If our citizens understood the dangers we are facing with our wild, out-of-control spending and the enormous advantages of a balanced or near-balanced budget, we might get support for fiscal sanity in Washington.
We have no fiscal sanity today, and worse, the optimistic projections from the nonpartisan Congressional Budget Office show the situation getting much worse. Those projections do not provide for new programs, recessions, war, pandemic, or any other unforeseen costs, some of which will surely arise. The projections show us going from $39 trillion in interest-bearing debt today, or 125% of GDP, to $64 trillion, or 137% of GDP, in 10 years.
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If we fail to fix this problem, it will be worse, and no one can predict how bad it will get. There are also enormous unfunded obligations — almost $100 trillion. Every rational scholar, informed citizen, and economist sees the danger, but the voting public, the silent majority, does not. Problem? What problem?
This is truly a mortal danger to our country. The day will come when our debt Ponzi scheme fails, because the only way we can meet our obligations today is by selling even more debt. That system works only as long as investors are willing to keep buying our debt at reasonable interest rates. The moment that changes, we are out of solutions. We will be forced to either default on our debt or print massive amounts of money, which is, in effect, a default. Either choice would have disastrous consequences. Once we reach that point, no amount of fiscal austerity will be enough to solve a problem of this magnitude.
There is a simple answer to how we avoid this catastrophe. We balance the budget.
Near balance would also work, but continued enormous deficits will eventually kill the goose that laid the golden eggs.
What would happen if we balanced the budget?
The government would not have to borrow more money to finance the deficit. That means the government would no longer be competing for scarce resources, and the private economy, the one that produces all the goods and services we consume, would have more resources to spend, save, and invest. That means growth, real growth, in our economy.
If the government did not have to borrow more money, then it would not have to expand the money supply excessively, only enough to cover growth in the economy and population. That means little or no inflation.
Interest rates would decline with low or no inflation. Interest rates are clearly a function of inflation or inflation expectations. The market wants a real interest rate on its money. To simplify, if the market wants a real rate of 2.5 % and inflation is 4%, then the nominal rate will be 6.5%. But if the inflation rate is 1%, then it will be 3.5%.
A balanced budget leads to the winning formula of higher growth in the economy, low inflation, and low interest rates.
We saw this work in the real world. After World War II, our debts were very high because of the war, around 114% of GDP. After the impact of the war economy settled, we had modest government and fiscal responsibility, and debt grew less than 1% per year for 20 years. This resulted in the economy growing at 6% per year for 20 years. The debt did not go down in absolute numbers, but because of the high growth in the economy, it came down to less than 50% of GDP, a very comfortable ratio.
Fiscal responsibility is the cure for a disease that will eventually destroy our economy. The problem is that we are not looking at the future. We are looking only at today, and today the economy appears good. Because of that, we convince ourselves that nothing can harm us. We have heard the siren song for years, warning of trouble ahead. It has not happened, so many assume it will not.
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That thinking is dangerously wrong. Times are different from anything we have ever witnessed in our history, and there is danger if we ignore the problem.
The problem is real, and so are the enormous benefits of a balanced budget. Fiscal responsibility is not simply good policy. It is essential to preserve long-term economic prosperity and avoid a future catastrophe. The longer we wait to confront this reality, the harder the solution becomes.
Les Rubin is the founder and president of Main Street Economics.
