By Joe Duffus
“When the people find that they can vote themselves money, that will herald the end of the republic.” Benjamin Franklin understood the temptations of over-spending. He hated debt and wrote about it a lot. His words should be top of mind whenever we talk about the federal government, its budget, and the gigantic national debt.
Franklin was a businessman, and he understood the need for taking on some debt to finance growth. What he hated was running up debt to the point where the interest payments alone become unpayable. And that’s where we are today.
Franklin wrote about Britain’s debt in 1777, using a question-and-answer format…
- Q. Suppose the interest of this debt to be three and a half per cent. per annum, what does the whole annual interest amount to? A. Six million, seven hundred and seventy thousand pounds.
- Q. How doth government raise this interest annually? A. By taxing those who lent the principal, and others.
- Q. When will government be able to pay the principal? A. When there is more money in England’s treasury than there is in all Europe.
- And when that be? A. Never.
Almost 250 years later, the nation Franklin worked so hard to create stares down a national debt of $29 trillion dollars and climbing fast. President Joe Biden wants to spend another $3.5 trillion. He calls it “building back better.”
On today’s podcast, Peter and Eric are joined today by someone who remembers those budget battles, former Rep. Jason Chaffetz. Now a distinguished fellow for the Government Accountability Institute, Jason writes and speaks about budget and corruption issues.
Jason recalls “when I came to DC in 2008… the entire debt was $8 trillion.” An article from Forbes notes the debt increased by $5 trillion in fourteen short months. The article mentions that, according to USDebtClock.org, the US’s national debt will come close to $89 trillion by 2029, not including the extra spending.
In a March 2021 paper and May 2021 paper, the Committee for a Responsible Federal Budget states that the US will pay a little more than $300 billion on national debt interest payments in 2021.
How long can we sustain this?
That is nearly 9 percent of all federal revenue collection, and about $2,400 per household. Already, the federal government spends more on interest than it does on science, space technology, transportation, and education combined.
What happens if interest rates go up, even a little? The Congressional Budget Office (CBO) predicts that the interest rate on the debt will increase to 3.4% by 2031. Rising interest rates will also increase “interest payments and deficits.
If interest rates go up one point the interest will cost more each year than Medicaid. Two points? More than the federal government spends for defense or Medicare. Three points? Almost as much as each year’s Social Security benefits. The cost per household of a one percentage point increase in the interest rate would increase costs by $1,805, to $4,210.
If the CBO’s forecast is correct, “interest costs will more than double,” totaling $631 billion in 2029, “$846 billion by 2031,” and increasing in the long term.
It’s easy to be discouraged by these numbers and these questions. The only bright spot is that it does actually “stimulate” the economy, because owning that debt becomes itself an investment opportunity. This is why investors buy Treasury bills. But as Peter points out, “monetizing the debt by printing money is like pretending there’s more economic activity, like adding water to milk.”
Some see the US debt and deficit in a “positive light.” During an economic downturn, if national debt is increased “by a deficit-financed tax cut (or transfers) …it can help stimulate private spending, making everyone better off,” according to the St. Louis Federal Reserve. In a well-off and stable economy, however, this type of action can contribute to a rise in prices, “which can lead to a redistribution of wealth.” Investors, they say, “value the securities making up the national debt in the same way individuals value money—as a medium of exchange and a safe store of wealth.”
But for how much longer?
As Jason says, the worst part of the federal budget is that “around 75% of it are for mandatory, programmatic spending.” So, the options for actually reducing spending are found only in that other 25%. And neither the Democrats nor the Republicans ever seem to talk about this.
Benjamin Franklin would not approve.