Excessive federal spending is creating grave economic and national-security risks. America’s fiscal recklessness must stop. The COVID-19 crisis has provided the latest impetus for government spending, even to the point of steering the American mindset toward socialism — a doctrine that has always harmed people’s well-being. As one of us demonstrated in his book The High Cost of Good Intentions, profligate government spending invariably has damaging consequences.
High and rising US national debt will eventually crowd out private investment, thereby slowing economic growth and job creation. The Federal Reserve’s continued accommodation of deficit spending will inevitably lead to rising inflation. Financial markets will become more prone to turmoil, increasing the chance of another big economic downturn. Financial markets’ current relative calm and low consumer-price inflation are no cause for comfort.
Previous periods of sharp increases in inflation, rapidly rising interest rates, and financial crises have followed periods of excessive debt like a sudden wind, without warning. Shultz and Taylor’s book Choose Economic Freedom shows that economic indicators in the United States gave no hint in the late 1960s of the subsequent rapid rise in inflation and interest rates in the early 1970s. Likewise, financial markets during the years immediately preceding the 2007–09 Great Recession provided little indication of the calamity that would ensue. Such an increase would have harmful effects — similar to those of mounting public debt — on economic growth and job creation.
Two hundred years ago, the ability to borrow was instrumental in America maintaining its independence from England. The US government’s careless spending is jeopardizing this asset. If the country continues along its current fiscal path, the federal government’s borrowing well will eventually dry up. When it does, America will be far less able to counter national-security threats.
As hostile foreign governments and terrorist organizations recognize this, the world will become a far more dangerous place. US policymakers’ mistaken belief that deficits and debt don’t matter is the sad culmination of a long downward slide in fiscal responsibility. From 1789 to the 1930s, the federal government adhered to a balanced-budget norm, incurring fiscal deficits during wartime and economic recessions, and running modest surpluses during good times to pay down this debt. This prudent management of the federal finances was instrumental in establishing America’s strong position in world financial markets.
Roosevelt’s New Deal broke this norm, and deficit spending has since become a way of life in Washington, with the federal government outspending its available revenues in 63 of the 75 years since the end of World War II. Annual deficits grew so large that by the mid-1970s the US national debt was growing faster than national income. During the last decade, any remaining fiscal concerns in either the Democratic or Republican parties have seemingly vanished. Freed from a belief that rising deficits and debt are harmful, policymakers unleashed a torrent of new spending.
By fiscal year 2019, the federal government was spending $1 trillion per year more in inflation-adjusted terms than it had a dozen years earlier. In fiscal year 2020, the federal government added nearly another $2 trillion of new spending in response to the pandemic, raising the national debt to 100% of national income. At that point, America’s democratic system will say the expenditure growth must stop.
Source: George P. Shultz, John F. Cogan, John B. Taylor | Project Syndicate
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