Wednesday, April 6, 2011

Why the Debt Matters

Since the national debt is in the national news, now is a good time to review it.  The national debt is over $14 trillion and growing.  It is slightly less than the GDP.  The debt-to-GDP ratio will be over 100% soon enough.  So what are the consequences of this?

We hear so often that we are putting a burden on our children and grandchildren because they will have to pay this back.  There is an element of truth to this, but let's examine it closer.  Our children and grandchildren technically don't have to pay back anything.  They can stiff all of the bondholders.  If there are enough people who understand the issue and take a stand, then it will be the bondholders that will suffer.  That will include foreign governments like China and Japan, foreign investors, American investors, and I suppose the Federal Reserve.

The national debt has real consequences and they are happening right now.  When the government spends money, it is misallocating resources.  It is draining resources from the free market economy.  There is less capital investment on the so-called private side.  It is wasting resources.  This diminishes our standard of living.  By not completely reforming our system - that is, by not withdrawing our consent to be governed - Americans are hurting themselves by allowing this debt to continue to grow.  It really comes down to Bastiat's philosophy of what makes a good economist.  We can clearly see the so-called benefits that the government hands out.  What we don't see is all of the products and services that would have been invented, improved, and more affordable.

The reason that the national debt is hurting our children, grandchildren, and future generations isn't because they will have to pay it back.  The reason is because of the lack of capital investment that is taking place because of the national debt and out-of-control government spending.  The government is misallocating resources on a massive scale.  It means that there will be less to consume in the future.  It means that there won't be as much growth in technology and production.  With less capital investment, the standard of living will not be as high as it should be for future generations.

The national debt will probably never be paid off.  It certainly won't be paid off in dollars that are worth as much as today.  The national debt has very real consequences though in making our standard of living far lower than what it should be.

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