Is It Right? National Debt as a Moral Issue
(728 words, three-minute read)
On April 7, in “This Bubble Too Shall Burst,” I shared my view, based on traditional economic thinking, that the mounting US debt is likely to become a serious economic problem for our children. What I didn’t do was address whether or not such borrowing is moral. Yes, I mean moral.
Few Americans would deliberately leave personal debt to their children. And yet, collectively, that is exactly what we are doing by leaving them a $25 trillion and growing federal debt.
Why are we doing something collectively that we think is wrong individually?
Perhaps there are a few reasons.
Federal debt is an intangible issue
Since we don’t individually do the borrowing, make the interest payments, or receive a monthly statement of our balance, it doesn’t feel real. But, that doesn’t mean it isn’t there.
It’s OK because we are only “borrowing from ourselves”
First, this is only partially true. $6.7 trillion is borrowed from foreign countries. Much has been written about China as an emerging new enemy, and yet we are happy to borrow $1 trillion from them. How do we explain the collective arrogance of a country that routinely criticizes its second largest creditor?
And just because the balance is owed to “ourselves” doesn’t make it less real. If you have your savings in a typical money market, own a bond fund, or have a pension, you are a lender to the federal government. You expect that your money will be there when you need it. And you expect it in real dollars, not diminished by inflation.
Lastly, $2.8 trillion of the total is borrowed from the Social Security surplus. When that is exhausted in approximately 2034, Social Security cash flows will be only 70% of required distributions. A 30% reduction in benefits will certainly seem real to those who depend on them.
But don’t all countries borrow?
Yes. Most countries can sustain a reasonable level of debt. Conventional thinking has been that as long as the national debt grows no faster than the economy, it will be manageable and interest expense as a percentage of the federal budget will remain stable.
Unfortunately, this is not the case in the US. From a 1974 postwar low of 24%, the national debt now exceeds 100% of GDP.
Is borrowing ever justified?
Yes. A longstanding principle of personal and corporate borrowing has been the matching of assets and liabilities. When a company invests in long-term assets like a factory, it can be appropriate to incur long-term debt to finance it. The returns of the factory will be long term in nature, and payments for it can be matched. Similarly, consumers can borrow for 30 years to purchase a home but only five years to purchase a car.
The federal government also makes long-term investments. In order to finance WW2, the government borrowed heavily and total debt reached 112% of GDP. The war was an investment in freedom and a world order that would benefit generations to come. It was, therefore, fair to ask them to pay a share. And in fact, the debt was steadily repaid over the following several years, declining by 1965 to prewar levels.
Similarly, when the country builds infrastructure like the interstate freeway system, or invests in the space program, it is appropriate to borrow, as the benefits of such infrastructure extend years after the project is completed.
In contrast, however, today we borrow from the future not to invest in long-term assets but to fund current consumption. This is tantamount to using our children’s credit card to pay for groceries. This happens daily in America, but increased dramatically during the COVID crisis, when we borrowed from our children in order to provide current income to people today.
Even the recent splurge would have been fine if we had any intention of raising taxes or cutting other consumption in order to pay it back. But we don’t.
Nothing is free, and neither is the national debt
Our collective attitude to the debt defies this truism. We borrow as if borrowing is free. Recently, when Congress approved the $2.4 trillion in COVID stimulus, there was no discussion or apparent concern about paying for it.
From the “greatest” to the most profligate generation
Unlike the “greatest generation” with their many gifts to us, this generation passes the mantle to our children burdened by our recklessness. At best, we have limited the resources available to them to address the significant problems that we have also left behind. At worst, we are leaving behind an economic time bomb.
In either case, this is not just an economic problem: it is a moral one.