Debt, Deficits and the Cost of Free Lunches

By Richard M. Ebeling

It seems that every generation or two, fundamental economic ideas are questioned and challenged. The reasonable and important idea that governments should balance their budgets on an annual basis was challenged in the 1930s by the rise of Keynesian Economics and the counter-argument that deficit spending was desirable, if it was used to maintain full employment. Now it seems that any defense or desire for fiscal restraint and less government spending and borrowing are entirely out the window. Fiscal folly is the watchword of the day.

It is not surprising that politicians care little about annual budget deficits and growing debt, since spending money is their way of buying votes from interest groups wanting to eat at the government trough. In America today, it is all a political game by which Democrats and Republicans pander to their respective voting blocs, especially in an upcoming presidential and congressional election year like 2020.

On the one hand, the danger of a looming political crisis is warned about in the media when they point to the coming budgetary circus that will most likely start playing out toward the end of the summer of 2019, when Congress comes back into full session and the new federal budget year that begins on October 1, 2019, will have to be handled in some way.

Budgetary Brinkmanship and Political Plunder

Will the country be facing another federal government shutdown threat like the one in late 2018 and early 2019? Will the national debt limit be raised to permit the spending of the huge sums of money needed to fulfill all the demands for other people’s money above actual taxes collected through the siphoning off of private sector resources by continued government borrowing in the financial markets?

On June 13, 2019, House Speaker, Nancy Pelosi, insisted that there would be no deal on raising the national debt limit until there is simultaneous agreement on domestic and defense spending increases, without which politicians cannot make their respective constituents happy in their home districts and states.

Acting director of the Office of Management and Budget, Russ Vought, immediately responded by insisting Speaker Pelosi was holding the ability of the federal government to meet its financial obligations hostage to raising formal spending caps on what may be spent on the military and on the domestic side. Without the removing those caps, the fear is expressed that defense and domestic spending might have to be decreased by 10 percent come October 1st of this year.

Of course, neither the Democrats nor Republicans will allow this to happen. Budgetary brinkmanship might be played out once again, and President Trump may huff and puff and threaten to once again blow the budgetary house down, but too much is at stake to bring the government to a serious halt or to even slow down the spending spigot.

Retaining or getting political power is just too important to put any restraints on plundering Citizen Peter to feed the spending and other special privilege desires of Citizen Paul. Who is the “Peter” and who is the “Paul,” in all of this is what the democratic voting process is all about. If your candidates for political office get in instead of those of the other political party, then you get to try to be, on net, the benefited Paul who picks the pocket of the burdened Peter in various spending, regulatory and redistributive ways.

Budgetary Gimmickry and Deficit Apathy

On March 1, 2019, the national debt limit kicked in again, after a hiatus of a year and a half through a deal between Congress and President Trump that said that whatever spending was done by the federal government above what was taxed and therefore borrowed during that 18 months would just be added to the national debt. That debt stood at $22.03 trillion dollars when March began.

But through various accounting tricks used by the U.S. Treasury Department, the national debt has actually, now, reached almost $22.4 trillion by the middle of June 2019. But the financial gimmickry will have been stretched to its limit by around the end of September of this year. So the Congress and the President will have to reach a deal to keep the spending going on by increasing the official debt limit

According to a recent The Wall Street Journal analysis, hardly anyone right now seems to care about the national debt or the continuing annual budget deficits that are making that debt grow. “Political support [for limiting the national debt] has melted away, with Republicans accepting bigger deficits in exchange for tax cuts and Democrats making big spending promises around 2020 election campaigns.” Interest rates remain historically low, thereby diminishing the current cost of financing the debt; and foreign and domestic demand for U.S. Treasuries remains strong in spite of the political polarization in America, along with Trump’s trade war sabre rattling.

This doesn’t change the continuing national debt trend or its longer-run implications. In its May 2019 “Updated Budget Projections” for 2019 through 2029, the Congressional Budget Office (CBO) anticipates that over the coming decade the national debt will grow by an additional $11.4 trillion, for a total of $34 trillion in 2029. In 2019 and 2020, the deficits are projected to be around $900 billion for each of those years, and over $960 billion in 2021. Then, beginning in 2022, there will be a return to $1 trillion-a-year budget deficits, CBO expects.

Entitlement Spending is Driving the Debt Dilemma

Entitlement spending will be the driver of the government’s budgetary trends. In 2019, Washington will spend about $1.04 trillion on Social Security programs; this will rise to $1.83 trillion in 2029, for a 76 percent increase over the decade. Federally funded health care programs (Medicare, Medicaid, and others) will cost $1.25 trillion in 2019, and become $2.34 trillion in 2029, for an 87 percent increase over the coming ten years.

All mandatory spending in fiscal year 2019 will come to $2.7 trillion out of a total of $4.4 trillion in expenditures, or over 61 percent of all that government spends this year. If the CBO forecast is correct, in 2029 total entitlement spending will come to $4.6 trillion out of total government expenditures that year of over $7.1 trillion, or 66 percent of that year’s total federal spending. Mandatory spending will be 70 percent higher in ten years than now, while total spending will have increased by about 60 percent.

The Congressional Budget Office also estimates that annual net interest payments on the national debt will grow from $382 billion in fiscal year 2019 to $921 billion in 2029, for an increase of 241 percent increase over the decade.  Mandatory spending plus net interest on the national debt in 2019 will come to $3.1 trillion out of this budget’s total of $4.4 trillion, or 70 percent; while in 2029, entitlement spending plus net interest on the national debt will come to $5.52 trillion out of that year’s total of $7.1 trillion, or 78 percent.

For the fifty years between 1969 and 2018, federal budget deficits averaged about 2.9 percent of Gross Domestic Product (GDP). The Congressional Budget Office estimates that for the coming ten years between 2019 and 2029, annual budget deficits will average around 4.3 percent of GDP, for an increase of more than 48 percent.

Another way of appreciating this is that in 2019, the federal government’s budget deficit of about $900 billion will be equal to 67 percent of all discretionary spending of $1.33 trillion. In 2029, the projected budget deficit of $1.31 trillion will represent over 85 percent of that year’s discretionary spending of $1.53 trillion. So, in 2029, if taxes remained what is currently projected under current law and entitlement spending was not reduced, then if the budget were to be balanced in 2029 by limiting spending to what was collected in tax revenues at that time, only $220 billion would be left for all discretionary outlays, including for the defense budget, with the latter coming in at $716 billion in 2019.

Entitlement Costs and the Democrat’s Spending Fairyland

Entitlement spending is eating the federal budget alive. There is no reasonable and practical way to get Uncle Sam’s budget under control if the core welfare state programs so near and dear to both Republicans as well as Democrats are not dealt with.

This should also put in perspective the fiscal fairyland that the array of Democratic hopefuls vying with each other for their party’s presidential nomination are all promising. Whether it is “single-payer” health care (that is, socialist centrally planned and provided medicine), or “free” college for all at any time, or a universal minimum income guarantee for just being you, or trillions to combat a climate change that is always naturally changing, or the funding of a vast infrastructure agenda, or the economic totalitarianism of the Green New Deal, or . . .

Since all the Democratic Party contenders not only promise to preserve the entitlement state but to expand it, either taxes will have to be dramatically increased or deficit spending will have to grow far beyond what is currently projected by the CBO, or some combination of both will have to be implemented. There is just no way around it.

Scarce Resources and Inescapable Trade-Offs

This means that at some a point in the future – and no one has a crystal ball to pin-point the precise month and year – the reality of the constraints of the U.S economy will confront everyone with the reality that “something’s gotta give.” At the end of the day, either resources, capital, and labor are employed by the private sector for the manufacture and supplying of goods and services that the income-earning consuming public desires; or it is shifted into the use and consumption of what those in government power and authority decide to produce and distribute.

Either savings is set aside by income-earners in society and put to work by lending it to profit-oriented private enterprisers who innovatively invest in making more and better capital equipment of all and sundry forms to increase the productive capability and capacity of the economy looking to the years and decades ahead; or it borrowed by the government to cover the consumption expenses of the present to pander to all the interest groups keeping politicians in power with nothing to show for it in the longer term than a tax bill for citizens to pay the interest and the principle on all those wasted funds at some point in the future.

The advantage of deficit spending from the politician’s point of view is that he can offer economic goodies of all sorts to constituent groups whose campaign contributions and votes on Election Day he so desperately wants. Deficit financing enables him to avoid informing the voters what is the real cost of all that they are promising, or when or who will have to pick up the tab for that portion of government spending not currently funded by taxes.

The Fiscal Illusion of a Free Lunch

This fiscal year the federal government is spending nearly $900 billion more with borrowed money than is being collected in taxes, representing about 20 percent of all government expenditures in 2019. This is equivalent to being told that you are going to get $100 worth of stuff you want, but only have to pay $80 to get – in other words, a 20 percent off sale.

But there are no free lunches. That $900 billion is coming out of the financial markets, along with the real resources that spending that amount of money reflects in the society. How much does this equivalently represent in the U.S. economy? Let’s use the Gross Domestic Product data for 2018 provided by the government’s Bureau of Economic Analysis (BEA).

This year’s federal budget deficit of $900 billion will be almost equal to everything spent by Americans on food services and accommodations ($942.4 billion); it will be almost three times as much as total expenditures on furnishings and durable household equipment ($331 billion); well more than double what was spent on clothing and foot wear in 2018 ($395 billion); nearly double what was spent on motor vehicles and parts ($507 billion); about double what was spent on transportation services ($454 billion); more than double what private businesses spent on informational processing equipment ($409.6 billion); almost one-third more than all that was spent on fixed investment business structures ($637 billion);  over 13 percent more than all residential housing investment costs ($795 billion); equal to 80 percent of everything spent on financial services and insurance ($1.24 trillion); and more than double everything spent by non-profit organizations serving households ($439 billion).

In other words, $900 billion of some combination of these and may other goods and services could have been available for private sector production and consumption if the real resources reflected in this dollar amount had not been siphoned off by the government through its borrowing to cover the costs of its deficit spending.

What is Not Seen with Taxes and Borrowing

The apparent “something for nothing” from government spending in excess of what is taken in as taxes, therefore, is seen to be a rather expensive “free lunch.” The French free-market economist Frederic Bastiat famously reminded people that it is important to see both “What is Seen and What is Not Seen” (1850). When the government taxes, say, $100 of people’s income, what is seen are the government roads repaved, or the re-shingled government-run school, or the “free” government housing. What is not seen are all the goods and services what would have been produced and used by those taxpayers if the $100 had been left in their pockets: the shoes for a taxpayer’s own children, a businessman’s investment in a new machine to increase his company’s productive capability; or the savings that might have been set aside for a citizen’s own future retirement needs, and which would have funded some private enterprise through the financial market to make more and better goods in the future.

But Bastiat’s reminder applies not only to what the government taxes, but to what it borrows as well. The dollars taken from the financial market by the government to cover its deficit spending, as we saw above, could have been borrowed and used by private businesses to produce more shoes, clothing, residential housing, business fixed investments, or to manufacture more automobiles and other means of transportation, or to cover any number of other things for which private sector savings might have been used instead of what politicians and bureaucrats decide to spend it on to advance various ideological causes and special interest desires that win them those votes and political power.

Why the Fiscal Follies are Likely to Continue

The momentum in the direction of ever more government spending and borrowing unfortunately cannot be noticeably slowed down, stopped or reversed in any immediate future. There are several reasons for this. First, too many Americans want it. That is, they have been indoctrinated for decades that government has to do all these redistributive programs that make up the welfare state under the presumption that a freer society cannot handle or solve these “social problems.”

Second, we are still in that fiscal stage in which, as the Wall Street Journal pointed out, most politicians of all political strips see it as the easiest path to win votes and stay in office. At the same time, interest groups motivated by ideology or simply the desire for other people’s money view government regulation and redistribution to be as legitimate as any other means of getting what they want from others in society.

Third, the seeming costs of using the government borrowing means to the wanted political spending ends still seem to have few costs connected to them. Borrowing costs remain relatively low, and both domestic and foreign lenders seem unconcerned, yet, about the amount of the borrowing or the capacity of the U.S. government to meet its legal obligations to its creditors.

Of course, something could happen tomorrow to set off the financial avalanche, with dire consequences then set in motion. But chances are the fiscal folly will continue for some time into the future, with no end to annual budget deficits and mounting national debt. So what is to be done?

Changing Political Attitudes Before the Crisis

In my view, the seeming continuing fiscal calm before the eventual financial storm should be used as a period during which all people concerned with the ideas and ideals of a free market liberal society make their case to their fellow Americans. To explain why it is important to look beyond the immediate to the longer-term consequences that are threatening over the horizon, however far away it may appear.

Bastiat’s theme of what is seen and what is not seen must be thoroughly and repeatedly explained and emphasized to our fellow citizens. There are no free lunches. The costs of deficit spending are real and right now in terms of reduced private sector investment, production, and potential standards of living due to government misdirecting what people are saving into the wasteful and special interest serving purposes of those wanting to eat and drink at the government trough at their neighbor’s expense. (See my articles, “Why Government Deficits and Debt Do Matter” and “Government Debts and Deficits are Out of Control”.)

And most importantly if a freer society is to be won in the future, the friend of liberty and prosperity must reason and persuade with all those with whom a calm and respectful discourse may be undertaken about the meaning of personal freedom, the importance and effectiveness of free and competitive markets, and explain the intended and unintended negative consequences that inescapably follow from more social and economic decision-making being transferred from people to politicians. It is necessary to inform others about how free markets work, and why markets are important to both preserve liberty and promote prosperity and betterment for all in the society, including and most especially those who the proponents of bigger spending government say they wish to help.

The real battle is the intellectual battle of ideas, because it is ultimately ideas that determine and direct what role government has in society, and what degree of freedom every human being has the opportunity to possess and enjoy. The budgetary facts and figures should be the motive to understand the wrong direction into which the country continues to move, and therefore the inspiration to win the battle of ideas so the right policies might be implemented before the real fiscal crisis occurs from which many if not most in society may not come out unscathed.

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Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina. Ebeling lived on AIER’s campus from 2008 to 2009.

This article was sourced from AIER.org