This much I have learned about debt after 40 years of writing and
study: It is better not to incur it. Once it is incurred, it is better
to pay it off. America, we have a problem.
We owe more than we can easily repay. We spend too much and borrow
too much. Worse, we promise too much. We conjure dollar bills by the
trillions–pull them right out of thin air. I won’t insist that this
can’t go on, because it has. I only say that it will eventually stop.
I don’t know the date, but I believe that I know the reason. It will
stop when the world loses confidence in the dollars we owe. Come that
moment of truth, the nation will resemble Chicago, a once prosperous
polity now trying to persuade its once trusting creditors that it is
actually solvent.
To understand our financial fix, put yourself in the position of the
government. Say you earn the typical American family income, and you
spend and borrow as the government does. So assuming, you would earn
$54,000 a year, spend $64,000 a year and charge $10,000 to your already
slightly overburdened credit card. I say slightly overburdened–your
outstanding balance is about $223,000.
Of course, MasterCard wouldn’t allow you to run up that kind of tab.
At an annual percentage rate of 15%, the cost to service a $223,000
balance would absorb 62% of your pretax income. But the government is
different from you and me (and Chicago). It has a central bank.
The Federal Reserve is the government’s Monopoly-money machine. It sets some interest rates and
influences many others. It materializes dollars. It regulates–now
regiments–the nation’s banks. It pulls levers to make the stock market
go up.
Congress is the source of the Fed’s power. The Constitution is the
source of Congress’s power. The parchment enjoins Congress to coin money
and regulate the value thereof. The founders viewed money as a scale or
yardstick, something that measures value. The Fed views money as a
magic wand, something that creates value.
Dollars aren’t so much minted these days. Rather, they issue from the
Fed’s computers in billowing digital clouds. The cost of producing them
is only the energy expended on tapping the keys. The Fed emits these
electronic greenbacks to attempt to control the course of economic
events. It’s a heaven-sent monetary system for a big-spending
government.
You may struggle to pay that midteens rate on your outstanding
credit-card balance. The Treasury gets by paying an average of just 1.8%
on that portion of the debt, held by savers and investors both here and
abroad. Defined in this way, we owe $13.9 trillion. The $19 trillion
figure ticking upward on the famous National Debt Clock adds the debts
the government owes itself. (How does this pseudo bookkeeping work?
The
Social Security Administration takes in–temporarily–more than it pays
out. With the surplus it buys Treasury bonds. The bonds enlarge the debt
clock’s debt.) It’s not so important that the government pays itself on
time. What is important is that the government pay its public creditors
on time. So cast your eyes on the exact numerical rendering of that
slightly smaller sum: $13,903,107,629,266. It is unmanageable.
One can assume that the creditors trust the currency in which they
expect to be repaid. I wonder why, and for how much longer. The Fed once
fought inflation. Now it actually sets out to cause it–about 2% a year
is the target. Striving to inflate, it presses down interest rates and
rustles up new dollars.
From the nation’s 18th century founding until 1971, the dollar was
defined as a weight of gold or silver. Americans did business with
paper, of course. But these commercial bills and banknotes were
convertible into monetary bedrock, the precious metals. The expression
sound as a dollar derives from the ring of a gold piece when you plunked
it on a counter.
Sound money coincided with balanced budgets. Government borrowings
climbed in wartime and subsided in peacetime. The pattern was
disarranged by depression in the 1930s and war in the 1940s. It was
broken by the Johnson Administration’s guns and butter and entitlements
programs in the 1960s. Richard Nixon administered the coup de grâce on
Aug. 15, 1971, when he announced that the dollar would derive its value
from the say-so of the government. The Fed could print as many green
bills as the traffic would bear.
Many applauded that sea change, then and later. Easy money rarely
fails to please–at first. It buoys stocks, bonds and commercial real
estate. House prices jump, and car sales zoom. (Average auto-lending
rates, now 4%, have been nearly sawed in half since 2007.) Politicians,
noticing how a bull market fattens public pension funds, ratchet up the
benefits they promise to retirees (a fact that state and federal
pensioners are encouraged to remember on Election Day).
Periodically, the buzz wears off. What remains is a hangover of debts
and promises. The proliferating dollars facilitate heavy borrowing.
Ultra-low interest rates mask the cost.
I don’t ask that we return to some long-lost fiscal and monetary
Eden. None has ever existed, even in America. Crises and business cycles
are always with us. I merely observe that sound money and a balanced
budget were two sides of the coin of American prosperity.
Then came magical thinking. Maybe you had a taste of modern economics
in school. If so, you probably learned that the federal budget needn’t
be balanced–it’s nothing like a family budget, the teacher would say–and
that gold is a barbarous relic. To manage the business cycle, the
argument went, a government must have the flexibility to print money, to
muscle around interest rates and to spend more than it takes in–in
short, to “stimulate.”
Oh, we have stimulated. Between the fiscal years 2008 and 2012 alone,
federal deficits totaled $5.6 trillion. The public debt nearly doubled
in the same span of years, to $11.2 trillion. The Federal Reserve
tickled $1.6 trillion in new digital dollars into existence. True, our
Great Recession proved no Great Depression, but the post-2008 recovery
is the limpest on record.
It’s tomorrow’s trillions–the ones we’ve grandly promised to pay
ourselves–that lie at the heart of the problem. The granddaddy of
far-off commitments was Social Security, which dates from the 1930s.
Medicare and Medicaid in the 1960s and the Affordable Care Act in 2010
duly followed. The debt, as big as it is, is the measure of past
spending in excess of tax receipts, a pattern of bad fiscal habits that
traces its intellectual roots to John Maynard Keynes and has its
dollars-and-cents origins with Lyndon Johnson and his Great Society.
What awaits us and our children and their children is the unpaid tab of
the future.
“Nobody knows anything,” screenwriter William Goldman wisely observed
about the accuracy of Hollywood box-office forecasts. The economists,
in general, are no better than the studio executives.
You can’t blame people for not paying attention. America has forever
defied the doomsdayers. The very language of government debt is
calculated to tranquilize the critical mind. We speak of the Department
of the Treasury rather than the Department of the Debt. (There’s no net
treasure in the Treasury.) We say entitlement instead of taxing Peter to
pay Paul and Social Security trust fund when we mean just another
ordinary government account at the Department of Debt. (There is no
trust fund because there is no division of assets, no accounts
containing funds earmarked for you, the citizen, who so faithfully
“contributed” your payroll taxes.)
Today’s miniature interest rates constitute another form of public
sedation. You’d suppose the doubling of the debt would jack up the cost
of servicing the debt. Nothing of the kind. As the debt has doubled, the
rate of interest has halved.
In 2007, we owed $5 trillion and paid an average interest rate of
4.8%. Net interest expense: $237 billion. In 2016 we’ll owe $14.1
trillion and pay the average interest rate I already mentioned: 1.8%.
Net interest expense: $240 billion. It’s a wonder we didn’t think of
this financial perpetual-motion machine about a thousand years ago.
Debt per se is neither good nor bad, though less is usually better
than more. How it’s priced and how it’s used are what tips the scales.
If chocolate cake cost a penny a slice, the best of us would be tempted
to break our diets. Well, government debt is priced at less than 2%, and
Washington fell off the wagon years ago.
How do we escape from our self-constructed fiscal jail? According to
the Government Accountability Office, unpaid taxes add up to more than
$450 billion a year. Even so, according to the Tax Foundation, Americans
spend 6.1 billion hours and $233.8 billion each tax season complying
with a federal tax code that runs to 10 million words. Are we quite sure
we want no part of the flat-tax idea? An identical low rate on most
incomes. No deductions, no H&R Block. Impractical? So is the debt.
So is the spending (and the promises to spend more down the road). We
need to stop the squandermania. How? By resuming the principled fight
that Vivien Kellems waged against the IRS during the Truman
Administration. It enraged Kellems, a doughty Connecticut entrepreneur,
that she was forced to withhold federal taxes from her employees’ wages.
She called it involuntary servitude, and she itched to make her
constitutional argument in court. She never got that chance, but she
published her plan for a peaceful revolution.
She asked her readers–I ask mine–to really examine the stub of their
paycheck. Observe how much your employer pays you and how much less you
take home. Notice the dollars withheld for Medicare, Social Security and
so forth. If you are like most of us, you stopped looking long ago. You
don’t miss the income that you never get to touch.
Picking up where Kellems left off, I propose a slight alteration in
payday policy. Let each wage-earning citizen hold the whole of his or
her untaxed earnings–actually touch them. Then let the government pluck
its taxes.
“Such a payroll policy,” wrote Kellems in her memoir, Taxes, Toil and
Trouble, “is entirely legal and if it were universally adopted, in six
months we would have either a tax revolution or a startling contraction
of the budget!”
Black ink, sound money and the spirit of Vivien Kellems are the way
forward. “Make America solvent again” is my credo and battle cry. You
can fit it on a cap.
Read more: The United States of Insolvency | TIME: Insolvenc
