by John McClaughry
The European banking system and stock markets – and therefore ours – are sinking from the increasing doubt that sovereign EU countries can pay their bondholders. It’s worth taking a minute to consider the effect of public debt.
Is public debt a good thing? Yes, if incurred to defend the nation (e.g., Civil War, World War II), or to build infrastructure that greatly increases the economic productivity of the people (Interstate Highway System.)
But no, if the government merely borrows now to spend on current programs and benefits, leaving future generations to come up with the taxes to service the debt.
The U.S. government is now $15 trillion in debt, and borrows 40 percent of every dollar it spends. That doesn’t include the unfunded liabilities of Social Security and Medicare “entitlements”. The former will exhaust its funds in 2036, and the latter in 2024. Each is at least politically obliged to keep paying benefits until 2085, but both programs are totally unsustainable..
At the Vermont level, the most recent (2009) report of the Treasurer’s committee that oversees teacher and state employee retirement systems forthrightly said “Simply put, financial commitments for pension and health benefit programs are growing much faster than the rate of revenue growth or the ability of taxpayers to pay for them….Our actuaries estimate that it will take more than 20 years at our current actuarial investment rate of return of 8.25 percent [since reduced to 8 percent] to get back to fiscal year 2008 funding level.”
Despite this ominous statement, Vermont is one of only nine states to maintain a AAA bond rating. And despite being the only state that does not have a balanced budget requirement, even Vermont’s very liberal legislatures have contrived – often with dubious accounting and fund-robbing practices – to produce a nominally balanced budget every year.
The Democratic administration in Washington, however, has embraced the argument that it’s better to go deeper and faster into debt to shower payments on favored (unionized) groups, and let another political generation figure out how to service the debt.
This convenient rationalization already has a sizable foothold among liberals and progressives in the Vermont legislature. How soon those legislators become majorities is an important question that bears watching.
The argument over the benefit or menace of public debt is far from new. It originated in Roman times, and became the great battlefield issue in the very First Congress.
Treasury Secretary Alexander Hamilton proposed that the new national government assume the Revolutionary War debts of the states. He ardently believed that a government that borrowed money from the rich to fund this assumption would enlist the rich in the protection of the government. (This scenario is playing out now in Europe, where the banks that lent billions to profligate governments are pleading with the European Central Bank to hit up the sound governments to bail out Greece, Portugal, Ireland, Italy, Spain and even France.)
Hamilton’s great adversary, Secretary of State Thomas Jefferson, saw the planned increase in public debt as evidence of “corruption” – today called “crony capitalism”. After leaving the White House, Jefferson summed up his opposition to Hamilton’s theory thus: “We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude.”
“If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds…[we will] have no time to think, no means of calling our mis-managers to account, but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.”
“And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for [another ]…till the bulk of society is reduced to be mere automatons of misery. And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.”
That was written in 1816, and accurately explains the consequence of runaway public debt today.
John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).