Episode Transcript
Speaker 0 00:00:00 Scott, thank you for hosting it and welcome everybody. Um, topic tonight is, uh, why does the national debt grow and when is it excessive? Uh, we often hear about the sustainability of, of government debt or what I'll call public debt. Sovereign debt is sometimes the word for it. Um, I, in, uh, economics have long specialized just in this topic. Um, I don't talk about it often because it's somewhat technical to a general audience, but I thought I would try to simplify it for you tonight. But just for those of you who want to dig more deeply into this, and I, in 2017, and I think Scott has the link to this, I, uh, published a book called The Political Economy of Public Debt, subtitled Three Centuries of Theory and Evidence. And the fifth and last chapter of that book is titled The Limits of Public Debt.
Speaker 0 00:00:51 And that is really, uh, what I'm, I'm trying to, we're gonna focus on tonight. So in other words, having gone through the theory and history of government borrowing, basically, why does it borrow? When does it borrow too much? When does it, and why does it default sometimes? Um, the book goes through the theory, the both the theory and the history, mostly of the United States and Britain, where the longest histories exist, but also, um, theories about what causes it and, and theories about the limits of public debt. Namely, what, what are the upper thresholds and what happens when they're met, and how do you measure them? Are there any objective metrics? Uh, now, but let me back off. And I know this is a more general audience, so I don't wanna be overly technical here. And I actually want to add some value by simplifying, as best I can.
Speaker 0 00:01:37 This topic. Uh, in the papers, in the, in the, in the headlines recently, of course, the most, um, relevance here is the debt ceiling. And, and I can talk about that later. But the, the issue though, of the US debt now is public debt, federal debt at the federal level. There's also state and local borrowing, but the US federal government has issued debt to the tune of about 32 trillion now, and it's risen enormously in the last 20 years or so, but especially since the 2008 financial crisis. And, uh, so people are concerned about that. What is it? What does it mean? Where does it come from? Is this a problem? Uh, they often think of an analogy to the household. Well, if the household borrows too much money or a business, if a business borrows too much money, um, and there is a thing called debt service, you have to repay the principle and interest.
Speaker 0 00:02:32 And, uh, depending on what the interest rate is, obviously it's an interest expense, cost involved. Uh, it can be difficult to have sufficient resources to repay or service the debt, even if it's not necessary to repay it in its entirety. Just the idea of servicing debt. If you have a credit card or a mortgage, you know what this means? Just keeping up the payments, so to speak. Uh, obviously at some point your income is insufficient or the collateral you've offered is insufficient, and you can default. You can either stop paying or in o in, uh, principle and interest, or only say partially pay. So the question is, is there an analogy to the public household, if you will, our government's in the same position, uh, as a household would be, in which case the metrics would be similar. We'd relate, uh, debt not just to to income, but also to assets.
Speaker 0 00:03:22 You've gotta remember always to do this. You can't just say out of the blue, someone owes X amounts trouble ahead. You always have to relate it to something. So if I say, Joe Schmo, you know, owes 3 million and, and Sally owes 3000, it sounds like Sally's in a better position. But if Joe Schmo is a multimillionaire, then 3 million is nothing. And if Sally is jobless and income less, she can't even repay the 3000. So you always have to relate these, um, measures of indebtedness, of what you owe to some other measure. Uh, we can leave aside for a moment, and maybe I'll leave it to the q and a, uh, something called modern monetary theory. A very kind of Keynesian brazen approach to public finance today, where it says that the government can basically borrow without limit and it can print money without limit, without limit meaning, without any deleterious consequences, without either interest rates going up or inflation rates going up.
Speaker 0 00:04:25 So that is not my primary concern tonight. I actually devoted a clubhouse to that April 27th, uh, what I called the insanity of modern monetary theories. So you can go look at that for background. But it, as related to today's topic, to the extent that they argue that none of this is a concern at all, uh, government can always print its way out of indebtedness. Now, just to go back to the basics, and as usual, I'll go on for, maybe I'm looking at the clock here, no longer than 20 minutes, 25 minutes, and then leave the balance half hour to questions. First of all, terminology, people often confuse deficits with debt. Tonight's topic is debt. Now, the debt, the relationship is the following. A deficit. A budget deficit is an, uh, a flow concept. Uh, over time, say typically a calendar year, we're measuring what is the government's revenues.
Speaker 0 00:05:18 Those are typically taxes versus it's spending, it's outlays. And if it's spending more than it's taking in, in taxes, that's a deficit. It's a budget, uh, imbalance, but it's a deficit. The opposite, of course, would be a surplus. If the government's revenues are coming in higher than it's spending, that's a surplus. But a deficit is spending more than revenues. Now, how do they spend, if they don't have sufficient revenues, how do they spend the full amount? Well, they borrow the difference just as you would in the household. If your spending exceeds your income, you, uh, borrow, uh, the difference. So, so the debt itself is an accumulation over time of deficits. It's not a flow concept, but a what I call a stock concept. Meaning at any point in time, you can, can take a picture and ask, you know, what is my credit card balance?
Speaker 0 00:06:09 What is the national debt? What, what is the number? How much do we owe? But you see that it's come from past net borrowing. And I say net borrowing cuz of course, if you have a surplus, you can devote the surplus to repaying and reducing your debt. Okay? So the, the idea of the national debt itself, where it comes from, it comes from the government borrowing where it cannot fully tax the spending. Now, that alone should tell you that there's some kind of root cause for budget deficits and therefore for national debts. Now, the first obvious one, and the most famous historically, if you know, is wartime. Wartime, where the spending goes up and enormously all at once. And there is a reluctance, understandable reluctance on the part of the government to tax people to the max to pay for the full amount. Why? Well, one, uh, one thing it does is it undermines, undermines the economy, which is needed to finance worse expenditures, but also undermines morale.
Speaker 0 00:07:08 And there's just a lot of, uh, tax avoidance even during war time that occurs. And also the idea that wars are supposed to be, or traditionally had been kind of short and over with after three or four years, and then in the post-war period, you use surpluses to repay the debt. Um, so that is, can be one cause of deficits, where, where you wouldn't necessarily want to meet it with a tax hike when there's so much turmoil going on. Now, what about in non, uh, wartime settings? And by the way, suppose you could say, listen, here's debt is warrant. In the case of war, we're facing existential threat. Uh, it's okay to borrow for that purpose, uh, to preserve the, the sovereignty of the country. Uh, I'm just laying out reasons why governments, uh, have borrowed in the past and why it might be legitimate.
Speaker 0 00:07:59 Not all wars are legitimate, uh, nor are they short. So that's a problem if you have for forever wars. Another obvious one is recessions. Suppose the business cycle is steady. The growth rate of the economy is solid, everything's going fine. There's not a lot of high unemployment. The government budget is balanced. You know, the revenues equal the expenditures, but then a recession occurs, and for set aside the reason why it might occur. But the, the, the minute in a recession occurs, you start getting a fall off in revenues, companies are not doing as well. Their sales go down, their production goes down, they're less able to pay taxes. So the tax revenues of the government will go down and not necessarily the spending at the same time, right? So a deficit occurs in this case, cyclically call it a cyclical business cycle deficit. And, and similarly, you can see why it might be argued, well, don't rush and raise tax rates to fill the gap because you're only gonna make the economy worse.
Speaker 0 00:08:56 Why raise tax rates during a recession is the worst possible thing. Companies are already challenged. Uh, so, so let it ride, um, and, and let a deficit occur. Say it's not a huge thing necessarily during a recession. And then when the recovery occurs, here's the key. You'd have to have recoveries and expansions associated with surpluses again, to, to go back and, and repay some of the debt that was incurred during a recession. Now, so those are two main reasons why you could have deficits. But notice they wouldn't necessarily be chronic deficit spending, chronic in the sense of year in and year out. There's a budget deficit, not so in the two cases I just named, so long as they're short wars and reasonably short recessions, well, that is not what we have going on in the major welfare states of the world today. What we have is chronic deficit spending.
Speaker 0 00:09:48 What we have is the rarity is to have a budget surplus or budget balance. The last time the US federal government had a budget surplus was in the four years running at the turn of the century. So 99, uh, it was 98, I think 99, 2000 and 2001. So the budget surpluses weren't that large, but they did exist. And believe it or not, at the time, certain economists were actually debating what to do when the national debt was radically reduced, maybe even to zero. That's how optimistic their forecasts were. How ridiculous, of course, but also how optimistic their forecasts were. They actually worried about their being too little government debt, too few government securities out there. We went completely the other way, of course, in the last 20 years, starting with y2k. And then nine 11, and then the 2008, 2009 financial crisis, and then covid.
Speaker 0 00:10:42 So we've had the covid lockdowns, which enormously increased spending and budget deficit. So we've had three or four waves of massive deficit spending, uh, in these episodes. But even in between those episodes, we didn't see budget balance, we didn't see surplus. So there's something going on with a chronic deficit spending and therefore in a chronic accumulation of debt. And here I'll just quickly throw in some numbers to give you perspective, the debt relative to G D P I I mentioned before, you should never look at any kind of debt out of context. You always must relate it to something. And G D P is a kind of crude, rough measure of national income. So it's kind of similar to the idea of saying, how much is your credit card or mortgage, you know, relative to your income or relative to the value of their, of your house.
Speaker 0 00:11:32 Now in the US the current ratio of US federal debt, which I said before, was 32 trillion to G D P is something like 130%. And here's why this is relevant. It was only 35% in 1975. It's gone through fluctuations over time, but it's really in the last 20 years or so that it's gone ever upward. So as I said, it's about 129, 130% now, but it was below a hundred percent, um, uh, five years ago, and it was below 80% 10 years ago. So the trend is deteriorating badly in terms of not only the debt rising, but the debt rising relative to national income. And if you wanted to look at the top of the list in nations, and I'm not really doing an international comparison today, but Japan of the major countries has the highest ratio. It is 265% of G D P. So think of that the national debt in Japan is two and a half times the size of the economy.
Speaker 0 00:12:34 And, and interestingly yet, it hasn't defaulted on its debt. So, so this issue of debt burden, uh, the debt, uh, how, how, uh, dangerous a debt can be as these are, the default is, is not a one for one correspondence. And I'll explain why that's the case. On the other hand, there's been hundreds since 1800 studies have been done of this over 300 death defaults of major countries over the last 200 years. So it's isn't as if there isn't a history of governments defaulting and defaulting, not just by, uh, not paying principle an interest or only partially doing so, but by resorting to the printing presses, what I call indirect or implicit default. An explicit default would be not paying interest in principle, an implicit more kind of hidden nefarious default is we'll just pay the lenders back in cheaper money, uh, just run the printing presses and pay them back that way into based money.
Speaker 0 00:13:34 That is a much more, uh, hidden, uh, ary type of, uh, default. And now imagine, here's where the break comes between the household analogy and the public household analogy. If you had a printing press, if you were able to engage in counterfeiting and net your debts that way, it would be equivalent to what the governments are doing since they've been off the gold standard and they've been off the gold standard since 1971. And, and so that is also contributing to, uh, rise in what I call public lever leverage, or debt to GDP ratios is just easier to resort to non-tax methods of finance in the government, especially when the effects of doing so aren't directly attributed to the government. So, for example, instead of taxing if they borrow and interest rates go up, it isn't obvious to people why interest rates are going up only because of government.
Speaker 0 00:14:28 They might blame any lender in town. They will blame bankers. And there's a long history of finance playing the, the scapegoat role in all sorts of things. Usy the hatred of usy, the hatred of charging interest per se, let alone charging high interest. So it's, it's in that regard, a very clever method for government to finance itself if it can get away with it. And of course, inflation is even more insidious. This is issuing money in excess of the demand for money, lowering the value of money, lowering the purchasing power of money. That's what inflation is. And that is even less visible. Uh, it, and I, I shouldn't say it's less visible. It's, it's more difficult for the general public to trace that to the perpetrator, which is the monopoly issuer of money, the central bank. And it shows up in prices. And of course, in that case, any price setter is seen as the culprit, uh, at the gas station, at the grocery store elsewhere.
Speaker 0 00:15:24 So the three methods of financing, government taxes, borrowing, printing money, you could see why from an electoral standpoint, from a purely democratic theory standpoint, uh, the politicians in office, those seeking reelection and those seeking election would want to avoid taxes as much as possible. And so part of the theme we're seeing, I believe is, is what I call unrestrained democracy, leading to fiscal pro unrestrained democracy, leading to fiscal pro by unrestrained democracy. I mean, to majority vote, any program is put up for a vote, proposed people will be for it. They don't see any immediate cost to themselves for voting for more and more spending on more and more programs in more and more departments. So unrestrained by, say, a constitutional limit on the proper functions of government, if there's no constitutional limit on the proper functions of government, then its spending can go completely out of control.
Speaker 0 00:16:28 Now, as it does, the question becomes, well, how do we finance it? And it's just not el electorally successful to say, well, we're gonna raise taxes because, uh, there are tax revolts, there's tax resistance. So, so the implicit bias that we see is a bias toward more spending, but less taxing or, and, and the Democrats are of course known for advocating more spending, and the Republicans are known for saying less taxes. So that is just a built-in bias if you, if you can see it toward deficit spending, and therefore a bias toward chronic debt accumulation. So part of the problem here is actually the unlimited government and the electoral motivations associated with that. Now, I wanna say something, uh, about tax. Even though we're on debt, a concept called taxable capacity, some cultures are more willing to pay taxes than others. This is demonstrable. You can find metrics on this, and it's a very interesting phenomenon because on the one hand, uh, America, which has this more independent, uh, or had until, uh, more recent decade, it's kind of more independent spirit, uh, a pride in the money.
Speaker 0 00:17:41 People earn, uh, resistance to paying taxes. The country itself was built, uh, largely on tax revolts, if you know, throwing tea into the harbor in Boston. And, and so interestingly, uh, even though the government grows, and even though that's demanded, uh, electorally and delivered by politicians, there di there is not a corresponding desire to pay the taxes, uh, that would fully finance this. Now, in other cultures in Europe and elsewhere, there is this greater willingness to say, well, I owe my life and my income to the state. If they require more taxes, I'll pay them. And so I hope you can see that quite apart from the issue of the spending, the issue of how it's financed, uh, can be very different in very different countries based on taxable capacity. Uh, basically the willingness of the electorate to pay the taxes. And then the United States has been well established in something called howser's Law.
Speaker 0 00:18:37 H e u s e r Hauser analyzed over time a very interesting phenomenon that the federal government only takes about 20% of GDP in tax revenues over long stretches of time. In, in other words, if you plotted this, it's a, it's a basically a flat horizontal line. And that might be surprising to some people, cuz you think, well, if they raise taxes, why can't they take, say, 25% of national income or 30% of national income? Well, because there's this resistance to paying higher taxes. And imagine you raise the tax rates, the tax rates say from, well, we'll charge 50%. No, we're gonna raise taxes on the rich to 60, 70, 80%. If you know what the graduated income tax schedules are, well, the higher those rates are, the more motivation there is to lobby for tax loopholes and exemptions and credits. And as a result, it brings down the amount of taxes that are brought in.
Speaker 0 00:19:39 Even when you lower tax rates enormously and get rid of loopholes, still, Hauser finds you, the government can only take something like 20% of, uh, uh, G D P. It's higher in other countries. Well, what does this mean? It it means that if spending is 20% of G D P, then there's gonna be a balanced budget, right? You got 20% of GDP p being spent, 20% of G B P coming in as tax revenues, no problem. But if those tax revenues are fixed at say, 20%, then any spending above that is gonna lead to, uh, uh, budget deficits and it's gonna lead to chronic budget deficits. And that is exactly what we've seen, especially over the last 20 years. But really over the last 50 years since they went off the gold standard, there's been an increased, uh, and an expansion of the welfare state, an expansion of spending on redistribution of wealth, not on the production of wealth.
Speaker 0 00:20:37 There's also, of course, been problems of prolonged costly losing wars like Vietnam, Afghanistan, and elsewhere. So those have also been costly. But the real underlying cause of chronic deficit spending is the gargantuan growing and ever-growing US welfare state. So as long as people want that and feel it's moral and feel that the government should do it regardless, you're gonna have this problem. And, and, and it's, it's also interesting from the tax side to see that, um, the shift in who pays the taxes has gone to a smaller and smaller share of taxpayers. Put another way. Half the tax payer, half the electorate in this country doesn't pay any federal income tax at all. They've just been exempted from it by the code. The whole soak, the rich, uh, mentality has led to the government trying to tax only the top 10%, or mainly the top 10%, say the top 20% in income. And so there's a, uh, a way skewed disproportionate attempt to tax a smaller fraction of the population. Again, because if they're the minority, they can't vote their way out of it. They can't, they're gonna be outvoted by those who don't face a tax burden. So that is another chronic problem associated with this whole setup.
Speaker 0 00:22:02 Uh, what else do I have here that's worth mentioning? Um, the, the idea of interest expense is very interesting. Again, a bit of a technical topic may maybe a bit a bit boring, but now think of this, you're borrowing money and if your tax rate is low, all else, uh, not tax rate, interest rate, if the interest rate you're paying is low, all else equal, you can borrow more. All else equal meaning all else equal your income, your, your assets, your collateral. But as that interest, uh, rate rises, it's applied to the principle, your interest expense is gonna become a bigger part of your budget. And unless you pay that, uh, you're gonna default. So it becomes a non-discretionary item. It becomes a very important item as long as you want to maintain your credit. Uh, and the same is true in government, public finance.
Speaker 0 00:22:52 Uh, a government does have to worry, even a government off the gold standard, which can print money without limit, has to worry about whether the interest rate is exorbitant or not. And, and here we have a kind of pressure, it's what's called in the, in the literature financial repression, where government policy as much as possible, tries to depress the interest rate. Um, now on the surface they'll say the Federal Reserve does this as it's sometimes told a zero interest rate policy or something close to zero interest rates. And the argument they'll give is, we're just trying to stimulate the economy. We're just trying to get the economy going. But really, in today's public finance world, what they're really doing is trying to make the welfare state seem affordable. They're trying to help the government borrow affordably cheaply by keeping interest rates low. And, um, the danger in this, of course, is if it gets out of hand, if they start inflating, and if interest rates start rising because lenders demand higher interest rates to offset the debasement of money, then that interest expense figure in the budget is going to, uh, skyrocket.
Speaker 0 00:24:05 It's going to start, it's gonna become a, a, it already is today in the us but it's gonna become a big line item in the budget itself. And this is where, this is where debt's really become dangerous, where you're basically borrowing to pay the interest on the money you've already borrowed. That is typically called a debt trap. That is usually a precursor of a spiral downward into complete chaos because, uh, the fiscal, the fiscal order is so out of order. And now the interestingly interest rates have risen more recently, but I, to be fair, they're not as high as they were in the late seventies. In the late seventies, the US bond yield was up to 14, 15%. What is it today? It's about four or 5%. So it's higher than it had been a couple years ago. But this is gonna be an issue also, and it's increasingly going to be an issue.
Speaker 0 00:24:59 I think the last estimate I saw is by 2035, that's only about a dozen years from now, interest on the federal debt will exceed all spending on the military. So to those of us who think, uh, you know, basic government functions like the military and the courts and the police are essential, if you get to the point where interest on the debt itself, uh, has become so large that it's bigger than those items, you have a problem. Now, I'll just end with, uh, how bad debts usually end, which is the issue of defaulting, and, uh, what it means to default. Now to those who hold, understand this. Now to those who hold government securities, treasury bonds, treasury note, treasury bills, those are the concrete, uh, manifestations of the debt, their assets to those people, right? That your banks will hold those. There might be in some of your mutual funds, they might be in some of your pension funds, their bonds, uh, and just like corporate bonds, they're an asset and they're paying you interest, of course, and you can buy and sell these things.
Speaker 0 00:26:06 So the first thing to recognize is for those who look at only one side of the ledger to simply say, well, why not just default? Why doesn't the treasury just default on its debt? Understand that the corresponding damage would be anyone holding that debt loses assets, uh, loses value, and then themselves can go bankrupt because the assets have been basically wiped away. But, but, uh, really what's going to happen in a case like the United States, where now here's the key point. They're, they're borrowing money in their own currency. They're borrowing money in their own currencies. So the US government borrows in dollars and simultaneously has a monopoly central bank that issues those dollars. What that means is there isn't necessarily gonna be, and there shouldn't really be any technical explicit default on the debt in the sense of not paying principle and interest, um, what, what they will do.
Speaker 0 00:27:04 And what they have been doing is defaulting implicitly by issuing money of lesser and lesser value. That is really what's happening. But on the other hand, this displacement of go government spending on things that might otherwise be productive, but are really just redistributing wealth instead of producing it and then paying interest expense. You should understand why this would cause a stagnating economy. It isn't just the taxes that are the burden. The real burden of government is the deflection of resources, the diversion of resources, the, the redistribution of resources, and whether they finance their spending by taxing or borrowing or printing money. The, the real burden is what the government is spending, what it's diverting. And, and these o these three methods have their various ways of hurting the economy, taxing, borrowing, and printing. And my focus tonight is on borrowing, of course, but we shouldn't lose sight of the fact that the real burden is the spending.
Speaker 0 00:28:06 And last time I checked, at every level, state, local and federal government in the us, they're spending something like 50% of gdp. Whereas a hundred years ago, well, let me go further back. Before World War I, it was something like 5%. So, and that's true in Europe, even more so, so, so over the past century with the gargantuan growth in the warfare welfare state, we have seen this massive increase in diversion of income, the basically division of national income. You cannot, as I long said, this is just the math of it, you cannot multiply wealth by dividing it. And you certainly, and that's what redistribution of wealth is. It's the division of wealth, not the production of wealth, not the multiplication of wealth. And unfortunately, the, the, the capacity to borrow, uh, enormously increases the government's ability to do this. Um, so I'll leave it at that. There's many other things to cover, but I'll leave it at that. It's roughly at the 30 minute mark. I'll take questions and, uh, comments. Thanks, Scott.
Speaker 1 00:29:09 Great. Thank you. Good presentation. Uh, feel free to raise your hand if you have questions. Uh, I'm gonna go ahead and start with one. Um, you know, I remember Greece was going through something like 10 or 15 years ago. Their, their debt was over a hundred percent, and they, you know, the, the whole EU got back and created an austerity program for them. But that seemed to create, you know, economic troubles too. Is is that the type of thing we need to be looking at?
Speaker 0 00:29:40 Well, there's two, that's a good question. And there's two aspects of that event, which are worth stressing, and which I only hinted at one of the reasons Greece, uh, defaulted and they did default. It's, it's interesting. Not only did they borrow too much, not only did the Greek government borrow too much, and not only was it a gargantuan redistributive welfare state, but, but here's the key of it, did not borrow in its own currency. Uh, it, it used to issue the drma and until the Euro replaced it, you know, so that the 11 or so countries that originally dropped their currencies and went into the Euro, Greece was one of them. And so now think of this, you're borrowing in, uh, euros, but you don't alone issue euros. So to the extent anyone in the Euro system over borrowed, they cannot, they could not call up their own central bank anymore and say, print up Drma.
Speaker 0 00:30:35 So, uh, that was a, uh, that was a clear cut case of, uh, it's a combination of your fiscally profligate, and you don't have a central bank to turn to anymore. Now, in many ways, you could say it's a good thing that we got the euro because it displaced a dozen other, uh, currencies. And now there was just this one currency, and it did limit the amount of borrowing that countries could do. It's similar in the US by the way, to a state. So the state of Florida, for example, borrows, but the state of Florida does not have its own central bank where it can print money if it borrows too much. So there's a much greater pressure, uh, among the 50 states to have fiscal restraint, uh, because they can't resort to the printing press. So it's a very good kind of case study in that.
Speaker 0 00:31:24 Now, the other thing you mentioned, which is important to stress, is what they call austerity programs. Now, austerity has a bad name, and, and possibly it should, the austere, uh, fiscal, uh, methods of how do you fix a country that's fiscally out of balance. Now, here's the problem. Typically when, and this happened in Greece, typically when the government is borrowing too much, and the, and people go in and they want to fix this, the first thing they come up with is raise taxes. They almost never start with restrained government spending or shrink the welfare state or get rid of this program or this department. And so it, it, it is true that some of the danger is to go in and only one side of the ledger and raise taxes, because that's only gonna depress the economy further. It's only gonna undermine the ability to raise revenues, and you just defeat your whole purpose.
Speaker 0 00:32:18 So studies have been shown, and this eventually happened in Greece, they eventually turned things around. The way to do this is to go in and not raise taxes, but to slash government spending. And the main impediment to this theoretically, is the keynesians. John Maynard Keynes and his followers have long claimed that not only government spending, but government deficit spending is somehow a stimulus for an economy. It is not, it is not at all for the reasons I named. It's a diversion of wealth, not a multiplication of wealth. So there's, there's very much resistance, not only for Keynesian reasons, but for quote unquote social justice reasons and quote unquote safety net reasons for public officials to resist public spending cuts and restraints when there's fiscal, uh, chaos going on. But that is the remedy. That's the remedy that works. That's the remedy that brings countries out of it, shrinking government back into the revenue stance that leads to, uh, balanced budgets and surpluses.
Speaker 1 00:33:22 Great. Well, thank you for that. Uh, let's go to Clark. Clark, thanks for joining.
Speaker 2 00:33:28 Yes, uh, thanks for having this. Thanks Richard, for presenting. Um, I guess my question would be, you know, this is something that, you know, all the trillions that we keep piling on year after year, uh, I mean, it's hard to believe that when Reagan was president, which to me doesn't seem that long ago. And maybe neither to you, Richard, but I remember just being completely just dumbfounded by the fact that the, the debt went from 1 trillion to 2 trillion. He doubled it. Well, <laugh>, we never had it so good. Now it's 31 trillion in climbing. And of course, you know, unfunded liabilities is, is, I don't know, over a hundred trillion dollars. And I, I guess what I'm, what I'm getting at is, I, I would assume that, that most professional economists know this, that, you know, this is just a ticking time bomb, whatever metaphor you wanna use, you know, we're facing a fiscal cliff, but why do so many Americans just don't seem to, to care at all about what should just be so obvious to everyone on the entire political spectrum.
Speaker 2 00:34:28 That's, you know, we can't just keep piling more trillions on top of more trillions. And yet, you know, you talk to millennials and Zoomers and, and all they wanna talk about is pronouns and, you know, trans, trans individuals. And, and I, I just scratched my head because I realize as a, as a baby boomer, you know, we've, we've contributed, uh, and I, I, I'm, you know, you're a baby boomer too, of course, Richard. But we've just, we've contributed to this trillions and trillions upon trillions added to the debt. And yet, you know, the boomers, zoomers, excuse me, the, the Zoomers and the millennials, it's almost like it's just some piece of, you know, just a statistic that has absolutely no relevance to their lives. How do we account for this, Richard?
Speaker 0 00:35:15 Well, it's a, it's a really very good question. And, uh, I know from the literature, the, the phrase that boast captures what you're talking about is something called fiscal illusion. And, and the first part of fiscal illusion, which I'm sure all you, you can recognize, is the idea of, well, if we don't tax people, but rather borrow and, and print money, it's a loser. They're not going to steal the pinch, so to speak. They're not gonna, uh, recognize that every time they increase government spending, well, it's gonna cost me outta my pocket. So that would be one thing. And that is precisely why these two methods, borrowing and printing money is what it's, it's the main reason they resort to this. Cuz they know that the electorate will not, um, revolt. And, and now from a li, from a libertarian objector's perspective, this is also a kind of a, uh, a paradox or a puzzle.
Speaker 0 00:36:08 Because when you think about it, suppose we oppose as we do the expansion of the welfare state. So then the secondary question becomes, um, tax or borrow. Well, from a liberty standpoint, you might say borrow, because you don't have to lend to the government. It's a voluntary choice. And unlike taxes where you do have to pay the government taxes. So in, in some respects, uh, you have this difficulty where in, in a context where you can't restrain government spending, but you can say something about how it's financed, you can see why even from a libertarian perspective, there'd be a bias towards saying, borrow. Now I am also a Hamiltonian, so I am up, I'm for the view that the debt should be serviced and never reneged. There are libertarians who say, just reneg on the debt, um, people had it coming to them, they wanted something for nothing.
Speaker 0 00:36:58 There's certain, some certainly something true to that. Uh, they're lending, uh, because they're lending voluntarily, uh, default on them if necessary. They're the, they alone will suffer from it. There is that kind of argument, not only from the left, but from the libertarians. But, but, but Clark, I think the fundamental, uh, answer to your question is they don't know it cuz they don't feel it, and they don't the the pinch, I mean, and they don't feel it. It's been very cleverly organized. I mean, the funding of the welfare state to minimize the pain to, uh, the broad part of the population. So they really do feel like they're getting something for nothing. It, you do notice, by the way, when inflation goes up or when interest rates go up, you do get, uh, public consternation and anger. But even then, it's somewhat diffused. They don't fully, as I said before, they can't fully attribute it to the politicians they've elected. They certainly, it's way over their head to think that a federal reserve banker did it. So it's a very, it's a very disheartening setup. At the same time, a very clever setup ever since they went off the gold standard. That, that, that the government can not only expand in such this way, but expand in a way that is not felt by the voting public. It's a, it's a, uh, it's a racket in a way. It's certainly dishonest and immoral the way it's being done, but people do vote for this.
Speaker 0 00:38:30 Uh, you mentioned by the, by the way, you mentioned unfunded liabilities. I mentioned the US national debt is now 32 trillion, but Clark is absolutely right. What's called the unfunded obligations of the US government are things like social security and Medicare and unemployment insurance. And I would say even the promise to bailout banks considered too big to fail. These are called contingent liabilities where the debt has not been incurred yet, but the promises have been made in legislation. And it's true that they are very many multiples of the existing explicit debt. So if the public debt in securities form is 32 trillion, last estimate I had for all the other stuff is something like 150 trillion. So now can they default on that? Yes, in the future they can basically, if, if necessary, reduce benefits. But of course, that would not be electorally successful, right? No one comes out and says, well, we, we need to restrain the national debt and borrowing and deficit, so we're gonna cut granny's check, uh, benefits check for social security.
Speaker 0 00:39:35 That'll never happen. So, uh, that, that is basically debt, that unfunded liabilities will become future debt. So it's a leading indicator of what the national debt will become. And I believe the US is heading toward Japan type levels of, uh, debt being something like two, 250% of gdp. Now, if, if you look at Japan, by the way, uh, Clark mentioned a ticking time bomb. A a lot of times these metaphors are used, some kind of explosion, some kind of, uh, implosion, you know, some kind of like dramatic sensational crash. Interestingly, that has not been the case in Japan over the last 30 years. It's not like there's been a series of, you know, e economic earthquakes, uh, you know, of mass panic and stuff like that, even though they've borrowed all this money, right? But what they have experienced is a steady slow stagnation where the economy is basically grinding to a halt.
Speaker 0 00:40:36 And lots of studies have showed that when government debt levels get to something like 90 or a hundred percent of G D P, that the aftermath is exactly that. It's not only that the welfare state is expanding and suffocating away the vibrancy and the vitality of an economy, but, um, it's, it's, it's borrowing is for redistributive purposes. Whereas the opposite would be a company borrowing for productive purposes. So it's, it's kind of like a cancer growing on an otherwise healthy body. So that isn't as dramatic a story, uh, to say that over time the US will just stagnate and there won't be any growth anymore. Or there might be a, you know, slight shrinkage over time. That's expa exactly what Japan has experienced, and it, and it can be very ugly. The, the, the whole vitality of the place goes down. The, the demographics go to aging instead of youngness. Um, uh, thankfully the US has some kind of immigration inflow of younger people. If it didn't, it would be going the route of Japan, of Japan in terms of aging like that. And so, um, that those are just some of the dynamics. It's not always going to be a ticking time bomb, uh, type of scenario. It's this long prolonged stagnation of no, so, so in other words, not a heart attack, but like a ca a terminal cancer patient.
Speaker 1 00:42:02 Great. Well, we've got a treat, uh, Atlas Society founder David Kelly is joining us. Welcome.
Speaker 0 00:42:09 Great.
Speaker 4 00:42:10 Uh, thank you Scott, and thanks Richard. Uh, thanks David. I should make sure my audio is, uh, functioning.
Speaker 0 00:42:17 Your audio sounds great.
Speaker 4 00:42:19 All right, thanks. Um, I've got a question that kind of builds on what Clark was asking, um, and you were talking about, and go, go back to this, the, the analogy between, you know, personal finance and the, and the, or the personal household and the public household. Yeah. You know, I, when I, when I grew up was growing up, my father didn't tell me a whole lot about money, but I, I got the message, you know, borrowing is for big things that will have some chance of retaining the value or supplying you with value over long term like a house or a car.
Speaker 0 00:43:01 Yeah.
Speaker 4 00:43:01 And that, you know, businesses I know borrow for productive purposes. Um, whereas if you're, if you're borrowing just to finance your current, um, lifestyle, you know, to pay, uh, pay for groceries, that you're in trouble. And I may be old, you know, just to have come from a different generation. Um, but I don't think that's all that unusual in attitude. And so that's, and it's one reason why I look at the public debt. And I, and I'm, I'm scared as God, as clarky. I mean, I think, oh my God, you know, we're just, you know, we may not be heading for a crash, like you say. It may just be, you know, long-term stagnation, which now that you mentioned it, I think we may have started already, but anyway. Yes, yes. Um, why is it that people can't make that, uh, analogy? I mean, you, you, you gave us a lot of reasons why it's hidden.
Speaker 4 00:44:05 Um, yeah. And the democratic, on the other hand, the democratic impulse to just spend away, cuz you don't pay for it all. But on the other hand, you know, what's happened, Americans still have some degree of independence and, um, that's reflected in, you know, the tax, you know, the limits apparent limitation of the, of taxes, 20%. But along with that sense of independence, usually it goes, or traditionally when some sense of responsibility, uh, and lots of people still have that, but it's not working. Um, it, if you look at what the welfare benefits people are paying for, I mean, even, even people of my generation, the baby boomers, I mean, we're going through the welfare state like Locus, um, yeah. Social security and Medicaid. Yeah, Medicare. Yeah. And, um, you know, didn't these kids have parents who lived through the great Depression like mine did, or thought the world wari like mine did and had some sense? I I, I'm, I'm, I'll stop there cuz that that's, I I've made my question. I don't have an answer.
Speaker 0 00:45:25 Well, this is a really good question, David, and there's pri you, you don't know this cuz you don't specialize it, but man, you have named many of the key principles in public finance that have been tossed over tossed overboard. But one of them is, you'll love this, there's something called the golden Rule of public finance. And I wrote a chapter on this in a book at Cato called a fiscal cliff a couple years ago. My contributory cha uh, uh, chapter was, uh, the golden Rule of public finance. Uh, its erosion and possibility of its revival. Here's the golden rule of public finance. Um, don't borrow unless it's for productive purposes or legitimate government function purposes. Now, in our world, legitimate government function is police, courts, military, even if we allow some infrastructure, okay, I'll allow that, say roads, bridges, ports, and things like that, tunnels.
Speaker 0 00:46:13 Um, the, the idea you have, David, is absolutely right in a household context, you'd say, well, you, you know, you can borrow for consumption, uh, the, the, the vacation, the this or that, maybe even the car. But, but you gotta be care. You know, you wouldn't borrow for food. What's the point? The point is, unless it's, if you borrow and buy a financially product, uh, uh, uh, economically productive asset, you have no means of repaying the debt. So that's the key that that borrowing for productive purposes is sustainable and borrowing for consumption purposes is not. And when you think, when you conceptualize what the US government has become, and I, and I documented this in the chapter when government was small and doing legitimate functions of the kind I just named its borrowing was not a burden at all because it was for productive purposes.
Speaker 0 00:47:06 I would even argue that the borrowing during World War II was quote, productive in the sense that it, uh, sustained the existential, uh, status of the United States and got rid of a, of a tyrant. Uh, but even so, you could see that the redistributive welfare state is consumptive to the core. It's totally consumptive. It, there's nothing, there's not only nothing productive about it, it's anti productive because you're taking from Peter to pay Paul and Peter's incentives to produce go down. And Paul, the recipient sitting on the couch is less motivated to go work. So it, so the redistribution itself isn't just a zero sum game, it's a negative sum game. Now, if on top of that the government is borrowing to do that <laugh>, it's, it's the golden rule of public finance is completely out the door. Now, one of the other things I did in that chapter, David, is I said, well, let me cleverly use the idea of the gold rule of public finance.
Speaker 0 00:48:04 One of 'em is the money supply should be the gold standard. And going off the gold standard permits them, of course, to spend, borrow and print without limit. So the golden rule of public finance went together with the gold standard, and we've lost that over the last 50 years as well. But I would go even deeper. And here's the moral issue that you and I often love talking about moral bankruptcy leads to financial bankruptcy. That's what we're seeing the moral bankruptcy going on today, is the freeloading mentality. Uh, the, the kind of the brazen, almost shameless idea of people owe me a living. Uh, p I'm entitled to these welfare state, uh, functions. Uh, it's unjust. If I don't get these things, I don't have to work. Uh, if I don't want to, even if I'm abled, they can't even get abled work in the legislation today.
Speaker 0 00:48:59 You know, what, what's called work. They can't even get that approved. And so if that's a moral defect, which it is, you could see why that would lead to the demand for a welfare state, which itself is redistributive. So, so all along the chain, you get the golden rule of public finance when to borrow or not out the door, the gold backing of the currency out the door, but even the base ethic of shall I sustain myself and be an independent human being, or shall I be a parasite upon society? Uh, call it the golden rule of treating people fairly and treating people reciprocally, that's out the door as well. But I think they're all interrelated.
Speaker 4 00:49:40 Great. Thank you. By the way,
Speaker 0 00:49:42 By Oh yeah, go ahead David. I'm sorry.
Speaker 4 00:49:45 No, I'm just, I just wanted to thank you and say that that, um, like so many issues, I don't wanna be proprietary about my discipline, but like so many issues, it, there is a philosophical, in this case, the moral issue involved.
Speaker 0 00:49:59 Yes. Um,
Speaker 4 00:50:02 So yeah, thanks.
Speaker 0 00:50:04 You're welcome. Thanks.
Speaker 1 00:50:07 Yeah.
Speaker 0 00:50:07 I, David, go ahead. Ahead, Richard. Go ahead Scott. No, go ahead Scott.
Speaker 1 00:50:11 I was just going to say, just to kind of add on to that, I, I mean, I remember being a young libertarian in the nineties and there was a book called Bankruptcy 1995 about the debt crisis and Yeah. Uh, and so, you know, but now, you know, when you're arguing with these young socialists, the idea that there could just be stagnation and not a crash may not be enough to, to get them to reconsider, uh, right. Their egalitarian goals.
Speaker 0 00:50:39 That's a very good point. And I would say, uh, not to be too grim about this in terms of forecasting where this is gonna go. Yes. Uh, if you can't, and I, and I think ma in many ways, you cannot sensationalize it and try to convince people by saying, you know, do something about it because there'll be a crash. Uh, you know, do something about it because there'll be a crisis. You know, you know, people in a pragmatic myopic setting will say, uh, well, wake me up when the crash comes. We'll figure it out. We'll try to figure it out. Then they won't care. They won't do anything about it in the interim. I don't even think intergenerational appeals work. So you get these Republicans who get on the Senate floor and they'll say, our children were robbing our children's children and our grandchildren's children's children.
Speaker 0 00:51:23 Again, a myopic culture wouldn't give a damn about that. The whole point is they don't give a damn about future generations and the whole attitude toward estate taxes that you don't have a right to pass on your wealth to heirs. So there's, there's this entire animist, uh, toward who cares about future generations. So they're treated like a fiscal commons. You know, the, what's called the tragedy of the commons, where a, uh, a resource is dissipated because it's not privately maintained and run. That's the same thing in fiscal affairs. The commons here are future taxpayers. I mean, that's what borrowing is. It's a, it's a congressman today saying, I'm not gonna tax my constituents cuz I'll be thrown out of office. Instead, I'll, I'll tax future conti constituents. Uh, cuz that's what debts are. They're just deferred taxes, the taxes that'll be paid in the future to pay the debts.
Speaker 0 00:52:12 But, but I agree with you, if you go the other route of saying you're gonna stagnate the economy, uh, by doing this, they're not gonna be any c you know, crash necessarily. But the whole system will just wind down and grind down into a no growth, maybe even a de-growth setting. They will applaud that. There's a certain group, we know the environmentalists and others who are so fixated on myths about eating up the planet and dissipating the planet. They, they want less growth. They want to depopulate the planet. I'm not saying every environmentalist, but a lot of them are into depopulation. It's a very misanthropic attitude. So, so to go at them from the fiscal side, you know, with the argument that you are, um, redistributing wealth and borrowing to do it to such an extent that you're grinding the US economy down into nothing, they're gleeful about that. They're, they're saying, this is great. Wonderful. Thank you very much. At least something's gonna restrain this awful capitalist, uh, juggernaut. So the, the more we see that kind of woke attitude among the young and the old, uh, yes, it appeals even to the idea of stagnating economy and a less vibrant economy won't deter them in the least. This is a, you can see why this is a real philosophic problem.
Speaker 1 00:53:33 Great. Um, well I wanna get to Peggy with the time we have left.
Speaker 5 00:53:40 Yeah, I had a question. Um, welcome. Can you hear me?
Speaker 0 00:53:45 We can, yes. Thanks Peggy.
Speaker 5 00:53:46 Okay, great. How much do you see this, I mean, personally I see the, the corollary between the growth of government money exponentially into education, both lower and higher. Um, a system that's completely divorced from accountability that it just fosters de festering of all kinds of ideas that don't have to have any basis in reality. And that's what's raising our children. Yeah. That's what, you know, they don't have to answer they to have a customer. We can't say no to them. And it's just growing and feeding this bizarre, magical thinking.
Speaker 0 00:54:29 I totally agree and I've long said that, uh, just as socialism fails, because it entails public ownership of the means of production. This system you're talking about, it fails cuz it's public ownership of the means of instruction. They're instructing and indoctrinating hordes of new generations of kids who set aside just a moment. The idea that they're taught goofy, magical thinking on public finance. You know, the Keynesian bullshit or the modern monetary theory. Many of them don't even know personal finance. Uh, the kind of things David Kelly was referring to earlier, personal finance used to be taught, believe it or not, in the public schools, you know, how to balance your checkbook, what an interest rate is, what a mortgage is. And, and, and there's, uh, there, if you just look up financial literacy, the, the tr the tragedy of financial literacy, the Federal Reserve of all people has a whole program trying to counteract financial illiteracy that, um, that people are working in.
Speaker 0 00:55:29 Not only is the government fiscally out of control and fiscally propagate, but there the, uh, younger generation is not being taught how to manage their own finances. And, uh, and so they become more dependent on this very government that's already growing out of control. Right. The, that, well, I need the government to take care of me cause I didn't save enough money. Why didn't you save enough money? I don't know what savings are. What do you mean? I don't know. I don't know how savings interact with interest rates and, and, and I don't know how to play the stock market and allocate my portfolio. See, all that is to the you're absolutely right, Peggy, the schools are not only lobotomizing kids in terms of knowledge of history or American physics or uh, uh, uh, civics, I should say, but on, on this area we're talking about tonight, a public finance and personal finance. They're ignorant and then they grow up to become economists and financial journalists and federal reserve officials. And it's just scary. It's scary to see who's running things. I
Speaker 5 00:56:25 Was even more shocked when I'm in LA U s d Yeah. Um, where I live in that area. Right. And af during the shutdowns from Covid Yeah. The school union board put out this list of demands to reopen the school that read like the Communist Manu Manifesto. Mm-hmm. Yeah. Things that even were completely unrelated to education, you know, free healthcare for all housing, you know, blah, blah, blah, blah, blah. It was blatant and people didn't bat an eye <laugh>. I'm, it's, uh, it's depressing.
Speaker 0 00:57:03 It certainly is. But thanks for the question, Peggy.
Speaker 5 00:57:06 Yeah.
Speaker 1 00:57:08 Great. Well, um, this has been a great topic, Richard. Thank you so much for doing it. Uh, thank you to everyone who participated. Uh, coming up Wednesday, June 21st, the Atlas Society asks, we'll feature our C e o Jennifer Grossman, uh, interviewing writer and speculator, Doug Casey at 5:00 PM Eastern. Then at six 30 eastern back here on Clubhouse. Uh, we're going to have David Kelly along with senior scholar, uh, Steven Hicks talking about the role of religion today. So, uh, I think that's gonna be a good one. Maybe even a little controversial. So, um, but in the meantime, again, Richard, thank you for doing this. Thank you. Thank you, Scott. Thank you. Everyone participated and, uh, great. We'll, uh, we'll catch you next week.
Speaker 0 00:58:01 Thank you everybody. Thanks Scott. Take care.
