Washington DC, January 13, 2009 --  

Deficit spending has replaced taxes as the primary fuel of big government, driving America ever closer to financial disaster.

One of the more colorful political metaphors to come out of the Reagan Revolution was called "starving the beast."¹ The idea was simple. By cutting taxes without regard to more painful spending cuts, the resulting budget shortfall would force lawmakers to hold the line on spending and shrink the "beast" of big government. The idea has had remarkable staying power. Two decades after Reagan came to office, President George W. Bush described his tax cut as a "fiscal straightjacket for Congress".²

For those of us who abhor big government, this is a beautiful idea. Except for one problem: The strategy has utterly failed. Despite tax cuts and growing deficits, the federal government spent $900 billion more in 2007 than in 2001³, according to the Congressional Budget Office. And because the CBO only counts spending that is "on budget" -- massive expenditures like the wars in Iraq and Afghanistan simply aren't counted. Thus, these figures greatly understate the growth of the beast.

In order to support its beastly spending, the government will have to borrow $1.2 trillion this year.⁴ And if the incoming Obama administration succeeds in getting its planned $800 billion in "economic stimulus," this year's federal borrowing will reach $2 trillion. This shocking sum will make borrowing rival taxes as the main source of government spending; the similar amount of $2.5 trillion was received from taxes in 2007.⁵

The shift from tax dollars to borrowing as the vehicle for government spending growth is nothing short of frightening, and conservatives are partly to blame. They didn't starve the beast -- they pressured it to mutate until it could live on a completely different food supply. And now that the beast has wholeheartedly adopted debt as its favorite meal, there is nothing left to stop it until it drags America into bankruptcy.

And bankruptcy is precisely what's at the end of America's financial trajectory. The size of the national debt, as of October 1, had grown to $10.1 trillion, or 70.2 percent of national income. ^6,7 If $2 trillion more is borrowed this year, and the economy remains stagnant, the debt will rise to over $12 trillion and 84 percent of national income by Christmas. And these numbers will only get worse in the years to come.

Apologists for the debt like to point out that America had an even higher debt ratio (95 percent) at the end of World War II, and managed to bring the debt level down to less than 50 percent by the mid-1960s.⁸ But the country never really paid off this war debt -- it just made the minimum interest payments, as the economy grew.

Unfortunately, America can't do that again this time. About 40 percent of the debt is held by other governmental agencies as pension and health funds (e.g. Social Security) and all of them are expecting to cash this debt in soon as the Baby Boomers start to retire. Just to let the debt level stagnate, the government will have to flood public markets with many trillions of dollars of new bonds over the next few decades. This is likely to push up interest rates, increasing the cost of paying off just the interest on the debt. And with the beast of big government unconstrained by budget shortfalls, even more debt will undoubtedly be thrown on the pile to make these higher interest payments.

This is a classic debt spiral, and without drastic action, it ultimately ends in bankruptcy. The risk of the American government defaulting on its debt within the next 10 years, as measured by credit derivative markets, has jumped from one percent to six percent in the past year.⁹

Unfortunately, policymakers pay little heed to this risk and instead of focus only on short term problems. The incoming Obama administration isn't talking about addressing the debt -- it's talking about its desire to pile another $800 billion on top of the debt, supposedly to stimulate the economy. But consider that the economy has already been infused with hundreds of billions of dollars in deficit spending every year since 2002. Why didn't that work as economic stimulus? Is spending $800 billion more really helpful?

Consider also that the current economic crisis was caused by the inevitable collapse of unsustainable credit-driven consumer spending. Can solving the crisis with even more unsustainable credit-driven spending -- this time government spending -- really be a good idea?

America has become so addicted to debt that it is behaving like a crack addict. Waking up after a bender, the addict seeks to overcome his sluggishness by smoking even more crack. It may relieve the short-term pain, but it only exacerbates the long-term problem.

Of course, political conservatives aren't the only ones to blame for the creation of this mess. They may have created the mutant beast, but Obama's spending plan shows that politicians across the board are more than willing to feed the beast the massive debt needed to fuel its growth. So long as lawmakers remain complicit, America will march ever closer to financial ruin.

Congressional Quarterly, Paying it Forward, December 12, 2008

Related Web Columns:

Circling Sharks and the Magic Hand, September 30, 2008

Yawning Toward Disaster, September 2, 2008

House of Cards
The Collapse of Credit-Driven Spending, November 27, 2007

Deficit Nostalgia, June 13, 1999

Notes:

1. Independent Review, "Starve the Beast," Summer 2007

2. The White House, Remarks by the President and Secretary Rumsfeld in Announcement of Chairman and Vice-Chairman of the Joint Chiefs of Staff, August 24, 2001

3. Congressional Budget Office, Revenues, Outlays, Deficits, Surpluses, and Debt Held by the Public, 1968 to 2007, in Billions of Dollars.

4. Heritage Foundation, CBO Budget Baseline Shows Historic Surge in Spending and Debt, January 7, 2009

5. Congressional Budget Office, Ibid.

6. U.S. Treasury, The Debt to the Penny and Who Holds It, January 8, 2009 http://www.treasurydirect.gov/NP/BPDLogin?application=np

7. Bureau of Economic Analysis, National Income and Product Accounts Table, December 23, 2008

8. U.S. Treasury, Ibid; Bureau of Economic Analysis, Ibid.

9. Washington Post, We’re Borrowing Like Mad. Can the U.S. Pay It Back? January 11, 2009