from federal tax liability for state and local taxes paid, and the tips, overtime and interest deductions all expire in three or four years.
But, Trick 2: Once a tax break is granted, it is never (certainly, rarely) taken back, as that would be doing something to those affected. Congressional budget analysts must, however, make projections about future debt according to the bill as written, as if these costly goodies will actually expire on schedule. Sure, right.
About the time of the worldwide depression of the 1930s, English economist John Maynard Keynes established a sensible principle: During good economic times, governments should run budget surpluses, which could later be applied to stimulate demand during bad times, smoothing out the peaks and valleys.
The U.S. has a strong economy at present, yet we still run huge deficits, perverting the Keynes principle. What will we do when times turn tough? Runaway debt, maybe?
If we keep overspending relative to tax revenue, that is, putting more dollars into the economy than are represented by increased goods and services, each dollar will ultimately be reduced in value. This is the definition of inflation. In the worst instance, this could lead to Argentine-like dysfunction and decline in wealth.
The simple solution is political courage. Impose discipline and pain where necessary to stop the flight to debt. Courage is costly. The best governors of my Illinois have been one-term governors: Thomas Ford in the 1840s, who paid Eastern creditors for foolish state expenditures, rather than default on huge debts to them and ruin the state's credit rating; John Peter Altgeld in the 1890s, who pardoned radicals who had been unjustly imprisoned; and Richard Ogilvie (1969-72), who imposed an income tax on voters to meet a fiscal crisis.
Most voters will never understand this matter of government debt. So, elected officials have to bear the burden of their decisions. How much do our politicians love their grandkids?
