Happy Deficit Day!

Reasonable people can claim that the government of the richest country in human history should provide certain things to its poorer citizens. But reasonable people cannot claim those things come without a price.

Tax Freedom Day was conceived in the 1940s to help people understand how much of their money all levels of American government take in taxes by asking a simple question. If the average worker sent his entire paycheck to the government starting on January 1, how many days would he have to work before he got to keep any of his own money? The day his wages become his own is Tax Freedom Day, which is calculated every year by the Tax Foundation. Tax Freedom Day typically falls in April. This year, it fell on April 19, which means the average tax burden in the United States—federal, state, and local—is almost exactly 30 percent.

At the other end of the calendar, Deficit Day is the hypothetical day on which the federal government spends the last dollar of its tax revenues for the year. Every dollar the government spends after Deficit Day contributes to the year’s budget deficit. This year, Tax Freedom Day and Deficit Day fall at the exact opposite ends of the calendar, with Tax Freedom Day on April 19 and Deficit Day on October 19. This year’s Deficit Day was the earliest since 2013. Ignoring the four years immediately following the Great Recession, when the government was spending at a more irresponsible rate than usual, the last time Deficit Day fell this early in the year was October 15, 1992.

In the 2018 fiscal year, the federal government collected a total of $3.3 trillion from all sources, combined, and spent $4.2 trillion, or $11 billion each day. If the government received the entire $3.3 trillion on January 1, and spent it at a constant rate of $11 billion per day, the money would have run out on October 19. From October 20, through Halloween, Thanksgiving, Black Friday, the start of Christmas break, Christmas Day, and all the way to New Year’s Eve, every dollar the government spent would go on its credit card.

The Growth of Our Massive Debt

At over $450 million per hour, the debt accumulates quickly. Assuming that the government won’t ever pay off its debt—a political (and almost mathematical) certainty—American taxpayers will have to pay interest on that $450 million per hour every year for as long as the republic endures. Because the Federal Reserve has held interest rates at unprecedentedly low levels for so long, the government currently pays only 2.5 percent interest on its $21.6 trillion debt. Even that puts the government’s interest expense alone at more than half a trillion dollars per year. Were a political miracle to occur, and Congress and the president found a way to produce balanced budgets every year from now on, Americans would still have to pay more than $500 billion every single year just in interest on the debt as it exists today. For perspective, that interest expense is around three-quarters of the entire US defense budget. Each day that Deficit Day falls earlier in the calendar increases every future year’s interest payments by almost $300 million.

But that’s at the current bargain-basement interest rate of 2.5 percent. Historically, interest on the federal debt has averaged 6 percent. If interest rates were to rise just to their historical average, American taxpayers would have to pay $1.2 trillion every year just in interest. That’s as much as the government spends now on Social Security and unemployment benefits. The Social Security Board of Trustees is forecasting that Social Security will be insolvent within the next fifteen years. Now imagine not only maintaining Social Security, but doubling it. That’s what the federal budget would look like if interest rates rose to their historical average.

The Fed’s Dilemma

Here we see that the government’s massive debt, if not problem enough, has actually spawned at least two other separate and distinct problems. First, when inflation starts to pick up, the Federal Reserve will face a dilemma, because to fight inflation the Fed must raise interest rates. If the Fed holds interest rates low, inflation will ravage people’s savings and retirement nest eggs. If it tries to fight the inflation by raising interest rates, the interest on the debt will go through the roof. When, not if, we encounter the next bout of inflation, the Federal Reserve will be forced to choose between protecting people’s finances and protecting the government’s finances.

Second, the federal government has borrowed so much money that it is, apparently, running out of places to borrow more. Broadly speaking, there are four sources the federal government can tap for money: Americans, foreigners, government trust funds, and the Federal Reserve. Since the Great Recession, foreigners (individuals, companies, and governments) have been divesting themselves of US government debt. Over the same period, the Social Security trust fund has not only stopped loaning money to the government, but has started asking for its money back. Americans have loaned more to the government, but not much more. To fuel its voracious appetite for cash, the government is increasingly turning to the Federal Reserve. In 2009, the Fed held around $700 billion in government debt. Today, that number has more than quadrupled to almost $3 trillion. The Fed is just slightly behind the Social Security trust fund as the second largest creditor to the US government.

Unlike all the other creditors, when the Fed loans money to the government, the Fed increases inflationary pressures. And this brings us, by a different route, back to the Fed’s dilemma. If the Fed doesn’t continue to loan to the government, interest rates will rise because the government will have to offer ever higher interest rates to entice Americans and foreigners to lend it more money. But if the Fed lends the government what it needs, it increases the likelihood of inflation.

There’s No Such Thing As a Free Lunch

This is what results from politicians offering voters all manner of “free” things. Subsidized home loans, guaranteed student loans, government-provided retirement benefits, government-sponsored health care . . . so far, the list has been limited only by politicians’ abilities to think up new things to give away. As creative as politicians can be, though, they cannot rewrite the rules of mathematics. Reasonable people can claim that the government of the richest country in human history should provide certain things to its poorer citizens. But reasonable people cannot claim those things come without a price. There is, after all, no such thing as a free lunch, and the waiter is on his way to the table with the bill. We were happy enough to shift the burden of our irresponsibility to unspecified future generations, but they are no longer unspecified. The first of the generations that will pay for the government’s profligate borrowing has already been born.

The will to deal with this problem hinges on people’s abilities to understand numbers so gargantuan that they defy understanding at virtually every turn. So consider this: In the time it has taken you to read this, the government has added another $40 million to that bill.

The only way to address this in any meaningful way requires first that there be no such thing as Deficit Day at all. As long as we continue to run deficits, we will never address the problem of the federal debt. It’s even worse than that, of course, because even a balanced budget would see us paying the massive expense of the interest on the existing debt, which itself becomes more difficult with each passing year. But first things first. The only way even to begin to stop the bleeding is to insist, right now and forever, that only a balanced budget will do. That won’t be nearly enough, but it would be a good start.

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