The headline numbers from the Congressional Budget Office’s newest debt and deficit estimates: Publicly held debt will be at 100 percent of GDP in 25 years, driven by spending on health care and Social Security that will double over the next quarter century. In spite of the fact that taxes as a share of GDP will be higher than their historical average, the debt will continue to grow — and interest payments on that debt will more than double from their current levels.
That’s the best-case scenario.
The more realistic outcome is that each of those measures of debt and spending as a share of GDP will in fact be considerably worse, because our GDP will grow more slowly. We have entered the realm of the vicious circle: Debt and deficits will slow down economic growth, and slower economic growth will make our debt and deficits worse.
Our growing debt slows down economic growth by sucking up capital that could have been used for productive investments. Today’s investors pay higher taxes to fund yesterday’s spending — at the expense of tomorrow’s workers, taxpayers, and entrepreneurs. As the CBO puts it:
The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. . . . Increased borrowing by the federal government would eventually reduce private investment in productive capital, because the portion of total savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income in the long run than would otherwise be the case.
The cost of government spending isn’t just the total in the column marked “total disbursements” on the great Washington cash-flow statement. It is that plus the economic growth forgone as a result of that spending.
The CBO, to its credit, has attempted to get a handle on how heavily that growing debt will weigh upon economic activity in the next 25 years, and the answer is worrisome: Taking into account the economic effect of those deficits, instead of our debt hitting 100 percent of GDP in 25 years, CBO estimates that it will hit something closer to 200 percent of GDP — or 250 percent under the least sunny scenario. (There are even less-sunny scenarios, but the CBO does not believe that it can model them reliably.) Note here that these estimates also assume that the sequester and other deficit-control measures remain in place, which would consequently mean that spending on everything outside of Medicare, Medicaid, Social Security, and debt service — everything else the government does — will be reduced far below current levels, in fact reverting to pre–World War II levels as a share of GDP. That is unlikely to be the case. Assume, then, that those spending and debt numbers look worse to the extent that the ladies and gentlemen in Washington lack the brass to resist demands for more domestic spending — and more military spending, too. The loudest and most insistent critics of the sequester have been defense contractors and the cluster of politicians in Maryland and Northern Virginia most sensitive to their complaints.
This is not just a balance-sheet problem; it is a problem of values and a problem of philosophy. On the one hand, we have the traditional conservative view that the role of government is to protect property and enforce contracts. The traditional antagonist to this view has been socialism, and in a sense it still is, though the old-fashioned Marxist analysis has been supplanted by what we might call the “Hey, the government invented the Internet!” school of economic analysis.
The Left has of late been atwitter about a new and energetic expression of that banal idea in a book called “The Entrepreneurial State,” written by Professor Mariana Mazzucato, a scholar in the field of technology policy at the University of Sussex. Professor Mazzucato’s argument is not really a matter of technology policy at all but a moral argument, and a poor one. Because government has made economic interventions in various ways in the past (e.g., through military research that has supported advances in things like smart phones and pharmaceuticals), it is immoral for businesses to look to minimize their tax payments or otherwise resist political control of their capital, and it is immoral — not merely mistaken, but immoral — to look to entrepreneurs, venture capitalists, and the like as the main drivers of economic innovation. Professor Mazzacuto writes:
In this era of obsession with reducing public debt — and the size of the state more generally — it is vital to dispel the myth that the public sector will be less innovative than the private sector. Otherwise, the state’s ability to continue to play its enterprising role will be weakened. Stories about how progress is led by entrepreneurs and venture capitalists have aided lobbyists for the U.S. venture capital industry in negotiating lower capital gains and corporate income taxes — hurting the ability of the state to refill its innovation fund.
In support of her claim that the state is an effective entrepreneur, Professor Mazzucato cites the government’s role in developing what we now know as the Internet, its $500,000 investment in Apple through a small-business program, the CIA’s financial sponsorship of GPS technology, etc. This is a classic example of single-entry bookkeeping: Every government intervention that has some connection, however tenuous, with a profitable product in current use is listed on the credit side of the entrepreneur-state’s ledger. Nothing is listed on the debit side. How many Solyndras do we have for every $500,000 handout to Apple? How many Fannie Maes and housing bubbles for every GPS or nascent Internet? Do not look for Professor Mazzucato and those of her kidney to answer that question, or even to acknowledge it in any serious way. But past successes in state entrepreneurship can justify future adventures only to the extent that past efforts have been on balance successful. That is a difficult case to make.
And the debit side has to include much more than such obvious disasters as Solyndra. The government does support pharmaceutical and medical research in many ways — but how many potentially useful pharmaceuticals and medical products have been kept off the market by the federal regulatory apparatus and the enormous costs it imposes on effective and defective products alike? (And how much damage has been done by the FDA’s incompetent policing of defective products that do reach the market?) How many businesses have not been started, and how much innovation forgone, because of the state’s rapacious appetite for capital? For a sense of scale, consider that, as of October 2011, the world’s largest hedge-fund company was Bridgewater Associates of Westport, Conn., with $77.6 billion under management. That total is well less than Medicare loses to fraud year in and year out. You’d have to combine the assets of the three largest private-equity firms to match what Medicare loses to fraud in a typical year, whereas the holdings of venture-capital titans such as Andreessen Horowitz are hardly even rounding errors on that amount.
Would you invest with a firm with that record?
Government is what government does, and what government does is what government spends. Our government is a corrupt HMO with an underfunded pension plan attached, and a few aircraft carriers in tow. Contra Professor Mazzucato, the confiscatory taxes the federal government wishes to impose upon Apple et al. are not being used to replenish any such “innovation fund” as may exist in her imagination, but to prop up the corrupt, wasteful, and destructive programs that make up the great majority of its spending. Federal support for basic science research is pretty low on the list of things that small-government conservatives are worried about, and George Will is not entirely misguided in his admiration for the National Institutes of Health. But the neo-Nehruvian dream of the state as main entrepreneur cannot intellectually survive even the most modest attempt to balance benefits against costs.
As the CBO sees it, the economic weight of the deficits we’re expected to add just in the next 25 years is enough to bring the national debt from 100 percent of GDP to 200 or 250 percent of GDP, i.e., from paralyzing to catastrophic. The deficits we’ve run for the last 25 years have imposed costs of their own. That the costs mainly manifest themselves negatively — in the form of businesses that don’t exist, profits that aren’t collected, and help that is not wanted — does not make them any less real, or less tragic. In the long run, the deficit is as much about whether you have a decent job or die from diabetes complications as it is about figures in CBO estimates. The price may not always be obvious, but you pay it every day.
— Kevin D. Williamson is roving correspondent for National Review.