America’s Despotism of Debt

By Samuel Gregg

Sunday, October 08, 2023

 

On June 15, 2023, America’s national debt reached $32 trillion. On September 15, 2023, it surpassed $33 trillion.

 

Think about that. In just 92 days, the United States added $1 trillion to its public debt.

 

As has become routine on these occasions, there was some huffing and puffing about how America can’t keep going like this. Then the story receded from the headlines. The topic will surely resurface whenever America gets close to its official debt limit. But, as night follows day, that limit will be raised after the usual band-aid is applied.

 

The economic consequences of an expanding national debt are well-understood. Ever-increasing interest payments on a growing debt, for example, will compromise the country’s capacity to respond to a genuine national crisis.

 

But above all, there are the negative effects of a metastasizing national debt on economic growth.

 

In their well-known 2010 American Economic Review study, which examined data on 44 countries over approximately 200 years, the economists Carmen M. Reinhart and Kenneth S. Rogoff concluded that developed nations with gross-public-debt levels that exceed 90 percent of GDP see their “median growth rates fall by one percent, and average growth falls considerably more.”

 

That paper generated enormous debate and considerable pushback. Yet as one subsequent 2021 analysis of studies of the topic noted, “While weaknesses in the economic literature undoubtedly exist, they do not invalidate the broadly well‐​founded conclusion drawn from the survey of 40 empirical studies—that high levels of public debt have a negative impact on economic growth.”

 

Compounding this is the risk that our debt problem will generate a vicious fiscal cycle whereby slowing growth leads to weaker federal revenues and thus a growing reliance by government on debt to bridge the gap between its income and expenditures, which in turn further diminishes economic growth.

 

Investors are not blind to these worrying trends. Fitch’s August 2023 downgrade of America’s credit rating from AAA to AA+ reflected concerns about excessive state spending, overregulation, an aging population, etc.

 

But disturbing data about a “growing general government debt burden” were a major reason for the downgrade. As the Economic Policy Innovation Center’s Paul Winfree recently observed, new debt has paid for 76 percent of federal spending since 2020. Should sufficient uncertainty emerge about America’s capacity to service its cascading debt, investors will move to protect themselves in ways that further undermine the country’s growth prospects.

 

Big majorities of Republicans, Democrats, and independents consistently state that tackling the national debt should be a priority. Nothing, however, seems to move the political needle. Even the disturbing prospect of interest payments on the debt becoming a bigger federal budget item than defense expenditures in 2028 and than Social Security by 2052 apparently isn’t sufficient to shift many legislators.

 

Typically, we talk about the politics of public debt in terms of conservatives being unwilling to raise taxes while progressives refuse to cut spending. Up to a point, that’s accurate.

 

There is, however, another aspect of the problem that is less discussed: the soft despotism of debt.

 

Though he never used the phrase, the idea of soft despotism was first expressed by Alexis de Tocqueville in his book Democracy in America. In simple terms, it amounts to people freely giving more and more power to the government in return for which legislators promise them a world of perpetual security.

 

One way this manifests itself today is politicians competing to provide us with more government programs that make more and more people beholden to the state without unduly increasing taxes. Public debt is the way that governments square the growing gap between their expenditures and tax revenue.

 

This reliance on debt frees legislators and citizens from the fiscal discipline created by a finite amount of tax revenue. It’s a recipe for a citizenry and a political class locked in a Faustian bargain that, eventually, corrupts everyone.

 

On the one hand, citizens decline to hold those they elect responsible for driving America further into debt. When faced with a choice between real expenditure cuts or a growing public debt, plenty of voters settle for the latter.

 

As for legislators, many will fiercely oppose any substantial spending cuts in the welfare programs that constitute the bulk of public spending. Other legislators will vote against expanded welfare. Some of those same legislators, however, will quietly do deals on the side to keep constituents in their district or state happy.

 

It adds up to an undeclared bipartisan consensus that we should ignore our public-debt addiction and live in a fiscal fantasy world. But this is plainly more than an economic problem. Ultimately it reflects a crisis of responsibility that infects not just America’s rulers but also the ruled.

 

This is one reason why America’s public debt was described in the recent Freedom Conservative statement as “an existential threat to the future prosperity, liberty, and happiness of Americans.”

 

It’s not as if solutions to our public-debt challenges don’t exist. Even today, many ideas expressed in reports ranging from the 2010 Simpson-Bowles Plan to the 2012 Domenici-Rivlin Debt Reduction Task Force Plan remain worthy of consideration.

 

The brutal truth, however, is that nothing will change as long as most American legislators and millions of citizens refuse to face up to the deep, ominous political dynamics driving America’s compulsive resort to public debt. The stakes are indeed high. But until we accept that the problem is more than just economic, the despotism of debt will continue to cast a long and debilitating shadow over the republic.