"Full Faith and Credit" and Related Delusions of Grandeur
Approximately half of all Americans receive government subsidies of one kind or another.
This is seen by some conservatives as the demise of the American Republic, the death-knell of resistance to the welfare state. It is nothing of the sort. It is strong evidence of the opposite: the high-water mark of the American welfare state. Why is this the case? Because American voters long ago drew a line in the sand on how much taxation they will tolerate. The only way that the federal government can maintain its existing level of spending is by borrowing. When the lenders finally close their wallets to the world's most spendthrift dowager aunt -- the government of the United States -- the experiment in massive wealth through government wealth redistribution will end in a Great Default.
THE FULL FAITH AND CREDIT
The dowager aunt has a favorite phrase: "the full faith and credit of the United States." By this, it means the United States government's ability to extract wealth by force from residents of the United States. Why do millions of people believe in this phrase, and open their wallets to this clearly out-of-control debtor, whose defenders brag that she will never pay off her debts, nor will she ever be called upon to do so -- Keynesians, monetarists, and supply-siders?
Other than Austrian School economists, what academic school of opinion has called for a return to 1836 -- the first and last year in which the United States government owed no one anything?
The United States government cannot extract much additional wealth from the residents of the United States. Only if they grow richer can Washington grow more profligate. Here is the great irony: this has always been the case. The assumption that Washington can extract wealth at will is one of the many delusions of academic economists and members of Congress. This assumption has been long been refuted by easily available historical evidence. The politics of the federal debt points to a permanent ceiling on the voters' acceptance of additional tax collecting. The voters are unconcerned about how much Washington spends. They simply refuse to pay for it.
By now it should be clear that Americans will not tolerate federal taxes any higher than approximately 20% of GDP. This has been true since the end of World War II. Even with the highest tax level, in 1944, the rate did not go above 21%.
Let me put it another way: 80% of GDP is inaccessible to the federal government through direct taxation. This is as close to an unbreakable political law as there is.
State and local taxation can extract no more than 13% of the wealth of Americans.
Conclusion: Americans are going to retain two-thirds of GDP as their income. Again, this has been going on for so long, that we might as well regard it as a law of politics.
Now let us look at the spending categories of the federal government. They are almost all non-discretionary. In other words, they are locked in.
The other expenditures are pretty much fixed as a percentage of the federal budget. There can be jockeying around, but they do not change much in the short run.
About 17% of the federal deficit is subject to political machinations: discretionary spending. That is not a large percentage. The politicians spend all of their time screaming and yelling and trying to round up votes in order to pass new programs that will have to be funded out of the 17%.
The era of the big federal programs is over.
The only way that the federal government can significantly increase its spending is through additional debt. This is what it is doing. The public does not fight this. The public knows it will never have to pay off the debt, so why should voters bother to fight this? The public, half of whom are on the dole, want to get their hands on the money now, because it is available now. It may not be available tomorrow. "Take it when you can get it" is the attitude of the public.
FEDERAL DEBT IS ADDICTIVE
The problem, of course, is that federal debt is addictive. The government cannot stop running gigantic deficits. Politically, George W. Bush set the recent pattern, although Ronald Reagan set it earlier. It does not matter who set it. The reality is this: the federal government is addicted to massive budget deficits. It is politically impossible to bring this to a halt. We have already tested this. We are way beyond the point of no return for bringing the federal deficit back to balance, let alone surplus, which would be necessary to pay off the debt.
Virtually all economists and virtually all politicians agree on this point: there will never be an orderly repayment of the federal debt. There is no attempt, and no ideology behind an attempt, to reduce the federal debt to zero through the orderly retirement of the debt. In other words, from an ideological standpoint, and from a moral standpoint, we lost this war a long time ago. We basically lost it in 1837. We have not had a debt-free federal government since 1836.
If we could not win this war under Martin Van Buren, who shared with Grover Cleveland the title of "limited government President," it will not be won in our day.
And yet it will be won. There is no ideology of an orderly reduction of the federal debt. This guarantees a disorderly reduction.
THE GREAT DEFAULT
The fact that half the American population is on the dole is simply a guarantee that there is going to be a Great Default. The politicians cannot roll this back. It is politically unstoppable. The off-budget liabilities, meaning the unfunded liabilities, cannot possibly be met. They are in the range of $200 trillion. Therefore, there is going to be a default. But this will not be not be the end of the American Republic; this will be its restoration.
National bankruptcy at the federal level is not the end of the American Republic. I do not see why people have trouble understanding this. It will be the basis of the reestablishment of decentralization, and therefore a return to something resembling the world before the New Deal. If we can persuade the public to know the Federal Reserve Act, it will return us to the status of the republic prior to 1913. That is a day of deliverance.
The naive victims who become dependent upon the federal government's handouts are going to suffer enormously. They are going to face a day of reckoning. Fiscal reality is going to topple on them like a collapsing New York skyscraper that was not hit by a 747 airliner. But this will not be the end of the American Republic. This will be an announcement on the bank account of the American Empire: "insufficient funds." For those on the dole, it will be "Sorry, Charlie."
The federal government cannot legislate any major new spending plan now. It does not have any spare change, other than what it can borrow. When interest rates finally reverse and start going back up, any extra money that the government has, which will come from borrowing from the Federal Reserve, will have to be used to pay interest to holders of federal debt, other than the Federal Reserve. If there is any extra money in the federal till, it is not going to go to new federal programs. It is going to go to people who loaned the government money. The only around this is outright default. But then that will end the great deception. That will end widespread confidence in the ludicrously implausible phrase, "the full faith and credit of the United States government."
CONCLUSION
We are now in the final phase of the Keynesian delusion. We are spending ourselves into bankruptcy, not prosperity. We are borrowing in order to pay off the debt.
Nationally, the federal government has signed a backward-walking mortgage. A backward-walking mortgage is where the homeowner does not pay enough monthly to reduce the mortgage. He does not meet principal and interest. What he fails to pay off is added monthly to the principal. Similarly, the government is not paying off the debt on its unfunded liabilities. Instead, it is adding to these liabilities by failing to pay down the amount owed: principal. At some point, anyone who has signed a backward-walking mortgage is foreclosed on. He digs himself deep into a hole from which there is no escape. But since creditors cannot foreclose on the federal government, they are going to be left with a pile of IOU's: "full faith and credit, suckers!"
No group has believed in "full faith and credit" with greater commitment and adulation than academic economists. They have staked their reputations and their influence on this phrase. They have individually and collectively bet the farm on the permanent nature of the West's backward-walking mortgages, nation by nation. They have believed in a world without foreclosure. So have the politicians. So have the voters. They have also adopted in addition to "full faith and credit" its inevitable political corollary: "kick the can."
Keynes dismissed concerns with the inevitable statistical outcome of such a mortgage: default. He quipped, "in the long run, we are all dead." In one terminally naïve epitaph, he defended "kick the can" by invoking "kick the bucket."
Keynes was wrong. In the long run, we are not all dead. But in the long run, Keynesianism will be. "Insufficient funds."