We know intuitively that an out-of-control national debt will hurt us in the long run, but do we know why?
The CATO Institute recently broke down the five biggest reasons to be concerned about the national debt:
- Spending Induced. Most federal spending is for subsidy and benefit programs, not for activities that increase productivity. Subsidy and benefit programs distort the economy and generally reduce overall output and incomes. Those distortions occur whether spending is financed by debt or current taxes. But the availability of debt financing induces policymakers to increase overall spending, which at the margin goes toward lower-valued activities.
- Tax Damage Compounded. When taxes are extracted to pay for government spending, it induces people to change their working and investing activities, which distorts the economy and reduces growth. When spending is financed by borrowing, the tax damage is pushed to the future and compounded with interest costs.
- Investment Reduced. Government borrowing may “crowd out” private investment, and thus reduce future output and incomes. Economist James Buchanan said, “By financing current public outlay by debt, we are, in effect, chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” The crowd out will be reduced if private saving rises to offset government deficits. But the CBO says, “the rise in private saving is generally a good deal smaller than the increase in federal borrowing.” Government debt may also deter investment through expectations—businesses will hesitate to invest if rising debt creates fears of tax increases down the road.
- Borrowing from Abroad. A decline in private investment due to government borrowing may be avoided if capital is attracted from abroad. Indeed, huge federal borrowing has been facilitated by global capital markets, and today more than 40 percent of federal debt is held by foreigners. Borrowing from abroad may prevent a fall in domestic investment but does not prevent the shifting of costs to future taxpayers. As government debt rises, more of our future earnings will be taxed to pay interest and principal on the government’s debt to foreigners.
- Macroeconomic Instability. CBO warns that a “large and continuously growing federal debt would … increase the likelihood of a fiscal crisis in the United States.” Experience shows that high levels of government debt tend to reduce growth and increase financial fragility. In their study of financial crises through history, Carmen Reinhart and Ken Rogoff concluded, “again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.” Government debt, they found, “is certainly the most problematic, for it can accumulate massively and for long periods without being put in check by markets.”
If we want to protect our children and grandchildren from any of these dangers, we'll need to take drastic action to force Congress to make the tough financial decisions.
That's why the Founders included the Convention of States option in the Constitution. Article V allows the states to call a convention for proposing constitutional amendments. These amendments can force Congress to control the national debt, balance the budget, and cut spending.
Sign the Convention of States Petition below to force Congress to stop spending irresponsibly!