In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.
But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.
The discussion was triggered by comments from the Chairman of the Federal Reserve.
Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront
of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.
As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.
The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).
To be more specific, politicians are violating my Golden Rule.
Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.
Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.
That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.
But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.
Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.
So how can America avoid a Greek-style fiscal nightmare?
Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.
The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.
P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.
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Image credit: 401kcalculator.org | CC BY-SA 2.0.
