Federal Debt, Detroit, and Greece

by Jacob G. Hornberger

If ever-growing federal debt is a good thing, they pray tell: Why is the Detroit city government in bankruptcy? They’ve been incurring lots of debt.
Is there really some kind of special difference between a national government and a local government? Of course not. Government is government, whether at a local, state, or national level. No government is exempt from economic and financial principles.
In fact, Detroit is also no different in principle from the Greek government. Both governments were spending more than what they were bringing in with taxes. They borrowed the difference. They kept doing that, year after year, adding new debt to an ever-growing mountain of debt. It finally got to the point where the Detroit government, like the Greek government, lacked the tax revenues to continue paying its bills and its debt payments. It was busted, just like the Greek government. That’s why it went to federal bankruptcy court, just like private people sometimes do when their personal debt has become so large as to become unmanageable.
It’s no different with the federal government. Ever-growing debt is a bad thing. It can get so large that even the federal government lacks the tax revenues to pay its bills and its debt payments.
In fact, that’s what the debt ceiling is all about. The ceiling prohibits the federal government from incurring any debt in excess of the ceiling. If the ceiling is reached, that means no more new debt. At that point, federal spending must be limited to what is being collected with taxes.
Why is there a debt ceiling? Why place a limit on the total amount of debt that the federal government is permitted to incur?
The reason is because too much government debt is a bad thing. The ceiling is an acknowledgement of that principle. If ever-growing debt was a good thing, there wouldn’t be a ceiling. The sky would be the limit. And that would lead to bankruptcy, as Detroit and Greece have learned.
The problem, of course, is that each time the debt ceiling is reached, Congress votes to lift it, thereby enabling the federal government to add new debt to its already existing mountain of debt. Given that the debt ceiling is lifted each time it’s reached, for all practical purposes there is no debt ceiling, which means that each time new debt is added onto the currently existing debt, the day of reckoning grows nearer.
There is another factor to consider here—unfunded welfare obligations, especially Social Security and Medicare. Since these are welfare programs, there is no legally binding contract for payment, as there is with government bonds. Nonetheless, we all know what would happen if the federal government tried to suspend Social Security and Medicare if it got into a financial pinch. Seniors would go ballistic and demand that the federal government continue funding these programs regardless of the financial and economic consequences, and public officials would not be able to say no. So, we have to add the ever-growing costs of the welfare state to that mountain of already existing debt.
And let’s not forget the warfare state. There is no possibility that the Pentagon, the CIA, and the NSA will agree to anything but minor reductions in the rate of increase for warfare-state spending. Thus, warfare-state expenditures, like welfare-state expenditures, just keep going up.
Of course, statists say that the federal government is different from Detroit and Greece because it has the Federal Reserve. They say the Fed can simply print the money to pay off the debt, much as it has done ever since its inception in 1913. But that only means a debasement in the value of people’s money—i.e., inflation. We all know the chaos the financial, economic, and moral chaos that monetary debauchery brings a society.
Moreover, doesn’t inflation constitute a default or a bankruptcy? When the government is paying off its debt in cheapened, debased dollars that are worth less than the dollars it borrowed, how is that different from simply declaring that creditors are only going to be paid a certain percentage of what is owed to them rather than the entire amount?
Of course, from a libertarian standpoint simply slashing federal spending isn’t an ideal solution because it leaves the government engaged in too many illegitimate functions, such as the drug war, invasions and occupations, welfare, and so forth. Ideally, Americans would be asking: What is the role of government in a free society? And then they’d simply abolish or repeal all that is illegitimate. By dismantling, not reforming, all welfare-state functions, regulatory functions (e.g, the drug war), and warfare-state functions, federal spending would obviously be slashed, even to the point that Americans could live without a federal income tax and IRS, as our American ancestors did for some 150 years.