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Your Guide to the National Debt (Part 4)

“Never complain of that of which it is at all times in your power to rid yourself.” – Adam Smith quoting Greek Stoic philosopher Epictetus, chapter I, section II, and part VII of The Theory of Moral Sentiments, originally published in 1759.

The national debt is a tremendous burden on our country, ourselves, and our posterity. In part one of this series, I provided a technical understanding of the debt, and in part two, I explained that we are much more likely to debase the currency (with all of the ruinous consequences such a drastic action entails) than to default on the debt. In part three, I claimed that the problem of the national debt is not insurmountable as long as people continue to lend to us, and I provided a few good reasons to believe that we have enough time to turn our dire fiscal situation around by addressing the debt.

I begin this final part with a quotation from Adam Smith (and by extension, Epictetus) for one important reason: It is within our power to rid ourselves of the problem of the national debt. We are fortunate to live in a free society in which we can actively engage in the political process. It's not an easy task, and we admittedly suffered some painful defeats last November, but we still have the ability to elect fiscally conservative candidates who will stand firm against granting Washington D.C. more blank checks.

We can still avert a debt crisis, but doing so will require difficult choices and a commitment to limited, constitutional government. Put simply, we must do two things in order to halt, and then reverse, the growth of our national debt: cut spending and encourage growth.

Cutting Federal Spending

This is the most intuitive solution to the national debt problem. If the government stops spending beyond its means, then it won't continue to rack up debt. However, we can do better than that. The Congressional Budget Office estimates that the federal government will bring in an impressive $2.913 trillion in revenue in fiscal year 2013. If we cut spending below that level, then we will generate a surplus and can begin to pay off the debt.

The logic of lowering expenditures in order to avert a national debt crisis is simple and straightforward, but deciding what to cut can be more difficult. In order to make informed and prudent decisions about spending cuts, we must first have a basic grasp of federal spending.

Federal spending is typically separated into two distinct categories: discretionary and mandatory spending. In fiscal year 2013, the CBO estimates federal outlays of $1.231 trillion in discretionary spending and $2.105 trillion in mandatory spending. What's the difference between these two categories?

Discretionary Spending

Even though discretionary spending constitutes barely one third of the estimated $3.554 trillion in federal spending this fiscal year, it remains the easiest place to cut. Why?

Unlike mandatory spending, discretionary spending does not occur automatically. Every year, Congress is supposed to pass twelve categorized appropriations bills to authorize new discretionary spending. If they fail to do so, then they must pass a "continuing resolution" to maintain temporary spending until they can pass an appropriations bill. On this subject, it's worth noting that the Democrat-led Senate has failed to pass a budget since April 29th, 2009.

What is included in discretionary spending? Well, for one thing, military expenditures. Of the estimated $1.231 trillion in 2013 discretionary spending, a whopping $644 billion goes to national defense. In other words, more than half of discretionary spending is defense spending.

The rest of our discretionary spending goes to the Departments of Agriculture, Commerce, Education, Energy, Interior, Health and Human Services, Homeland Security, Housing and Urban Development, Justice, Labor, State, Transportation, Treasury, and Veteran's Affairs. Major federal agencies are also included in discretionary spending, such as the Environmental Protection Agency, Food and Drug Administration, FBI, and NASA.

While there is plenty to cut in terms of discretionary spending, such an approach to balancing the budget is inherently limited. After all, more than half of discretionary spending is defense spending, and national defense is a fundamental responsibility of government, so there is only so much that we can cut from there.

This year, the federal deficit is expected to hit $641 billion. Even if we cut discretionary spending in half, the budget still wouldn't be balanced, and we would still be adding to the national debt. It's clear that only a portion of the requisite spending cuts can come from discretionary spending.

Mandatory Spending

Mandatory spending differs from discretionary spending in that it occurs automatically, without a Congressional appropriations bill or a continuing resolution. Entitlement programs such as Social Security, Medicare, and Medicaid constitute the bulk of mandatory spending, by far.

Right now, mandatory spending accounts for a little more than 59% of total federal spending. However, the CBO projects that its share of federal expenditure will continue to grow and that it will reach a staggering 64.5% share in just ten years. The federal government is on a path to spend $3.555 trillion on mandatory spending compared to $1.384 trillion on discretionary spending by 2022.

Where do we need to cut?

Mathematically, it is obvious that our long-term spending problem is centered around mandatory spending, not discretionary spending (although we need to cut that, as well). If we're going to reduce spending and to get the national debt under control, we must reform the entitlement programs at the heart of mandatory spending.

Finally, one last note on spending cuts. Remember the economic argument I put forward in part one of this series: Massive government borrowing to finance deficit spending raises interest rates in the "loanable funds" market, which "crowds out" private investment. Investment spending is the catalyst for rising productivity, sustainable long-term economic growth, and therefore improvements in our standard of living.

Cutting spending will reduce government borrowing, thereby freeing up more loanable funds for investment in the private sector. This will help to spur economic growth, which leads neatly into my second proposed means to fix our debt problem:

Encouraging Economic Growth

Just about everyone agrees that economic growth is the best method to avert a debt crisis. As the economy grows, people make more money and the federal government receives more tax revenue. Ideally, additional tax revenue should always come from economic growth, not tax hikes. This new revenue will shrink the federal deficit and could even result in a surplus. Therefore, it is not surprising to hear so many people clamor for us to "grow our way out of the deficit."

How do we achieve growth? Progressives want to use massive federal "stimulus" spending to boost aggregate demand in the economy. Not only is this Keynesian approach to creating growth painfully flawed on a theoretical and historical basis (but that's a subject for another piece), it is also completely contrary to our goal of averting a debt crisis. The government spending trillions and trillions of dollars trying to manipulate and "kick-start" the economy will only cause our debt to balloon faster.

However, there is a great deal that the government can do to spur economic growth without resorting to bailouts, stimulus packages, subsidies, or other forms of intervention. Fundamental tax reform, for example, is an obvious first step toward encouraging growth. Repealing corporate welfare subsidies will create a more level playing field between businesses of all sizes and give entrepreneurs a greater chance to succeed. Eliminating massive government interventions into the economy, such as ObamaCare, will help allow markets to function properly. Slashing harmful regulations that prevent entrepreneurs from starting businesses will go a long way toward restoring our traditionally innovative and enterprising American spirit.

Frankly, these suggestions are only the start of what we can do to create a true recovery and substantial growth in the American economy.

An Avertable Crisis

In some ways, the debt crisis has already struck. Our national debt is through the roof, our nation's credit rating has worsened, and our representatives in government appear unwilling or unable to act. However, we have good, solid reasons for optimism. The solution itself is clear and almost within reach, after all. Through a combination of spending cuts and economic growth, we can stem the tide of debt.

It is time for us to demonstrate a national willingness to propose, enact, and stay faithful to a serious long-term debt reduction plan, and it is up to us to step forward and to rally the political will necessary to make it happen. Then, and only then, will the debt crisis be behind us.

back to part one


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