The Real Solution to the “Fiscal Sustainability Problem”
As I’ve blogged many times before, I don’t think there is a “fiscal sustainability problem” as the people who are presently deluging us with exhortations to bring the national debt and the debt-to-GDP ratio define it. That’s because I define “fiscal sustainability” in a different way than they do, as I’ve explained in another post. In this one, however, for the sake of argument, I’ll accept the deficit hawk/dove notion of “fiscal sustainability” and offer a different and, I think, much better solution to that problem than any of the deficit-reduction Commissions, groups, and individual members of these bodies are proposing to us now.
Fiscal Sustainability according to the deficit hawk/doves refers to: the annual Federal Deficit (the gap between Federal Spending and Federal Tax Revenues), the public National Debt (the accumulated inflation adjusted sum of deficits and surpluses since the inception of the Republic), and the debt held by the public to GDP ratio. People who write about this see things this way: continuing and growing deficits are a sign that fiscal sustainability is going down; continuing and growing increases in the national debt are a sign that fiscal sustainability is going down; an increasing debt-to-GDP ratio is a sign that fiscal sustainability is going down, and the problem of fiscal sustainability must be solved by at least stabilizing, and eventually, decreasing the debt-to-GDP ratio over time.
When they explain why they see things this way, they say that the Government can only fund its spending by either taxing to raise revenue, or borrowing to fund deficit spending, and that if too much is borrowed too fast, so that the debt-to-GDP ratio grows too rapidly, this will result in the bond markets losing confidence in the Government’s ability to repay its debt, which, in turn, will cause these markets to demand higher interest rates on Treasury Securities, increasing the cost of interest on the debt over time, until, eventually, the interest payments on Federal Debt are so high that they squeeze out other Federal expenditures and programs, and leave no space for spending we need to do to solve vital problems.
The concern about the bond markets and the pressure on the dollar they can bring to bear is so great that some have reported that President Obama’s primary reason for creating the National Commission on Fiscal Responsibility and Reform was to try to get a long-term deficit reduction plan through Congress in order to convince them that the United States is serious about bringing its debt problems under control.
There are many things wrong with the reasoning I’ve just laid out, and in past months I’ve blogged about its various flaws. But let’s put that aside for this post. Let’s assume that the narrative is correct. If so, then the problem of rising interest costs is caused not simply by deficit spending, but by our need to borrow to fund it.
If we didn’t need to do that anymore, then we’d be able to avoid increasing the national debt, and the debt-to-GDP ratio, and, eventually, there’d be no Federal interest costs at all, since we’d be gradually paying down our previous debt as it came due. By 2025, the date when current projections suggest that our debt-to-GDP ratio will reach 120%, we’d actually have a debt-to-GDP ratio of zero, because we’d have paid off the national debt.
So, the simplest and most direct solution to the so-called “debt crisis” is simply not to issue any more debt when the Federal Government deficit spends. Why can’t the Government do that now?
The answer is that when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress didn’t repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. The mandate to borrow funds, however, has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich, and any positive effects it produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else.
So, let’s make the deficit hawks and doves happy and remove all their debt, and debt-to-GDP ratio worries with the following solution. Congress: repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending! The mandate has no useful function now, other than to provide welfare for the rich and foreign nations. If you repeal it we’ll:
— cease to provide that welfare,
— gradually pay off the Federal debt entirely,
— have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
— have no further need to worry about what the bond markets think or are going to do, or
— about our debt or deficit spending being “fiscally unsustainable.”
C’mon Congressfolks, you can solve the deficit hawk/dove’s version of the fiscal responsibility and reform/fiscal sustainability problem very, very easily, and also quit having to worry about those difficult votes on increasing the debt limit. All you have to do is get rid of that mandate to issue debt, and the whole political mess these deficit reduction Commissions and interest groups are making goes away.
You won’t have to raise the Social Security Retirement age and get young people angry at you, or piss off Seniors because you’re committing to cut their Medicare, or get people frosted because you’re going to cut the heart out of a program they really, really like. You know you really, really, really don’t want to take that vote the President, Bowles and Simpson, Alice Rivlin, Pete Peterson, and all their friends, are setting you up for. So don’t! Get rid of the mandate, get on with the real problems facing the country, like jobs, education, a new energy foundation for our economy, and real health reform rather than an insurance company bailout, and tell the bond markets to go to hell!