Why Federal Debt Is Bad

Almost every US state has to have a balanced budget every year.  Some evade the requirement with gimmicks, some issue excessive debt to boost spending, but basically they can’t get away with deficit spending year after year after year.  This acts as some kind of governor on state spending, although knucklehead states like California, New York, New Jersey and lovely Minnesota just raise taxes as fast or faster than spending, so they can keep the gravy train for teachers and others rolling along.  The residents of those states are understandably bailing as fast as they can, typically to Florida, Texas or other no or low-tax states.

The federal government on the other hand, and for mysterious reasons that elude me, can, and for decades has, run annual deficits.  This deficit spending has been endorsed by both parties.  When the fed runs a deficit, it has to issue debt to cover the shortfall.  That debt piles up, and adds to the deficit in the form of ever-growing interest payments, which now are over one trillion dollars a year and headed toward two trillion.  We won’t have any money left to spend on anything else.  We are well and truly f**ked financially.  Neither party seems to show any real appreciation of the depth of the problem.  Republicans are more likely to acknowledge its existence.  Dems are in deep denial and seem to think they can tax their way out of the deficit problem, but that is absurd to even contemplate.

Why are debt and deficits so bad?  Private businesses sometimes use a fair amount of debt for leverage–if you can pay a reasonable interest rate and the total interest payments are a small part of spending, then the returns for your shareholders are higher, as long as the money you borrowed gets put to a productive use that generates a return higher than the interest payments.  But the federal government is in essence running a deficit on completely unproductive spending.  It is now borrowing money to pay interest.  Sounds like being in debt to a loan shark.  It is borrowing money for massive subsidies on green bullshit that has no return, in fact burdens the economy and consumers.  It gives a lot of slackers free everything–housing, health care, phones, clothes, food.  Nothing productive in that.  Almost all government spending has zero return.

And tax policy is equally stupid and contributes to deficits.  There are all kinds of special tax gimmicks that only benefit rich people and cost hundreds of billions a year in lost revenue.  Private foundations should be abolished and a one-time 75% tax levied on their assets.  Federal tax should have no deductions, no credits, no nothing but a recognition of everything that is income and a progressive, but flat tax on all forms of income equally.  So for incomes up to say $50,000, the tax is 5% and everyone pays it.  The top rate should not be more than 25%.  I guarantee you this would raise far more revenue for the government and result in far fewer economic distortions.

A good explanation of all the issues caused by ever-growing federal debt is found here.  Every consequence of excess debt they set out is present in the US today, and it will only get worse.  There is no easy solution.  The government can stop all the freebies, which will make a lot of voters mad.  It can raise taxes, which will make a lot more voters mad, and especially the rich people who buy off politicians, and will hurt the economy.  It can try to control spending while letting high inflation erode the value of the debt.  Whatever happens from here on out is going to be incredibly ugly.  (ZH Post)