What kind of parent would secretly take out a loan in their child's name? When Baby Boomers vote for expanded federal healthcare entitlements, including free pharmaceutical drugs, the costs won’t be coming out of their pockets. Instead the costs will simply be dug out of the enormous pit mine of United States public credit. What is this pit, really? In dollar terms, it has the dubious distinction of being the largest inheritance of any American generation in history.
As of November, the U.S. public debt is $17.1 trillion. That figure is almost unintelligibly large. Every day it rises by about $749 million. But the public debt is most relevant in the context of the public’s ability to pay it. The most common measure for that ability is the “gross domestic product,” or GDP. That is essentially our country’s annual income. U.S. gross domestic product is currently $16.9 trillion per year. That means U.S. debt is 102% of its national income. The debt is larger than the whole economy.
Let’s put this all in a personal context. Say you earn a median salary of $52,762. Then let’s say over the past few years you’ve taken out loans totaling $53,817 (that is 102% of your salary). However, these loans weren’t for school, professional training, or anything productive. They were for new cell phones and gadgets, massages and spa treatments, and other impulse buys that you can hardly remember. You have almost nothing to show for all that money you spent. What’s worse, you have no plan to pay it back. You’re spending more than what you earn just to make the payments on your new house, your new car, and your gym membership. What do you do? You either cut your expenses (by getting rid of the house, the car, or the gym) or increase your salary. Of course, there is a third option: you declare bankruptcy.
Our options with the U.S. public debt is the same. Our first option is to cut spending. More than anything, that requires shrinking so-called “entitlement” programs like Social Security, Medicare, and Medicaid. These programs consume two-thirds of all federal spending. The military only consumes one fifth. Even if all military spending were stopped completely, the public debt would still continue to grow. Like it or not, entitlement programs have to be significantly reduced. But they won’t be. Too many people are enrolled in these programs, or doggedly support them.
Our second option is to increase revenues. That means we raise taxes. (Some people say that economic growth is another method, but there is actually no precedent for that even if it were a realistic hope.) Raising taxes would require arbitrarily singling out some groups that we want to take more money from. Like it or not, Americans must financially prey on other Americans. But they won’t be, at least not to the extent required to draw down the debt. Too many people would resist that sort of aggressive fundraising by a government that has a record of poor financial management.
Our third option is to default on the debt. There are a terrifying array of mechanisms for default. The simplest is to repudiate the debt – to just say “Sorry, creditors. We won’t be paying you back.” That may sound great, but keep in mind that the majority of our debt isn’t held by foreigners like the Chinese – it’s held by American banks, investors and pension funds. Hurting them would hurt the economy and leave us worse off than we started. We could also give the debt a “haircut” and declare we will only pay some fraction of each loan’s value. But again, that would clearly hurt the economy. Another way – one that would spread the pain around to everyone almost invisibly – is creating money. Fresh money could be used pay any public debt that is due, and it would also serve to devalue the remaining public debt, which would make it much easier to bear. Of course, creating money indiscriminately would also foster the single most insidious and destructive force known in economics: inflation. Inflation would also wreck the economy, but by sapping its strength slowly over time. It’s considered the best among bad options.
Meaningful spending cuts or tax increases are both politically unachievable. Therefore, default is the only option left to us, appalling as that may be. Ironically, it is Baby Boomers that seem to be most upset by talk of a default, when they won’t be the ones to face it. Maybe they realize their children will be saddled with their debts. Perhaps they are ashamed of the state of the nation they are passing down to their children. That would be remarkable. A Baby Boomer government just passed one of the largest entitlement program expansions in United States history, funded by yet more public debt. Debt that Baby Boomers’ children will have to try to pay down their entire adult lives. After such a colossal feat of shamelessness, it is comical that Baby Boomers would still be ashamed of anything at all – even stealing from their children.