No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fourteen: Decision-making in Democracy: Public Choice 349 problem identified in Figure 14.9 is clearly a spending problem—we have promised more than we can pay. We should expect these promises to be “modified” in the future— likely the near future. To provide an additional sense of urgency, we are financing our debt with record low interest rates. If interest rates rise, we will have to significantly reduce other government services to service our debt. Historically, countries with debt burdens as large as ours solve the problem in one of two ways: default or debauch (inflate the debt away). Economic historian Niall Ferguson showed that there is one case in all of financial history that has successfully paid down their debt without defaulting or debauching: Great Britain after 1815. So the bad news is, it was only done once; but the good news is that it can be done! The political debate continues over the fiscal problem we face, with various politicians suggesting that more revenue and/or less spending is needed to fix the budget. Figure 14.10 will help put the problem in perspective. As you can see, the average expenditures were almost 3% higher than revenues for the last 60 years. But the recent spending binge after the financial crisis, coupled with sharply lower tax revenues, resulted in a much larger deficit. The Trump Administration’s reduced focus on spending constraints, coupled with lower taxes, exacerbates this trend. And the ongoing (as this text is being updated) COVID-19 pandemic is crushing tax revenues and exploiting the debt. Default: failing to pay of contractually agreed to debts. Debauch: diluting the value of your currency by inflation (printing more money). Figure 14.10, Federal Tax Revenues vs. Expenditures. Federal tax revenues (receipts) have averaged approximately 18% of GDP since 1960, while expenditures have averaged over 21%, thus the continual increase in the National Debt. Crises only exacerbate the problem, and the ongoing COVID-19 crisis will accelerate the trend.