The Gatestone Institute sponsored a student essay contest on free market capitalism. Larry Kudlow and Larry Kadish spearheaded the competition, and Alan Dershowitz and Gordon Chang served as judges. I submitted the following composition on the national debt, which tied for the institute’s top prize.
Milton Friedman, a longtime professor of economics at the University of Chicago, regularly said, “There is no such thing as a free lunch.” That is ample framing for my exposition of the national debt’s economic, moral, and political implications. Please note that we are posting this essay just as I submitted it in January: It has not gone through the Thinker’s standard editing process and, unlike other pieces we publish, it has a bibliography.
When the national debt crossed the $1-trillion threshold in 1981, President Reagan bluntly said, “One trillion dollars of debt. If we as a nation needed a warning, let that be it” (1). Almost completely ignoring the Big Gipper’s admonition, politicians accumulated another $28.6 trillion of red ink in the ensuing 40 years (2). At $29.6 trillion and 124% of gross domestic product (2), the national debt no longer warrants a stern presidential warning. It is a four-alarm fire with serious economic, geopolitical, and moral consequences—and Generation Z’s imperative is to extinguish the blaze.
The national debt, in brief, is the manifestation of politicians’ recklessness. Rather than deciding between defense spending and welfare payouts, legislators combine everything into annual bills thousands of pages long and market them as “compromises” (3), inevitably approving more spending than they collect in taxes. The Treasury must then sell debt to make up the difference, leading to federal budget deficits. The national debt is the long-term consolidation of those annual deficits, and it has risen every year since 1957 (2). In earnest following the 2008 recession (4), the Federal Reserve has printed dollars to buy stupendous quantities of Treasury bills, notes, and bonds on the open market (5)—suppressing bond yields and providing the government an indirect, no-strings-attached funding source (a process best described as debt “monetization”).
President Trump, aiming to prevent further debt accumulation, pushed to eliminate the deficit (6). But China exported the coronavirus and, with it, an economy-stultifying lockdown model. Trump and Congress responded with emergency measures that enlarged the debt, but his successor one-upped him by signing into law $1.9 trillion of spending dubiously attributed to COVID-19 (7), approving $1 trillion in infrastructure spending (8), and pushing for nearly $5 trillion in entitlements (9). The national debt surged by almost $2 trillion in 2021 (2), showing that there is little prospect of debt reduction. This is dangerous and wrong for six reasons.
The national debt, for one, is immoral. It is unjust when politicians seize living Americans’ income and socialize it, as such expropriation runs roughshod over the natural-law principle that people should be allowed to keep and consensually dispose of the fruits of their labor (10). But it is doubly immoral when politicians mortgage the wealth of the future and redistribute it to people in the present, as they do when they instruct Treasury Secretary Janet Yellen to sell bonds that must eventually be repaid to finance welfare checks (11).
Moreover, the national debt degrades the virtue of the populace by implying that people do not need to live within their means and backstopping the choices of those who do not. Household debt regularly sets new records (12) as people emulate their leaders, and the 2008 bailouts showed Washington, D.C.’s willingness to leverage the future to accommodate spendthrift behavior today. Concurrently, the government uses debt to fund an entitlement state that lays waste to Americans’ work ethic and morals. Soothed by handouts that will be paid by future generations, Americans are no longer inspired by Andrew Carnegie’s rise from Scottish poverty to the pinnacle of U.S. life. Instead, they opt for welfare-sponsored out-of-wedlock child-rearing (13) and idleness masked as the “Great Resignation” (14). A debtor government necessarily inculcates the conviction that something can be had for nothing, a mindset that has been anathema for American finances and mores.
Third, as 2020’s example indicates, the national debt portends significant price inflation. The government incurred $5 trillion in debt as it countered the coronavirus lockdowns, and the Federal Reserve purchased 55% of the Treasurys issued that year (15), albeit indirectly via open-market operations. The Fed thus increased the share of the debt it owned from 13% to 22% (15) and grew the money supply by 26% (16). This helicopter money precipitated the 7% consumer-price inflation of 2021 (17), a preview of what will come if the government does not reduce the debt. Yellen will sell new Treasurys—which will be indirectly purchased by the Fed—to finance the retirement of maturing debt, introducing a continuous stream of new dollars and triggering ever-increasing inflation. A Cato Institute report identified 56 hyperinflationary incidents in the past century, defined as inflation of 50% or more monthly (18), and America is not immune to this straightforward consequence of excessive money production.
Additionally, the national debt renders the government and American consumers vulnerable to a rise in interest rates. If the government continues to incur sizable deficits, it will have to devote more of the budget to paying interest on the accumulated debt—even absent a rise in interest rates. But if new debt issuance eventually overwhelms investors and the government must pay a higher interest rate to convince people to lend to the U.S., interest costs will become unbearable. One report notes that “interest rates of 5% could push the national debt toward 300% of GDP within three decades, if paired with modest new fiscal expansions in the meantime” (19). Meanwhile, continued government profligacy will soak up private savings, limiting the availability of funds for private borrowers—e.g., people seeking a mortgage or startups seeking seed capital—and elevating economy-wide interest rates.
Penultimately, the national debt threatens America’s vitality by framing the economic decisions of consumers and firms in terms of what they expect Washington, D.C. to do, rather than what is in their self-interest. The government must eventually pay the $29.6 trillion it has borrowed in the United States’ name, whether it imposes punishing income taxes, seizes a portion of people’s bank deposits like Cyprus (20), or prints money. This uncertain economic landscape saps people’s incentive to work and invest in America, perhaps explaining the sub-1% average American labor-productivity growth rate in the decade following the 2008 recession (21)—a period in which the debt more than doubled (2).
Finally, the national debt enslaves America to foreign nations. Foreign investors own $7.7 trillion of U.S. debt (22), or 26% of the Treasury securities outstanding, compared to $374 billion in 1989 (23). Foreign adversaries, including China, could sell their holdings of U.S. debt to the highest bidder, glutting the market and causing a precipitous rise in American interest rates (24). This is an inescapable problem given the breadth of America’s debt. Related, interest payments on the debt crimp spending on national security by reducing the pool of funds that Congress can feasibly appropriate (25), and the debt’s very presence limits the borrowing the U.S. could incur in wartime. It is unacceptable that the U.S. is economically subjected to its adversaries and handicapped by politicians’ recklessness.
Any of these arguments individually justify making national-debt reduction the center of federal policy, but an extraordinary Generation-Z leader must advance the necessary reforms. A balanced-budget amendment, which would prohibit the government from incurring deficit spending, is a no-brainer. The repeal of the Seventeenth Amendment (26), combined with federal term limits, may reconfigure political incentives so that politicians would not need to bribe voters with entitlement spending or fret about the political blowback from repealing entitlements. Finally, monetary reform—namely, a return to the gold standard—would crucially prevent the government from printing money to liquidate the national debt. The worst debt-reduction proposal is a hike in individual, corporate, or capital gains taxes, as income confiscation would diminish firms’ incentive to produce and hire, reduce economic growth, and constrain future revenue (27).
Whatever the exact policies legislators adopt to reduce the deficit and debt, time is of the essence. America’s future, and that of her future generations, hangs in the balance.
*The views expressed in this article solely represent the views of the author, not the views of the Chicago Thinker.
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In general, well written essay. However, I’d like a bit more explanation on the claim that “President Trump, aiming to prevent further debt accumulation, pushed to eliminate the deficit (6). But China exported the coronavirus and, with it, an economy-stultifying lockdown model.” Seemingly contradicting your claim that Covid-19 was solely to blame for any raised deficits under Trump, the deficit went up in 2017, 2018, and 2019, before the pandemic even started.