As of this writing, the US government debt (the total amount the United States government owes, excluding some obligations) is about twenty-five trillion dollars, and rising rapidly. Twenty-five trillion dollars is 25 with 12 zeroes after it. With that many zeroes, it starts getting hard to wrap your head around just how much money we’re talking about it. So, consider it this way: As of this writing there are about 330 million people in the US. Simple division shows that for every person in the US – every man, woman, and child, from the youngest to the oldest – the US government owes about $75,750. So, if you’re part of a family of four, the government owes over $300,000 on your family’s behalf. In many parts of the country, you could buy a half-decent house for that amount of money. If, instead, you decided to use that money for a down payment and took out a mortgage for the rest, at least when you paid off that mortgage you would still have the house. When we pay off the US government debt, or when our children do, or when their children do, there will be almost nothing tangible to show for it. How did we get into such a sorry state of affairs?
To make a long story short, it pretty much starts with a British economist named John Maynard Keynes. Although Keynes is a man many people love to hate, virtually all would agree that he was among the most influential economists of the 20th century, if not the most. One of Keynes’ core contributions was the idea that during economic downturns, when the businesses participating in the economy are unable to adequately sustain the economy for whatever reason, the government should step in to act as both an employer and a consumer and should be willing to take on debt (deficit spend) to do it. This, of course, flies squarely in the face of a free market economy, and if the world hadn’t been in the middle of the Great Depression, the idea may well have fallen on deaf ears. But the world was in the middle of the Great Depression, and Keynes found willing listeners, including US President Franklin D. Roosevelt. Roosevelt and his government adopted several of Keynes’ ideas, and the country has not been the same since.
The large problem is that the government has almost completely missed or forgotten the very important “during economic downturns” part of Keynes’ message and has let the money flow ever since the floodgates were first opened – during both bad times and good – accruing an ever-larger debt almost the whole time. This has been particularly true since Ronald Reagan, so for about the last 40 years. For a brief time before World War II and then up until Reagan, the debt, as a fraction of the Gross Domestic Product (GDP) – basically what the whole country makes in a year – had periods, some long, of decline. So, in that sense (but not in actual dollars), the debt declined. Since Reagan, except for a brief period during the personal computer boom, the debt has been steadily rising both in dollars and as a fraction of GDP.
It should be noted that this continuous need for economic life support is a not a partisan issue. Both parties are at fault. (The purpose for the increased debt is often different, ranging from attempts to support the needy on one end to buying more and bigger weapons on the other. But that’s beside the current point.) It is simply an irrefutable indication of the point that we’re making here, that the US capitalistic system is very broken – and it is so regardless of how hard the politicians taking on the additional debt try to convince us otherwise.
Among the many reasons to increase the national debt that have presented themselves to politicians over the years – reasons politicians seem willing, even eager, to accept – a significant one has been bailouts. There has been a long string of bailouts starting with the Panic of 1791. Many of us are painfully aware of several rounds of recent bailouts, including those given in response to the Great Depression, the Savings and Loan Crisis in the late 1980s and early 1990s, and the 2008 Financial Crisis. As these have occurred, the concept of “too big to fail” has arisen. At least some of us thought that this meant a company was simply too big, with too many resources, to possibly succumb to downward pressures in the economy. We discovered in 2008 just how wrong that quaint little understanding was, and “too big to fail” morphed into “too big for the government to let fail” (or maybe was that way all along). In any case, what it means is that a company has grown so big that letting it fail would have catastrophic consequences in terms of employment, economic stability, and possibly for the economy itself.
Hopefully it’s clear that this situation completely undermines any possibility of a healthy free market system, a mainstay of which is that unhealthy companies can be left to fail as healthier ones come in and take their places. If a company can’t fail because the US taxpayer is going to backstop it, regardless of how terribly it’s run or what outlandishly stupid risks it takes, how can a competitor, who may be inherently better, ever have a chance of competing and taking its place? When a company establishes itself as “too big to let fail,” it has firmly established its impenetrable concentration of power, and all other bets are off. The bottom line is, from the perspective of a healthy economic system, if a company is too big to let fail, then it is too big. It’s that simple.
A final type of life support, in addition to the need for continually rising government debt and for bailouts, is near-zero interest rates. Until the 2008 financial crisis, adjusting interest rates was pretty much the only tool the Federal Reserve (the Fed) used to control the money supply. Since 2008, it has started using other tools, but adjusting interest rates is still an important one. If the economy starts to heat up too much, the Fed raises interest rates, thereby making the use of money more costly, therefore decreasing the demand for it – less demand means less availability to invest and grow business with. If the economy cools off too much, the Fed does the opposite, lowering interest rates to increase the availability of money to invest and grow business. In other words, in this case, it tries to stimulate the economy.
After the 2008 financial crisis and until recently (when the Fed began gradually increasing interest rates more toward normalcy – and then the coronavirus hit), the Fed had kept its federal funds rate at very nearly zero. The federal funds rate is the interest rate that banks charge other banks for overnight loans and is the rate that most other variable interest rates track. Although having such a low interest rate has some benefits (including low mortgage rates, for example), the downsides are significant enough that such a low rate is unhealthy and would only be maintained in a continually distressed economy. Briefly, the main downsides are that the Fed loses its ability to lower interest rates in the face of too cool an economy, as just described (although some countries have tried ill-advised negative interest rates); it mostly removes an important source of income – interest income – that many people depend on, including many retirees; and, by removing interest income, it makes the ever-risky equities market (the stock market) almost the only game in town, artificially inflating that market and making it even riskier in the process.
The overall point is that the need for persistently low interest rates is yet another indication that our economic system is in trouble.
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