There is huge confusion on the burden created by the deb,as people often get scared by politicians throwing around “trillions” of dollars. The numbers are huge, but so is our economy.
President Joe Biden’s recovery and jobs plans have led to considerable alarm over the resulting increases in the deficit and debt. Most of these concerns are misplaced.
The issue of whether a deficit is too large depends entirely on whether it causes us to push the economy too far, leading to inflation. The deficit for last year was $3.1 trillion, which was equal to 15.2% of GDP. This was by far the largest deficit, relative to the size of the economy, since World War II.
Yet, the inflation rate actually slowed in 2020, as the pandemic related shutdowns created an enormous gap in demand in the economy. It would be difficult to find any major sector of the economy that was operating near its capacity last year, and therefore raising prices.
The question going forward is whether President Biden’s spending proposals, coupled with his tax increases, are likely to push the economy so far that it will not be able to meet the demand created. That is not impossible, but it does seem unlikely. We have not seen a serious problem with demand generated inflation in more than four decades.
The other side is the burden created by the debt. There is huge confusion on this point, as people often get scared by politicians throwing around “trillions” of dollars. The numbers are huge, but so is our economy.
Furthermore, the people who complain about the debt almost never comment on the other ways that we create burdens for future generations. Most obviously, government-granted patent and copyright monopolies are an enormous burden. These monopolies raise the price of prescription drugs, medical equipment, computer software and other protected items by many thousand percent above their free market price. The burden in the case of prescription drugs alone is close to 2.0% of GDP, and rising rapidly.
If we want to talk seriously about burdens facing our children, the government’s debt is a tiny part of the picture. We will hand down to them a whole economy and society, including the natural environment. If we paid off the national debt, but left an economy in ruins and a devastated environment, we will not have done our children any favors.