It’s the Debt, Stupid!

Political leaders around the world have gotten comfortable with the rather seductive idea that things like deficits and the national debt don’t really matter. 

“Don’t worry,” they say, “we can borrow as much as we want. The Fed can always just buy Treasuries, right? Debt is just a tool and we should use it.”

Or “Look, we’re only at 130% debt-to-GDP ratio. Japan’s at 260% and China’s at 286% and nothing too bad has happened there. We’ve got plenty of room for growth!”

Decades of extreme central bank activism (i.e. interest rate suppression) have emboldened people to believe that running up big debts is totally ok. I get where the sentiment comes from and its allure. Up until very recently, the extremely manipulative policies we pursued in the aftermath of the financial crisis of 2007-08 looked like a big success. Not only did we avoid another great depression but also the economy recovered pretty quickly. The tech boom continued and until COVID hit and ruined everything, there wasn’t much inflation.

Times were so good in the 2010s that people desperately want to believe that once this little inconvenient bout of inflation dissipates, we can just go back to the good old days. No one wants to believe this more than our politicians. For them, the more government-controlled money to play with the better, for this is the currency of political influence.

Here’s the problem: if there was ever an inconvenient truth for governments it’s that, of course, debt actually matters. The idea that you can borrow indefinite amounts of money with no real consequence is utter nonsense. No matter the level or degree of manipulation, no matter how much we distort the market, eventually the bill comes due! We either pay it with taxes or inflation or both and, along the way, the financial strain imposed by rising debts impairs the ability to deal effectively with the pressing policy issues of the present.

This is happening right now in America. Our interest expense is growing rapidly:

Obviously, this is NOT the chart you want to see going parabolic. While there’s not much you can say with confidence about economics and markets, we know this: when a chart of the cost of your interest payments looks a like meme coin on the way up, you have some serious problems. And indeed we do:

Interest payments are already eating up a ton of our spending capacity and crippling our ability to address important public policy issues. Time and time again, as I’ve been exploring big public policy issues with our courageous guests on the Nick Halaris Show, the issue of funding comes up. 

As we learned this week from Katherine Schweit, in a country with as many guns as ours (400M and counting) and Constitutional protection of gun ownership, the only real way to stop mass violence is by investing in mental health resources and advanced anonymous reporting systems and by making significant upgrades to law enforcement technologies. And what does that take? Money and lots of it.

Similarly, we learned from Matt Murphy about the (basically criminally negligent) severe lack of resources in the fight against child trafficking. It’s a travesty and a great moral wrong that our law enforcement agencies around the country are so underfunded that they cannot even follow-up on over 90% of these reported cases let alone investigate and prosecute them. 

Even immigration has a money problem. Clearly, whatever we are doing now is not working very well. I’m not a proponent of a border wall but obviously whatever strategy we choose to secure the border is going to require a lot of financial resources. And the funding issues in immigration go beyond just border security investments. As our guest Jack Malde pointed out, one of the reasons the border has been such a mess is that we simply don’t have enough judges and administrative staff to properly process all the applications coming in. 

We are resource-constrained beyond belief and the problem is forecasted to get much, much worse:

Imagine what our country is going to look like when we are spending 40% of our tax revenues on interest expense. 

I realize I’m not the first person to be concerned about the national debt. But it’s one of those exasperating public issues where everyone basically knows the truth, yet we are unwilling or unable to do anything constructive about it. There are tons of reasons for this, mostly dealing with our psychological propensity to prioritize what is expedient over what is right and to value the present more than the future. When it comes to debt, we only “deal” with it when forced to by external circumstances. A moment like that may be fast approaching for America.

What is likely to happen if we don’t do anything? Here are a few ideas:

None of these big, intractable policy issues we’ve been discussing will get solved. Many will get worse. Everything we’ve been talking about, whether it’s housing affordability or homelessness, crime, or mass violence, requires substantial public investments. The money is just not going to be there.

Inflation will continue to be a big problem and will act as a kind of governor for economic growth. Absent runaway technological progress, American standards of living will be under continuous assault. 

Eventually, America will start defaulting on the promises it has made, particularly to the older generations. For example, the Social Security eligibility age will keep getting pushed back and back. It already happened once in 1983 under Reagan when it went from 65-67 and is definitely on course to happen again and again and again. It’s simple math. Similarly, healthcare is on a trajectory to become such a huge expense problem that the government will eventually force private healthcare providers and drug makers to lower their prices. This will probably get so bad that they entire capitalist incentive structure of the industry will be destroyed.

What should we do about this?

We have to get serious about balancing the budget. This doesn’t have to happen immediately or all at once but we have to start heading in that direction. I’m not one of those people who think we should try to tax our way out of this. I think taxes are necessary, of course, but we really should try to limit them wherever possible. We want to preserve the capitalist incentive structure as much as possible and this means keeping taxes low. It also means that we have to get real serious about regulatory reform and addressing inefficiencies in the bureaucracy. We also have to be ruthless about eliminating corruption and waste wherever we find it. 

We should take a serious look at healthcare. The industry is an absolute mess and is forecasted to get much worse. I don’t think we should shy away from radical reform ideas here, nor should we laugh at some of the policy proposals being floated by people RFK Jr. around exercise and healthy eating. There’s no question that we could drive an enormous amount of spending savings by inspiring Americans to get in and stay in better shape.

We should also weaponize our immigration system. Not only will this improve our international competitiveness, but also it will help with GDP growth. Remember, GDP growth is essentially the sum of productivity growth and population growth. Unlike most countries around the world, people actually want to come here to live. In my view, our failure to use this for our collective advantage is the greatest strategic blunder in American history. 

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