Degrees of Seriousness on the National Debt

Greater freedom is the answer.

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Commentary

We hit an ignominious milestone recently when the national debt crossed $39 trillion. Naturally, regular citizens have chimed in about what’s to blame, who’s at fault, what can be done, or whether it even matters.

The discussion usually takes one or more of the following shapes.

If you’re new to the conversation, just dipping your toes in for the first time, you might think that we can simply cut defense spending, or eliminate “waste, fraud, and abuse.” Considering how many military bases we have around the world, that’s a legit angle.

Likewise, when you factor in the Pentagon’s numerous failed audits and run-of-the-mill household items running into the thousands of dollars, you could kill two birds with one stone.

We’re just scratching the surface here, though.

If you’re somewhat serious, in addition to those, you would do well to point out discretionary spending. Those are monies that Congress approves annually, such as farm subsidies, spending on education and housing, etc. The nearly trillion-dollar defense budget is part of it.

However, all told, such spending barely makes up one-quarter of the overall budget—if that.

If you’re more serious, you could include all of the aforementioned items, plus the programs on autopilot: Social Security, Medicare, and Medicaid. They are the three biggest items in the federal budget, eating up more than half.

Interest on the debt, another expenditure on autopilot, recently overtook defense as the fourth-largest item—but cannot be tackled directly. Only by addressing all the rest will that one be pushed down in the process.

Social Security’s financial health has been feeling the strain of an ever-growing number of beneficiaries and a declining birthrate.

By some estimates, what is in the Social Security Trust Fund will be insufficient to pay benefits within the next decade.

Regarding health insurance, its very structure is handicapped by its third-party payer nature. When consumers don’t know the actual price of the service they’re receiving, they’re less judicious in their spending.

Most Americans choose a low-deductible insurance plan in which, after a visit or two to the doctor, all they pay is a $20 or $50 copay. Few have an idea of what the full menu of prices looks like for medical services.

At that point, general tax revenue, i.e., what comes out of your federal tax withholding, will be tapped to make up the difference.

One of the few less efficient enterprises than that is the government. That it is the genesis of Medicaid and Medicare exacerbates the problem.

Regardless, you know that you’ve encountered someone very serious about debt and deficits when he discusses attacking it at its root: the government’s ability to service it.

Investors (remember to check your 401k) will continue to buy U.S. Treasurys if they believe that Uncle Sam will continue to have the ability to pay the interest. That ability rests on the taxing power it has over productive citizens.

So, why not cut tax rates and reduce that ability?

History has shown that when they are reduced and/or the code is simplified, the revenue flows to Treasurys actually increase. This is partly due to taxpayers changing how they file, but it can also be attributed to the signal that they’re getting from the government.

“We’ll take less from you, and you won’t have to spend as much time filing,” it tells them.

Although some would convert that time into more leisure, that might very well entail more spending. What would juice economic growth even more is if some of that spending was via investing.

Alas, more growth creates more revenues, which gives buyers of U.S. debt even more confidence to continue lending to reliably profligate politicians. What then?

But, if you’re really serious, go further: If we’re serious about reducing the national debt, the ability of the federal government to incur any more must be seriously curtailed.

In much the same way that “waste, fraud, and abuse” will never really go away until spending is reduced on a large scale, the spending itself will never really go away as long as there are tax revenues and borrowing to finance it.

Whether or not this is the biggest problem facing us is up for discussion. Being a personal financial literacy teacher who walks the walk, I find such staggering debt levels to be outrageously appalling.

The upside is that the most organic, effective solution just so happens to coincide with a higher level of freedom and subsequent prosperity for citizens.

From the Foundation for Economic Education (FEE)