Paying Down the National Debt Will Not Shrink the National Debt

The parsimonious in Washington won’t always remain in power. Which is a weak attempt at humor, or irony.

Still, let’s assume for fun not just major spending cuts by a few thrifty politicians, but also a concerted effort to pay down the national debt with the money not spent. If so, see this opinion piece’s opening sentence. Power in government is a moving target.

Consider the changing face of power alongside a shrunken national debt. The latter would simply free the legislators of the future to not just spend money saved on a smaller budget with greater ease, but also borrow with greater ease owing to an enhanced credit profile rooted in a demonstrated ability to pay monies borrowed back.

That was kind of the point behind Alexander Hamilton’s urgent stance in favor of the newly created United States attaining borrowing power in the late 18th century. About his urgency, don’t forget that Hamilton was a libertarian. He wasn’t pursuing big government through the raising of debt as much as he wanted the government to have the ability to grow if a national defense emergency required it.

By borrowing, and then much more importantly paying back monies borrowed, the U.S. would establish credit that would facilitate borrowing in much greater amounts if necessary. Particularly during times of war.

Consider the origins of U.S. debt versus the debt of the present. Why the huge disparity? The left of course say we’re not taxing the rich enough, while the right say excessive spending by the Democrats is the cause. Supply siders implicitly agree with both sides given their promise to “raise” taxes on the rich by taxing them less so that government can receive more growth-related tax revenue and spend more subsequently.

All three sides are revealing near total mystification about the causes of the debt. The bet here is that Hamilton would agree.

While it’s certainly true that politicians exist to spend, the national debt is growing in ever larger amounts because we have more tax revenue now. Worse, the markets plainly expect soaring amounts of tax revenue in the future. If anyone doubts the previous assertion, they must explain why Treasury yields in 2026 roughly mirror yields in 2007 when the national debt was $7 trillion.

Remember this with paying down even more of the national debt top of mind. While near-term parsimony or so-called “entitlement” reform could seemingly make a minor near-term dent, normally sophisticated geniuses like Thomas Sowell have made cases for selling off federal lands to pay down even more. Sowell’s solution won’t age well, and that’s true even though he’s right that the federal government shouldn’t be the U.S.’s biggest landlord.

In Sowell’s words, “As of 2015, government-owned lands were valued at $1.8 trillion by the Commerce Department. This is the kind of money that can make a real contribution to the government’s fiscal balance, at a time when so many government operations are urgently in need of support.” He surely knows better.

Without bothering to address the “government operations” Sowell views as “urgently in need of support,” can he seriously believe that the answer to the U.S.’s “fiscal balance” is sending more money to Washington? Really, when has this ever worked to keep government, government debt, or both in check?

The answer is that it hasn’t, nor will it. Precisely due to the incentives that drive the actions of politicians, it’s pure folly to assume that actions meant to increase the U.S.’s creditworthiness will shrink its indebtedness. Quite the opposite actually, and as the last 250 years have made abundantly plain.

Originally published on Real Clear Markets.