Reason | Sep 22, 2020 | 0
Meet the Spendthrifts
(Sing along to the theme song from the Flintstones.)
Spendthrifts, meet the Spendthrifts,
They’re the modern wasteful family.
From the town of DC,
The most reckless house in history.
Their massive outlays are so darn carefree,
They have no concept of reality.
When you’re with the Spendthrifts,
Common sense, restraint and honesty are all a joke.
Soon we will all be broke.
Meet the Spendthrifts; but they’re not from the Stone Age. They are an American family who spends a lot more money than it earns each year. Last year, the Spendthrifts made just over $34,000 but spent more than $44,000. Nearly $10,000 of their spending came from borrowing—they put the excess spending on their credit cards. The problem is that their credit card debt was over $215,000 at the start of the year, bringing it to over $227,000 at year-end. Oh, and they weren’t making any monthly credit card payments.
How could they continue to add to their credit card balances without making monthly payments? They couldn’t. Why would the credit card companies allow them to accrue that much debt with their income? They wouldn’t.
But the Spendthrifts are not an actual family. Rather, they represent the federal government—and it can spend without restraint because it is the credit card company. Just add nine more zeroes to all the above numbers and you end up with the federal budget and debt as of September 28, 2019, the end of the federal fiscal year. Specifically, the feds spent $4.4 trillion but only raised $3.4 trillion in revenue. The shortfall of nearly $1 trillion was borrowed, along with some unpaid interest, which resulted in debt of nearly $23 trillion.
These numbers are scary, but not as terrifying as what they would be if Bernie or one of the other Democratic presidential candidates gets elected and then has his or her way. Medicare for All, the Green New Deal, free college, and myriad other outlandish programs would add literally tens of trillions of dollars to our already massive debt. This is unsustainable, and common sense is all you need to understand this. The feds may be able to spend more than the Spendthrifts, but they still have limits to the amount of borrowing they can incur without harming the economy and the integrity of our monetary system.
The debt-to-GDP ratio is simply the current debt divided by the current Gross Domestic Product (GDP is a measure of a nation’s total economic output). For fiscal year-end 2019, that ratio was over 106 percent ($22.719 trillion in debt to the $21.345 trillion GDP). The World Bank has determined that the debt-to-GDP ratio tipping point is just 77 percent; anything above this ratio over time will reduce economic growth.
The highest debt-to-GDP ratio in US history was 118.9 percent in 1946, in the aftermath of World War II. Subsequently, the ratio was just 32 percent in 1980, climbing to 68 percent in 2008, then exploding past 100 percent in 2014. Since the beginning of George W. Bush’s presidency in 2000, the debt has grown at over 7 percent per year compounded. If that growth rate continues, the debt will double every ten years.
The growth rate of the US economy is roughly 2 percent per year over long periods. With a 2 percent growth rate in GDP and a 7.2 percent growth rate in the debt, the debt-to-GDP ratio is projected to be 173 percent in ten years and 284 percent in twenty. To put that in perspective, Japan’s debt-to-GDP ratio broke 100 percent in 1997 and exceeded 200 percent in 2009, and they have had anemic economic growth over the past thirty years.
Keep in mind that our debt would climb much higher than the above projections with Bernie or virtually any other Democratic candidate for president in office. Their proposed programs along with the unfunded liability of over $85 trillion for Social Security, Medicare, and Medicaid would certainly bankrupt our country. We need to fix our existing entitlements before we can even consider boondoggles such as the Green New Deal.
When interest rates climb to market rates at some point in the future, the annual interest payments by the feds are expected to exceed $1 trillion (not even considering principal payments). These are monies that cannot go to feed the poor, provide health insurance, provide free college educations, or help comply with climate accords. The debt is currently over $71,000 per citizen and over $187,000 per taxpayer.
Certainly, if you were confronted with the same situation in your personal life you would most likely attempt to rein in your spending and begin to reduce debt. But for some reason, the public is not alarmed enough to demand our legislators do the same. Why isn’t the public more concerned about these numbers? I believe part of the answer is that they can’t comprehend how high the debt is and how much the feds spend each year. A trillion is a number very hard to fathom.
How long ago was one trillion seconds? Here’s a hint: there are 86,400 seconds per day. Most people of whom I ask this question say something like ten years, a hundred years or even a thousand years ago. But one trillion is an unfathomable number. A trillion seconds ago was all the way back in 29,690 B.C.!
It is sad that our federal government spends over $4 trillion per year and we don’t realize how large that number is. 4 trillion dollar bills stacked on top of each other would reach all the way to the moon, over 238,000 miles away from Earth (a stack of one hundred one-dollar bills is less than half an inch thick). If you spent $1 million per day, it would take you over 2,739 years to spend a trillion. These numbers are ridiculous.
The public may think one of the reasons we elect our representatives and a president is to manage our public finances prudently, but they are sorely misguided. Most politicians have no real knowledge of economics. Most probably they can’t even balance their own checkbooks, let alone the federal budget. These people are elected in a popularity contest, and one way to get popular is to tell the voters they will be getting lots of handouts if the politician remains in office.
Despite any good intentions, politicians care about themselves first and foremost. They get many benefits from being in office and many more when they leave. To remain in office, they need votes. Telling people the government needs to cut back on expenses and reduce debt are mundane, boring things that don’t get votes. Spending other people’s money on other people is what does the trick.
It all comes back to common sense. The feds cannot continue to add more gargantuan programs that will require lots of taxing and borrowing without bankrupting the country. Borrowing is just a humongous deferred tax on Millennials, Gen Z, and subsequent generations. And the rich don’t make enough money to raise even a trillion dollars in new taxes annually, even if the top income tax rates are raised to 100 percent.
The spending problem is not all the fault of Democrats and socialists, however. The Republican party talks a good game about limiting government and spending but somehow always does the opposite anyway. Maybe it has something to do with buying votes?
The Spendthrifts would not exist in the private sector, as the lenders would never allow them to borrow that much on their income. We need to do the same with the feds, although that is much easier said than done.
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