The Spending Crisis: Reductio ad Absurdum

Given current trends, the annual interest on our debt will exceed GDP; let that marinate!

The Spending Crisis: Reductio ad Absurdum

By: George Noga – May 10, 2020

OF THE 600 POSTS I HAVE AUTHORED DURING THE PAST 13 YEARS, NONE IS MORE CONSEQUENTIAL THAN THIS ONE! Usually I limit posts to 600-700 words but did not wish to break this one into two parts; hence, it is twice the normal length. I used my time at home due to coronavirus restrictions to research and to prepare an expanded, fresh and gripping analysis of the spending crisis.

       For the first time, I employ an apagogical argument that proves a contention by deriving an absurdity from its denial. Specifically, reductio ad absurdum disproves an argument by following its implications to an absurd conclusion. The fallacy lies in the argument that can be reduced to absurdity; reductio ad absurdum merely exposes the fallacy, in this case that the US can continue spending and borrowing.

       What makes this analysis so different and riveting? (1) I have taken a much deeper dive into the data; (2) Assumptions about the composition of the debt are changed; (3) Realistic assumptions are used instead of optimistic ones; (4) More recent data are available; (5) The reduction to absurdity argument is adduced; and (6) It explains why, at its beating heart, the spending crisis is moral rather than economic.

Assumptions About GDP

       GDP for 2019 was 21.4T (trillion); for 2020 I used the latest Goldman Sachs forecast – a 6.3% reduction from 2019. For the first time, I assume mild recessions (4% contractions) once a decade in 2026-27, 2036-37 and 2044-45. Other than recession years, I assume GDP grows at 2%, in line with the past decade, and then slowing to 1.5% in later years. These are middle-of-the-road, Goldilocks assumptions.

Assumptions About Debt

      Public debt at year-end 2019 was $17.2T. To that I add coronavirus spending Phases I, II and III of $2.3T (total) and my Phase IV (infrastructure, etc.) estimate of another $2.0T. I also must add the 2020 structural deficit of $1.0T and the additional operational deficit due to coronavirus of $0.8T. This results in a public debt of $23.8T at year-end 2020. For future years, I assume the debt grows at a rate in line with the trend of recent years – with appropriate adjustments for recession years.

“Before long, public debt and total debt will be one and the same.”
Public Debt Versus Total Debt

         Here I make a notable departure from the past. Previously I have counted only the public portion of the debt, which is $7T less than the total debt. The difference consists of intragovernmental debt owed to Social Security, FHA and other agencies. Before now I excluded such debt because it is non-marketable, accrues (but does not pay) interest and is notional in nature. Before long however, the government must begin issuing public debt to fund the intragovernmental debt for, inter alia, paying future Social Security benefits. Therefore, I now assume that intragovernmental debt of $1.0T is converted to public debt each year from 2021 through 2027. Thus, public debt and total debt will be one and the same by the end of 2027.

Government Sponsored Enterprises (“GSEs”)

        Fannie Mae (FNMA), Freddie Mac (FHLMC) and a few other GSEs are owned by the federal government. In a rational universe, they would be consolidated into the accounts of the federal government. Although the feds are not legally liable for the debts of Fannie and Freddie, there is an industrial-strength implicit guarantee based on precedent. Fannie and Freddie guarantee $7T of debt; in a crisis they would need trillions in bailouts. For this analysis, I have not included any debt for GSEs.

Unfunded Liabilities and Obligations

       The Treasury Department estimates federal unfunded liabilities are $122T; this means the government has made promises to pay that amount without providing any funding. Over time, these obligations come due and must be financed with – you guessed it – more debt. I have not counted any of this $122T in this analysis. I once studied unfunded liabilities and concluded that a more realistic estimate is double the Treasury number, or one-quarter of a quadrillion dollars. In even more cheery news, state and local governments have another $10T in unfunded pension liabilities.

Reduction To Absurdity

        Based on the assumptions described supra, following are the Debt/GDP ratios for select years. The GDP and debt are in trillions of dollars. Data for 2019 are actual.

Year             GDP              Debt             Ratio
2019             21.4               17.2                80%
2020             20.1               23.8              119%
2025             22.2               37.5              169%
2030             22.6               59.7              264%
2040             24.4             161.2              659%
2050             26.4             588.4           2,226%

       In five years the ratio is projected to be 169%; within a decade it is 264%. In twenty years the ratio skyrockets to an absurd 659%, while in 2050 it is a preposterous 2,226%. The US has passed the point-of no-return. The Titanic has hit the iceberg and there is no way to unhit it; now it is but a matter of time until the inevitable happens. Because of the humongous coronavirus spending, the advent of the crisis has been advanced by five to ten years – all in just the past few months.

       By reducing to absurdity the future spending and debt, this analysis proves it is impossible to sustain our spending and borrowing for much longer. It is risible that the US can have a ratio of 2,226%, or even 659%. Moreover, the 2030 ratio of 264% is tinctured with absurdity; even the 2025 ratio of 169% is problematic. Even with a powerful tailwind from MMT, it seems like we have fewer than 10 years left.

        While trafficking in the absurd, let’s peek at interest on the debt. At the current US composite rate on its debt (2.5%), annual interest on the debt will reach $1 trillion circa 2026 – in just over five years. If the interest rate to service our debt increases to 4.5% (a low number historically) interest payments would exceed GDP by 2050. Let that metric percolate for a while; our annual interest on the debt would exceed GDP!

“We always chose the easy path. As a nation, we failed morally.”

        It is impossible to look at the data and analysis presented herein and to imagine we have more than five or ten years left before the spending crisis reaches critical mass and discombobulates our lives for the next 20-25 years, i.e. a lost generation. It will be worse than the dot-com bubble, the great financial crisis and coronavirus combined. Great and sustained sacrifice will be required until all the excess debt is purged. The gargantuan spending cuts necessary (20% to 30%) will rend the social fabric of our nation; we will be lucky to avoid anarchy and to maintain the rule of law.

The Moral Root of the Crisis

        Ever since I began writing about the spending crisis, I have posited that, at bottom, it is a moral crisis, not an economic one. Historically, the US has borrowed heavily only to finance wars. Our national debt in 1980 was less than $1 trillion and our debt ratio was under 30%. Inexplicably, that’s when we began our debt binge.

       We gave some segments of the population huge tax cuts to beguile them into accepting massive spending on other segments of the population. We spent vast sums on certain cohorts of Americans to bewitch them into tolerating the tax cuts on other cohorts of Americans. We have repeated this pattern up to the present in a futile  attempt to avoid tough choices and to buy social peace via massive borrowing.

         The decades of the 1980s and 1990s were prosperous. There were no major wars, natural disasters, pandemics or financial meltdowns. The baby boom generation constituted 38% of the population and was in its peak productive years. There were few retirees and Social Security and Medicare generated massive fiscal surpluses. The Berlin Wall fell and the USSR collapsed, unleashing an enormous peace dividend.

         The period since 1980 should have been the easiest time in American history to balance the budget; instead, we kept borrowing feverishly and never stopped. We danced while the band played on. We must plumb the depths of our souls to understand why we became so addled and addicted to spending and borrowing. For whatever reasons, we always chose the easy path and, as a nation, we failed morally.

       We believed politicians who promised us the moon was Stilton, wishes were horses and pigs had wings. They promised abundance for all by robbing Peter (our children and grandchildren) to pay Paul. They promised social peace by avoiding the confrontations inherent in making choices. They promised no man must ever pay for his sins. But even in this brave new world, water will wet us and fire will burn, and the Gods of the Copybook Headings, with terror and slaughter, will return!


The final paragraph uses snippets from Kipling’s, The Gods of the Copybook Headings.
Next on May 17th, we blog about school choice and the LGBTQ issue.  
More Liberty Less Government  –  mllg@mllg.us  –  www.mllg.us

Lessons From Christmas Shopping

The three gifts of Christmas embody important economic lessons.
Lessons From Christmas Shopping
By: George Noga – December 16, 2018

         This post was super popular with readers last Christmas; I have updated it and am reprising it for this holiday season. Christmas shopping embodies valuable lessons about economics and government. All gifts fall into three economic categories.

         First Party Purchase:  The most felicitous gift is the one you buy for yourself with your own money. Clearly, you know better than anyone precisely what you want as well as how much you will spend. Your priorities are both price and quality; you want the highest possible quality for the lowest possible price. There are many trade-offs between product features, quality and cost and many places to shop. You are uniquely qualified to evaluate all the permutations and to make the correct choice. Such gifts are never returned. This is a first party purchase; the person paying is the person using.

         Second Party Purchase:  Your Uncle Warbucks sends a generous check for you to buy a gift for yourself. You remain the best judge of what to buy for yourself, but you now are tempted to purchase something you would not have bought with your own money. You still want high quality because you are consuming the product, but you are not as concerned about price. When someone else is paying, the temptation to splurge is great. This is a second party purchase; the person using is not the person paying.

         The typical Christmas present is one you buy for someone with your own money. However, you often are reduced to guesses about the needs and wants of others, even those close to you. Because you are spending your own money, you care about cost but are less concerned with quality, as you are not using the product. You don’t invest time comparison shopping and your gift is likely to be returned. This is a different example of a second party purchase; the person paying is not the person using.

       Third Party Purchase:  Now we have the situation where you buy a present for someone else with money supplied by a third party. Say your boss asks you to buy a present for a customer. You buy the present with money that is not your own; therefore, you do not care about the cost. You are not going to consume the present; therefore, you don’t care about the quality – or even the appropriateness of the gift. You have absolutely no idea what the person may want or like. You don’t waste time shopping and buy what only can be described as a white elephant and certain to be returned. This is by far the worst of all Christmas gifts; it is called a third party purchase.

* * * * * * * * * * * * * * * * * * * * * * * * * *

      All government spending consists of third party purchases. Government takes money from you and others and spends it based on its priorities; often, there is not even the pretense of acting in your interest. They are not concerned with either cost or quality. But it gets even worse. Government agencies and individual bureaucrats have their own priorities which often are directly opposed to yours; they respond to their own personal incentives and disincentives. It is akin to shopping for a customer and intentionally buying a present you know the customer doesn’t want, need or like.

       The lessons of the three gifts of Christmas apply with a vengeance to health care. The cost of government funded health care continues to skyrocket while, at the same time, service and quality deteriorate. With single-payer health care, patients often are treated shabbily because they are not the customer – it is a third party purchase.

     Contrast this to private health care, the norm in dentistry, ophthalmology and cosmetic surgery. The inflation-adjusted cost of such private health care is stable or decreasing, while quality and service are good. When you visit your ophthalmologist, dentist or cosmetic surgeon you are treated with unfailing courtesy because this is a first party transaction and, if not treated well, you go elsewhere. The most powerful force on earth is a consumer armed with a free choice as in a first party transaction.

WE ARE TAKING OUR CUSTOMARY HOLIDAY BREAK. OUR NEXT POSTING IS PLANNED FOR MID-JANUARY. THANKS TO ALL OF YOU FOR READING AND FORWARDING. A MERRY CHRISTMAS AND HAPPY NEW YEAR FROM MLLG!


Our next post previews MLLG’s plans for 2019 plus another pithy topic.