US National Debt: Running on Empty

By Chris Monday

Some $7 to $9 trillion in debt: these are the 10-year projections from the Congressional Budget Office and the Obama administration for the U.S. government.

Concord Plausible Baseline has calculated grimmer, yet more realistic figures by presuming that many of Obama's expensive proposals will in fact be ratified. Factoring in the cost of these programs, they reckon, sends the 10-year forecast to over $14 trillion. These amounts are unsustainable.

The dilemma is not the size of the national debt, but the bleak prospects for future U.S. economic growth.

Through wishful thinking, economist Paul Krugman contends that if the U.S. were going to experience sustained high growth (at least 2.5 percent real GDP growth per year), then, as in the 1950s or 1990s, America could feasibly finance its debt. But for several reasons, this projection of abundant growth is excessively sanguine.

Most serious experts, exploiting vast troves of data, believe that the recovery will be weak. Namely, Ken Rogoff and Oliver Blanchard exploit pertinent examples of past recessions to demonstrate that post-recession growth is habitually tepid. Rogoff is even contemplating a decade-long stagnation. For the U.S. economy, even this prognosis is too optimistic.

If American debt were planting the seeds for future growth, then government overspending would not be so troublesome. Too often, economists consider government expenditure to be a mere variable, ``G,'' which can be increased and decreased at a whim.

Economics spends far less time examining exactly who is receiving money from whom. But the banal reality is that increasing ``G'' means taking cash from the most productive industries and giving it to the least.

In theory ``actual aggregate output'' may be moved closer to the ``potential output curve.'' In reality, resources are taken from Apple and Microsoft ― through taxes, higher interest rates and ineffective allocations ― and given to Chrysler and ING.

Indeed we have already witnessed how the latest ``stimulus'' package which was supposed to rewire the American economic machine has been spent on mundane or useless projects. In my home state of California, in place of Tomorrowland-style Monorails, we are erecting army latrines.

(The Los Angeles Times last month provided an inglorious list of realized spending projects, which included minor repair for local roads around Anaheim, a.k.a. Disneyland, but no Monorails).

In the 1930s and '40s, ``G'' entailed the creation of spectacular dams, energy plants and mighty byways. In truth, this ``got the men back to work,'' beneficially employing low-skilled workers. These days, however, ``constructors'' are not mere ``Grapes of Wrath'' laborers, but highly trained plumbers and electricians.

Is employing the expertise of these workers for digging army latrines really expanding the horizons of future productivity? A growing part of ``G'' accrues to ``Homeland Security.'' This sprawling agency, through absurd decision-making, routinely denies skilled foreign workers U.S. visas, a horrible misallocation of labor that has even further retarded America's lagging technology.

(In the meantime, cash-strapped states are slashing budgets for basic education spending.) Another slice of ``G'' went to the ``Cash for Clunkers'' car sale which mainly stimulated Japan and Korea. At a more fundamental level, ``G'' is borrowing from an ever-shrinking young population to ``invest'' in a drastically aging one.

As demonstrated by Public Choice theorists, ``G'' is not some switch which can be turned on and off at will. Rather, ineffective government spending quickly becomes impossible to shut down.

As Mancur Olson proved in his work on collective action, ``G'' inevitably spawns powerful and harmful lobbies. We have already beheld the overreach of these special interests in the health care ``reforms'' and the reckless attempts of unions to levy tariffs on Chinese imports.

New quantitative evidence proves that the effectiveness of government spending (the multiplier) is substantial only when economic agents reasonably expect future government spending to decrease sometime in the near-term, thus mitigating the government's need to raise taxes: only then will consumers readily spend their government handouts. But does anyone believe that U.S. government spending will be reduced in our lifetimes?

``G'' cannot be controlled as a variable in an equation. Notoriously, military spending is wildly unpredictable; many empires, especially ``benevolent empires,'' have fallen by assuming that their military spending is ``extraordinary'' and time-bound.

Unlike Aesop's boar who claimed ``if you want peace prepare for war,'' empires quickly run into trouble when they are not actually prepared to back up their threats with force. The military budget forever eludes the grand plans of Keynesianism. Currently, the entrenched campaigns of Afghanistan and Iraq have no clear terminal point and will demand ever more financial commitment.

The countdown for an Israeli ― and de facto American ― strike on Iran has already commenced. Taiwan and Georgia present two more dangerous flash points: any sort of military campaign against Russia, China or both entails exponentially escalating outlays.

Quite soon armed intervention may be required against a pugilistic Venezuela, a disintegrating Cuba, or even an imploding Mexico. This list could be continued ad nauseam. The shifting paradigms of military technology ― drones, robots and a new space race ― are already exacting more and more resources. In addition, experts agree that global warming will amplify the world's propensity to seek violent solutions.

Finally, cyber war will inevitably require martial responses; as I write the botnet ``Conficker,'' furtively lodged in my computer, could pounce at any moment. Mass epidemics such as swine flu and a growing struggle for limited natural resources add more wild cards to the budget equation. Debt forecasts, of course, take none of these ``extraordinary'' expenses into account.

Finally, the geopolitical structure of debt financing is inherently unstable. FDR never borrowed from Hitler, Stalin or Hirohito, but today the U.S. is relying on nations which will certainly become future geopolitical rivals.

According to Minxin Pei, China's development has been forever skewed by a ``trapped transition.'' While China is not a fascist or Stalinist state, its history, economy, and ideology vastly separate it from the U.S. The oddness of this relationship has been pointed out by historian Niall Ferguson's notion ``Chimerica.''

Moreover, world traders enjoy ever-mounting opportunities to invest in more capital-friendly markets, than those of the United States, whose own national economy will soon be 30 percent state-run.

China is already moving away from the dollar, wisely buying IMF-backed bonds and issuing yuan-denominated bonds. Russia and Brazil have promised to follow. This means that the cost of financing the U.S. debt will rise, perhaps abruptly.

Chris Monday is a researcher at Dongseo University in Busan. He lived for eight years in Russia. He can be reached at chrismonday@gmail.com.