A reader recently sent along a news item about how Congress won’t address $33 trillion (and counting) worth of federal debt. The reader was concerned. He shouldn’t be. The reality is that Treasury markets are the deepest in the world, and they long ago priced Congress’s indifference to the debt. Markets yawned.
If this is doubted, consider that in 1980 when total federal debt was $900 billion, the yield on the 10-year Treasury was over 11 percent. $32 trillion worth of additional debt later, the 10-year yield is 3.9 percent. The latter is a fairly substantial signal that the owners of Treasury debt aren’t worried about Congress’s debt insouciance. 3.9% signals that U.S. creditors are confident they’ll be paid back.
The Manhattan Institute’s Brian Riedl is arguably the most prominent commentator on federal debt today, and views it with worry. He argues the debt is a “problem screaming for a solution” given his view that it’s not sustainable. Riedl is the expert, but here’s another way of looking at the debt.
About this look, it’s in no way meant to defend government spending. Government spending is the biggest tax of all when it’s remembered that Congress doesn’t spend money as much as it directs trillions annually in politicized fashion. That’s the central planning of staggering amounts of resources. Imagine how much freer and prosperous we would be if Congress’s budgetary footprint were much smaller.
Still, the argument here is that a focus on the debt and sustainability misses the real problem. For one, Treasury yields yet again indicate that the markets aren’t really worried at all. Put another way, the surest sign that all the federal waste is sustainable is all the federal waste. Investors line up to buy Treasury debt not because they’re generous, but because they once again know it will be paid back.
Riedl makes the valid point that taxing the rich won’t work as a debt fix, but $33 trillion in federal debt signals that we neither have a spending nor a revenue problem as is. This is important because Democrats view the debt as a consequence of too little federal revenue. The viewpoint is absurd given the enormous amounts Treasury collects annually.
Republicans point to excessive spending as the cause of the debt, but that too is an insufficient explanation. Worse, it shifts the terms of the debate to one of insufficient revenue collection relative to spending. Except that the latter is plainly not the problem as evidenced by the yield on the 10-year. The latter signals enormous revenue collection now, and then as markets are a look ahead, it signals much greater revenue collection in the future. We have enormous debt precisely because Americans are way overtaxed.
Yes, the problem is too much federal revenue. And that explains the debt. There’s really no mystery to it. Think of it in terms of individuals and companies. The richest can borrow with ease. It’s just a way of saying that if Republicans really want to shrink federal debt, the only way to do so would be to reduce federal taxation so much that tax collections decline a lot now, and quite a bit more in the future. If so, watch lenders to Treasury disappear.
Except that neither Republicans nor Democrats will ever propose taxation that actually results in greatly reduced revenue collection. Politicians want to retire in splendor too, and a massive federal budget is their retirement.
Which is why the view here is that pundits should cease focus on debt that investors plainly don’t worry about. Much more worrisome than the debt is the true spending burden that politicians in both parties are foisting on every American now, and much more painfully for Americans not yet born: a massive government.
That’s the truly bitter inheritance for now and forever. The problem is that a focus on debt that markets plainly don’t fear is obscuring the problem. It’s a growing government that signals the politicized allocation of gargantuan amounts of precious resources. Central planning is awful, and it’s a much more compelling policy story than is debt that markets are yawning about.
Republished from RealClear Markets
