In barely one year, America’s national debt has expanded by more than $4 trillion. It is now more than America’s GDP. But what is this debt buying for Americans?
Debt hawks typically don’t differentiate between good debt and bad debt, but there’s a difference. The last time the national debt exceeded GDP was in the aftermath of World War II. The return on that investment was not only a planet liberated from fascism and protected from Communist expansion, but an industrial and technological supremacy that gave rise to an American economic boom. And with the postwar boom came deleveraging.
From a peak of 118 percent in 1946, the national debt steadily declined. By 1950, it dropped to 86 percent of GDP. By 1955 it was down to 64 percent, by 1960, 53 percent. It dropped below 40 percent in 1966 and hit a low of 31 percent three times, in 1974, 1979, and 1981.
But then what happened?
During Ronald Reagan’s presidency, the decision was made to spend the Soviets into the ground on military technology, without seriously confronting or reducing the many new taxpayer-funded entitlements ushered in by the New Deal and the Great Society. One might argue this first debt binge was justified. By 1990, the national debt was back up to 54 percent, but the Soviet Union was no more, and the United States became the lone superpower nation.
For a time, there was a so-called peace dividend. Ten years later, in 2000, the national debt had only ticked up one percent, to 55 percent of GDP. But by 2007, after years of warfare in the Middle East, the debt-to-GDP ratio had risen to 62 percent. By 2010, after the bank bailouts, it had jumped to 91 percent. Rising steadily throughout the Obama and Trump administrations, by 2019 it had already reached 106 percent. One COVID wracked year later in 2020, the debt exploded to 129 percent.
There is no end in sight.
Today’s Debt Isn’t Your Grandfather’s Debt
What are Americans getting today in return for all this debt? Clearly, there is a way to claw this debt back down to size. The postwar boom in the 1950s and 1960s proves that. But the result of the investments made by the government during World War II was America positioned as the only nation that wasn’t devastated by that war. America’s intact industries operated virtually without competition for nearly a generation, creating broad prosperity and government budget surpluses.
The explosion of middle-class prosperity after World War II was based on the United States operating from an unusual position of economic dominance that is unlikely to be repeated. In 1960, the United States GDP was an astonishing 40 percent of global GDP. In 2019, adjusting for purchasing power, the U.S. economy accounted for just 16 percent of global GDP. America’s industries cannot pay the wages they did 50 years ago, because today they have to compete against peers. Back then, they had no peers.
This argument can be taken too far, however, because it becomes an enabling excuse to write off America’s middle class. Gains in productivity ought to make up for the loss of export markets. Claiming America’s quality of life is no longer sustainable is a lie. The benefits of cheap imports ought to be a lower cost of living. But what has happened is the opposite. Sure, televisions and smartphones are better-faster-cheaper every year. The price-performance curve on high technology continues to follow Moore’s law. But it ends there. Why?
There’s a reason Americans can’t afford homes, healthcare, or college tuition. There’s a reason Americans are being required, more than ever, to ration their use of energy and water, while paying more for what they are allowed to consume. It is because of artificial scarcity, engineered by government in partnership with financial special interests. America’s unaffordable cost-of-living is politically contrived to protect the dollar. Worse, it is not a strategy that can be sustained.
Economic historian Adam Tooze in Crashed: How a Decade of Financial Crises Changed the World makes something plain that ought to be obvious but is instead hotly debated: money is a political construct. How is it that America is allowed to print as much money as it wants to, running up trillions in federal debt? The reason is that the dollar is the transaction and reserve currency of the world, and foreigners know they can use American dollars to buy American assets: Real estate, technology, raw materials, agricultural products. There’s more.
In what is dismissed as pointless neglect of needy Americans, but is actually part of a strategy to maintain the dollar’s status as a desirable international currency, the U.S. spreads hundreds of billions around the world every year. This takes the form of direct foreign aid, foreign workers in America sending their earnings to relatives abroad, military personnel spending dollars in local communities overseas, and drug cartels profiting from America’s insatiable appetite for narcotics. In 2008, the U.S. Federal Reserve transferred hundreds of billions of dollars to foreign central banks as part of its response to a global liquidity crisis that threatened to crash the whole system.
But the biggest way dollars are exported abroad, year after year, is through the American consumer’s desire to find the cheapest imported product to stoke their materialistic lifestyle. America hasn’t had a trade surplus since 1975. In 2020, the U.S. trade deficit was $679 billion. And to balance America’s trade deficit, America’s assets, all of them, are for sale to any foreigner with dollars in his pocket.
Asset Inflation Keeps the System Running
By erecting prohibitive barriers to new housing and infrastructure, usually justified on environmental grounds, but also through byzantine layers of conflicting bureaucratic regulations, America has legislated and litigated its way to near paralysis. But this conveys tremendous upside for existing financial and political elites. Real estate portfolios, public utilities, public bureaucracies, and heavy industry all see the value of their services and their assets appreciate. At the same time, homeowners are able to borrow against their rising home equity to purchase foreign imports, sending dollars overseas. Then those dollars come back in the form of foreign investment in American real estate, bidding prices up even further.
All of this is a political construct. Monetize the world with dollars. If the dollar devalues against foreign currency or against commodities including gold, just print more. If inflation hits, good, because all that dollar-denominated debt will get wiped away, and manufacturing jobs will migrate back onshore.
As long as property in the United States can be purchased with dollars, and as long as the United States remains a haven of relative political stability and relative individual freedom, the global appetite for dollars will remain. But how long can it go on?
Depending on who you ask, this could collapse any day, or it could go on for a very long time. In the last “normal” year, 2019, according to the Congressional Budget Office, the federal budget was $4.4 trillion, revenues were $3.5 trillion, and interest on the Federal debt was $375 billion. Put another way, in 2019, federal debt service was 8.5 percent of expenditures and 10.7 percent of revenues.
In 2021, at a two percent rate of interest, the federal debt service is going to run around $600 billion, or roughly 15 percent of revenues. This is a manageable burden. Moreover, to the extent the Federal Reserve steps in to purchase federal debt directly, this will mitigate how much of the federal budget has to go out in payments on treasury bills.
The bigger problem with America’s federal debt isn’t that it can’t be sustained for a long time. The problem is America’s deficit spending is not being put to productive use, which means there won’t ever be another economic boom big enough to begin to finally reduce the debt.
The defense budget is being squandered on foreign military operations instead of being invested in technological supremacy. “Infrastructure” spending goes to pay consultants, bureaucrats, litigators, public employee unions, and projects without genuine utility. America’s ability to live on the capital endowment built primarily in the 1930s and 1960s is slowly coming to an end.
While libertarians may find the second half of this statement deliriously misguided, it is a tragic waste of deficit spending to emphasize ongoing unemployment compensation instead of providing ample funding to go back to the moon. America’s federal COVID relief spending is about to break $5 trillion, but Congress can’t spare more than a lousy $2 or $3 billion for a new moon mission. This is a preposterous travesty. Being first in space yields spinoffs of spectacular value to the nation. Paying people more to stay home than to work will destroy the nation.
The biggest danger to America’s future isn’t deficit spending. It’s what we’re doing with all that money. Instead of fixing our schools to have a skilled workforce, and instead of reducing unemployment benefits to have a motivated workforce, we are paying billions to the teachers’ unions and trillions to the unemployed. Meanwhile, jobs are unfilled for want of qualified applicants.
If you are going to spend money you don’t have, spend it on things that are real and build national wealth. That would not be foreign adventures and domestic entitlements. It would be pure research, space industrialization, and strategic military assets. It would also mean investing cost-effectively in genuine practical infrastructure, instead of the monstrosity currently marinating in Congress, yet another boondoggle that has made the very word “infrastructure” synonymous with fraud.
Until Bitcoin or rubles or yuan can be used to purchase a villa in Montecito or a compound in Montana, don’t write off the ability of America to print as many dollars it wants. But that day will come, if trillions continue to be deployed in ways that are precisely the opposite of what is needed to maintain a healthy nation and a hearty people.