Washington's Largest Monument: Government Debt
September 11, 2015
Today′s federal debt totals more than $13 trillion dollars. While some may argue that federal debt is not currently the most important issue, the U.S. would do well to return to the standard of Thomas Jefferson's fiscal prudence.
- Before the 1930s federal spending averaged only 2.7 percent of GDP.
- By the end of 2015, the federal debt will be equal to 74 percent of GDP.
- From 1791-1929 the U.S. government had a balanced budget for 68 percent of those years.
- From 1930-2015, the U.S. government had a balanced budget for 15 percent of those years.
Two changes in the 1930s shifted the U.S. away from an anti-debt mindset. First, the development of "entitlement" programs which now use two-thirds of all noninterest federal spending. Second was the idea that deficit spending was good for the economy. However, research shows that government debt causes many problems:
- Spending distortions created by supporting subsidy and benefit programs which reduces overall output and incomes.
- Tax distortions caused by changes in lifestyles in response to higher taxes.
- Increased federal spending that removes incentives for government officials to be frugal and eliminate budget waste.
- Tax damages placed on future generations when payments on interest and principal will be due.
- Reduction in investment as businesses may be hesitant to invest for fear of tax increases in the near future.
- Borrowing from overseas requiring Americans to pay interest to foreign creditors.
- Macroeconomic instability since high government debt tend to lower growth and increase financial fragility.
Structural changes such as a Balanced Budget Amendment as Jefferson recommended should be considered. Other alternatives include a cap on the annual percentage growth in total federal spending or other structural changes that encourage fiscal responsibility.
Source: Chris Edwards, "Washington's Largest Monument: Government Debt," Cato Institute. September 2015.
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