An article in the recent issue of the Journal of Economic Perspectives reviews “Rising Government Debt: Causes and Solutions for a Decades-Old Trend.” Governments have to borrow money when their spending exceeds the amount of revenue from taxes and other sources. This graph, showing the amount of federal government debt as a faction of the total value of economic activity in the U.S. (Gross Domestic Product), sums things up quite well.
While the focus of the paper is on the U.S., the author notes that “Advanced economies as a group have experienced a long-term increase in government debt to GDP.”
According to the author,
“Large debt buildups can eventually lead to diminished economic activity, either by crowding out private capital investment or by forcing an increase in distortive taxes and a decrease in public investment to facilitate repayment. Moreover, a government carrying such a high debt load may be constrained in responding to future catastrophes, such as financial crises, natural disasters, or wars … In extreme cases, the result is default through explicit debt repudiation or inflation. … The costs of default include increased stress on financial institutions, lower international financing for domestic firms, and decreased export market access.”
In the latter half of the 1940s, the U.S. government had to borrow money to finance wartime expenditures. This was obviously necessary. After World War II, government spending fell and productive resources devoted to the war were transferred to civilian or consumer production and business investment. As the U.S. economy grew and government spending declined, government debt as a share of GDP declined as well.
Unfortunately, there is no clear prospect for an anticipated decline in government spending today. Mandatory spending programs, such as funding for Social Security, Medicare, and Medicaid, as well as interest on the government debt, take up more than half of the federal government budget. These cannot be reduced. There is also no pent-up slack in the U.S. economy now like there was during World War II to produce the kind of growth seen during the 1950s. In other words, even if government spending can be reined in now, it is not likely that government debt as a share of GDP will decline rapidly too.
The author asks an interesting question: “Has the rise in government debt over the past four decades served a socially beneficial purpose that would compensate for the risks of the added debt burden?” Unfortunately, he argues, it has not. Simply stated, the long-run trend in rising government debt today cannot be justified according to reasonable explanations for short-term government deficit spending.
According to the author, “Current governments want to be fiscally irresponsible, while simultaneously hoping that future governments be fiscally responsible.” Ay, there’s the rub! It’s the same mentality we have with respect to dealing with climate change. We don’t want to make the difficult decisions now, so we’ll force our children to make even more difficult decisions later. But children do what they see their parents do. Where is the education in that?