At the start of the 21st century, the United States, joined by most other advanced nations, is pushing well past what just a short time ago most economists considered unsustainable debt levels. In the 2008 economic crisis, the world piled on $75 trillion dollars of new debt, and it has added another $150 trillion in the past decade, with almost half of that being accrued by governments. In the United States, we spent the past decade adding an average $1.16 trillion to the national debt every year, crossing the $22 trillion mark at the start of the year. Additional spending to keep the economy afloat during the COVID-19 pandemic will add as much as $6 trillion to the total. Moreover, these numbers do not consider the tens of trillions of dollars in unfunded liabilities—Social Security, Medicaid, and Medicare—promised to Americans over the next few decades.
In the past, the only times great states have seen similar levels of debt as a percentage of GDP was at the conclusion of a global war. But, in those wars, debt accumulations were driven solely by the costs of the wars and were rapidly reduced (as a percentage of GDP) once the hostilities ceased. Today, huge amounts of deficit spending are now employed to prop up the welfare state. In fact, such spending has been so normalized that few national budgets show signs of slowing their debt accumulation, despite a flood of warnings that growing debt is leading the nation and the rest of the global economy toward a fiscal disaster.
Running counter to this argument are those who believe that the United States, because it can issue debt denominated in dollars, can do so forever without penalty, as the Federal Reserve can always print cash to pay the debt. This so-called Modern Monetary Theory is hugely criticized by mainstream economists, who view it as the pathway to bouts of economy-wrecking hyper-inflation. There are, however, a few prominent economists who support MMT as a chance to pay for everything the government wants with few, if any, negative side effects. But, when one reads deeply into their papers, they all admit there comes a point when the inflation risks become so great that taxes must be raised by significant amounts. So, if mainstream economists believe Modern Monetary Theory is the road to economic hell, and even its supporters are willing to admit that the free ride must, at some point, come to an end, what is one to make of the current situation?
As the Wall Street Journal has pointed out, after $3 trillion in COVID related new spending, and trillions more in Federal Reserve loan guarantees and bond purchases, we are all modern monetary believers now. Settling arcane economic debates is not for the moment important. The point worth acknowledging is the remarkable fact that the U.S. government is spending trillions of dollars, but financial ruin still appears no closer than before the crisis. From this one might ascertain that the United States is likely at a point in economic history where the experts have no idea what is going on.
After several decades of deficit spending, often supported by massive quantitative easing programs (printing money), the government—as of this writing—can still fund ten-year bonds at an incredible 0.7 percent interest rate. Moreover, while the risk of inflation can never be totally discounted, it is for the moment. In fact, deflation, as a consequence of excess production capacity around the globe is now a much greater risk. Consequently, markets are signalling that bond rates will possibly hover around zero.
The one thing almost certain to induce market panic is the slightest hint that the United States will someday be unable or unwilling to collect sufficient taxes to pay the cost of its debt burden. This fear is what makes debt growth so worrisome to many, as almost all of our debt is being incurred to finance transfer payments, such as Social Security, Medicare, and Medicaid. As such, this debt-financed government spending is doing almost nothing to strengthen or grow the economy. In fact, we are allowing the debt to grow even as U.S. infrastructure crumbles, and the nation falls behind in high-growth sectors of the global economy. Consequently, we are on a course that is edging us closer to the day to when we cede our great power status to China or another more dynamic competitor.
But current market conditions present the United States Government with a once in century opportunity to reverse these trends by spending truly enormous amounts of money at minimal risk to the nation’s long-term economic prospects—with the caveat that this new spending be properly and wisely spent.
We know what must be done to reverse our slide: rebuild our legacy infrastructure (ports, roads, bridges, railroads, etc); invest heavily in basic scientific research (including quantum computing, artificial intelligence, 5G and beyond); move our education system into the 21st century; support getting innovative technology into the global marketplace; and, finally, but just as crucially, recapitalize the military and transform it into a 21st century fighting force. Everything on this list will accelerate U.S. economic growth, and synergetic impacts could launch a period of hypergrowth akin to what China has experienced for the past two decades.
The singularly most important rule is that all this additional funding must be applied to research and investments aimed at advancing economic growth and sustaining scientific and technological dominance. None of this new funding should ever be applied to meet current budget requirements or to fund transfer payments. Also, as almost all of these funds will need to be borrowed in a very short time period—taking advantage of low current interest rates—there is the risk that much if it could be wasted if the spending takes place too quickly. This was the case with 2009’s nearly $800 billion stimulus bill, in which the Obama Administration discovered there were very few “shovel ready” projects, but there was an insatiable demand for easy cash. To ensure new spending is not wasted, the funds should be parked at the Treasury Department or a newly created development bank and dispensed as projects and initiatives are vetted and approved. To make sure whatever bureaucracy is established to oversee this project moves with dispatch, Congress should give it a drop-dead date and deny it any additional funding after the first tranches are delivered.
Adding the military and other national security endeavors to the overall spending plan might strike some as an action unlikely to enhance future economic growth, but there are two major reasons for including such spending in this proposal. The first, is that the U.S. economy has, for decades, been the beneficiary of technologies that were first researched and built for military use, including jet engines, nuclear technology, and the Internet. There is no reason to expect such trickle-down windfalls will cease.
Second, the military ensures the security of the not only the United States, but also the liberal global order in which global trade flourishes. Without it, everything else we accomplish will be for naught. The U.S military may seem like a cost center, but one must consider how much more dangerous the world would be if there was not a policeman—one that values the current world order—on the global beat. Unfortunately, from a national security perspective, it is increasingly clear that our current military force may not be ready to confront the challenges China and other non-liberal powers increasingly present.
Sadly, the growing realization that we are heavily invested in a force vulnerable to the type of weapons our enemies are avidly pursuing has not jolted policymakers into making the radical force structure and acquisition changes required to win the next war. Thus, it is probably time to admit that the entrenched interests are not going to be overcome in the near-term. But, what if the Services, for the next five years, received a several hundred billion dollars above current budget plans, all of which were earmarked for researching and purchasing the weapons needed to defeat peer adversaries? There is no entrenched constituency that is against extra spending, particularly if the military gets another large sum of funding to recapitalize the current force and complete already planned purchases.
A year ago, such a recommendation would have been an impossible fantasy, or, at a minimum, a recklessly dangerous proposition. But that was a year ago. No one then foresaw interest rates hovering just above zero, or contemplated a Federal Reserve committed to buying any debt not sold in the marketplace. In just the past few weeks, for instance, the Federal Reserve has added over $2 trillion to its balance sheet and shows no sign of slowing down. The Fed now has nearly $6 trillion on its balance sheet, up from under a billion dollars in 2008. Taking on another $6 trillion is not an ideal situation, but given the state of the markets, it appears manageable.
One of the great risks in taking on such a tremendous debt load is that it will all have to be rolled over in ten years, when it is possible that interest rates will be much higher. Great Britain, faced with a similar problem when it needed to finance its wars against France and again in the First World War, issued Consols that never matured. Hence, they were never forced to pay off the principle or roll over the debt at higher rates than originally agreed. In fact, Great Britain did not pay off the last of its Consols until 2015, when the payment was little more than a blip in the hugely expanded economy. There is nothing stopping the United States from issuing similar debt, free of interest rate risk, and only repaying the principle out of the taxes of a much larger economy in the distant future.
So far, the markets are applauding the Fed’s moves, as they are additional government fiscal spending. But markets are fickle and our goldilocks moment, with interest rates near zero and almost no inflation, is not likely to last. Consider also that the government has already sold more than $22 trillion in debt without any of it promising future economic growth. How much more favourably will the markets view new debt that promises to grow the economy—and, hence, the tax base—while also securing the global order that has raised the living standards of so many of the world’s billions? The window in which to enact such far-reaching policies is fleeting. But it is open right now, and the opportunity needs to be grasped.
Doing so is not without risk but consider the alternative. The United States ends the COVID crisis with mountains of debt and a stagnating economy. This situation will be made worse by a Congress unwilling to rein in entitlements before a financial collapse forces its hand. In this scenario, which is the direction we are currently headed, the United States ends up in a prolonged recession, with a broken financial system, and an expensive but second-rate military force.
In place of that dismal scenario we can take advantage of historically low interest rates to borrow the four or five trillion dollars needed to spur American economic growth forward for decades and rebuild our military into a truly effective force. Moreover, as an additional economic benefit, the economy and tax base will grow, putting the government in a better position to secure entitlement programs for future generations.
If this century is to be a second “American century” we must be willing to borrow money right now and use it to bet big on the future.