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

Chapter Fourteen: Decision-making in Democracy: Public Choice 351 Over the last decade, we’ve watched citizens of Greece riot against budget cuts and witnessed massive protests in Wisconson and other rust belt states in response to state governments reducing benefits to workers. This chapter outlined the political process of how we got into this mess, and it also suggests how it will be resolved. The political process will determine which interest groups will suffer the most in the debt drawdown. The eventual resolution is not clear: which interest groups will have sufficient power to force others to pay? And if the “rich” are made to pay, does Figure 14.11 give us any hope that they actually will? IMPLICATIONS OF THE PREVIOUS GRAPHICAL ANALYSIS 1. Our public debt is very high, but is historically possible to pay off. 2. Our promises for future entitlement spending growth cannot be kept; therefore, at least some of government spending promises will not be kept. 3. The increase in spending and reduction in tax revenue in the last decade accelerated the problem, and the ongoing COVID-19 pandemic threatens to bring this problem to a head much sooner (see text box). 4. Raising tax rates has historically not generated signficant additional revenue. This suggests that growing the economy may be the best approach for raising revenue. COVID-19 THREATENS TO BREAK THRU THE DEBT ICE The 2020 global pandemic with the Covid-19 virus resulted in governments worldwide significantly restricting economic activity, with many nations effectively shutting down with the exception of services deemed “essential.” Governments passed massive stimulus bills in the trillions of dollars (in the U.S.) while tax revenues shrank dramatically. As the 3rd edition of NFL is being updated in July 2020, the National Debt has risen to approximately $26.5T, with another stimulus of >$1T being negotiated. This does not include the ~$3T of assets that the Federal Reserve has purchased, which may add to the debt if the U.S. Treasury has to backstop the Fed, should those assets decline in value. It is clear that interest rates will not be allowed to rise in the near future, which means the debt is going to be inflated away.