The United States of Insolvency

This much I have learned about debt after 40 years of writing and study: It is better not to incur it. Once it is incurred, it is better to pay it off.

America, we have a problem.

We owe more than we can easily repay. We spend too much and borrow too much. Worse, we promise too much. We conjure dollar bills by the trillions — right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.

I don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.

To understand our financial fix, put yourself in the position of the government. Say you earn the typical American family income, and you spend and borrow as the government does. So assuming, you would earn $54,000 a year, spend $64,000 a year and charge $10,000 to your already slightly overburdened credit card. I say slightly overburdened — your outstanding balance is about $223,000.

Of course, MasterCard wouldn’t allow you to run up that kind of tab. At an annual percentage rate of 15%, the cost to service a $223,000 balance would absorb 62% of your pretax income.

But the government is different from you and me (and Chicago). It has a central bank.

The Federal Reserve is the government’s Monopoly-money machine. It sets some interest rates and influences many others. It materializes dollars. It regulates — now regiments — the nation’s banks. It pulls levers to make the stock market go up.

Congress is the source of the Fed’s power. The Constitution is the source of Congress’s power. The parchment enjoins Congress to coin money and regulate the value thereof. The founders viewed money as a scale or yardstick, something that measures value. The Fed views money as a magic wand, something that creates value.

Dollars aren’t so much minted these days. Rather, they issue from the Fed’s computers in billowing digital clouds. The cost of producing them is only the energy expended on tapping the keys. The Fed emits these electronic greenbacks to attempt to control the course of economic events.

It’s a heaven-sent monetary system for a big-spending government.

You may struggle to pay that midteens rate on your outstanding credit card balance. The Treasury gets by paying an average of just 1.8% on that portion of the debt, held by savers and investors both here and abroad. Defined in this way, we owe $13.9 trillion.

The $19 trillion figure ticking upward on the famous National Debt Clock adds the debts the government owes itself. (How does this pseudo bookkeeping work? The Social Security Administration takes in — temporarily — more than it pays out. With the surplus it buys Treasury bonds. The bonds enlarge the debt clock’s debt.)

It’s not so important that the government pays itself on time. What is important is that the government pays its public creditors on time. So cast your eyes on the exact numerical rendering of that slightly smaller sum: $13,903,107,629,266.

It is unmanageable.

One can assume that the creditors trust the currency in which they expect to be repaid. I wonder why, and for how much longer. The Fed once fought inflation. Now it actually sets out to cause it — about 2% a year is the target. Striving to inflate, it presses down interest rates and rustles up new dollars.

From the nation’s 18th-century founding until 1971, the dollar was defined as a weight of gold or silver. Americans did business with paper, of course. But these commercial bills and banknotes were convertible into monetary bedrock, the precious metals. The expression sound as a dollar derives from the ring of a gold piece when you plunked it on a counter.

Sound money coincided with balanced budgets. Government borrowings climbed in wartime and subsided in peacetime. The pattern was disarranged by depression in the 1930s and war in the 1940s. It was broken by the Johnson Administration’s guns and butter and entitlements programs in the 1960s.

Richard Nixon administered the coup de grâce on Aug. 15, 1971, when he announced that the dollar would derive its value from the say-so of the government. The Fed could print as many green bills as the traffic would bear.

Many applauded that sea change, then and later. Easy money rarely fails to please — at first. It buoys stocks, bonds and commercial real estate. House prices jump, and car sales zoom.

Politicians, noticing how a bull market fattens public pension funds, ratchet up the benefits they promise to retirees (a fact that state and federal pensioners are encouraged to remember on Election Day).

Periodically, the buzz wears off. What remains is a hangover of debts and promises. The proliferating dollars facilitate heavy borrowing. Ultra-low interest rates mask the cost.

I don’t ask that we return to some long-lost fiscal and monetary Eden. None has ever existed, even in America. Crises and business cycles are always with us. I merely observe that sound money and a balanced budget were two sides of the coin of American prosperity.

Then came magical thinking. Maybe you had a taste of modern economics in school. If so, you probably learned that the federal budget needn’t be balanced — it’s nothing like a family budget, the teacher would say — and that gold is a barbarous relic. To manage the business cycle, the argument went, a government must have the flexibility to print money, to muscle around interest rates and to spend more than it takes in — in short, to “stimulate.”

Oh, we have stimulated. Between the fiscal years 2008 and 2012 alone, federal deficits totaled $5.6 trillion. The public debt nearly doubled in the same span of years, to $11.2 trillion. The Federal Reserve tickled $1.6 trillion in new digital dollars into existence. True, our Great Recession proved no Great Depression, but the post-2008 recovery is the limpest on record.

A thin cheer went up in January when the deficit (calculated over the 12 preceding months) weighed in at a mere $405 billion, the lowest over any 12-month period since 2008. Only $405 billion. It’s not so much, as Washington strums its calculators.

Let us pause to reflect that a billion is a thousand million, and that a trillion is a thousand billion — or, alternatively, a million millions. It’s a measure of the fix we’re in that the billions hardly seem worth talking about.

It’s tomorrow’s trillions — the ones we’ve grandly promised to pay ourselves — that lie at the heart of the problem. The granddaddy of far-off commitments was Social Security, which dates from the 1930s. Medicare and Medicaid in the 1960s and the Affordable Care Act in 2010 duly followed.

The debt, as big as it is, is the measure of past spending in excess of tax receipts, a pattern of bad fiscal habits that traces its intellectual roots to John Maynard Keynes and has its dollars-and-cents origins with Lyndon Johnson and his Great Society. What awaits us and our children and their children is the unpaid tab of the future.

You can’t blame people for not paying attention. America has forever defied the doomsdayers. The very language of government debt is calculated to tranquilize the critical mind. We speak of the Department of the Treasury rather than the Department of the Debt. (There’s no net treasure in the Treasury.)

We say entitlement instead of taxing Peter to pay Paul and Social Security trust fund when we mean just another ordinary government account at the Department of Debt. (There is no trust fund because there is no division of assets, no accounts containing funds earmarked for you, the citizen, who so faithfully “contributed” your payroll taxes.)

Today’s miniature interest rates constitute another form of public sedation. You’d suppose the doubling of the debt would jack up the cost of servicing the debt. Nothing of the kind. As the debt has doubled, the rate of interest has halved.

In 2007, we owed $5 trillion and paid an average interest rate of 4.8%. Net interest expense: $237 billion. In 2016 we’ll owe $14.1 trillion and pay the average interest rate I already mentioned: 1.8%. Net interest expense: $240 billion. It’s a wonder we didn’t think of this financial perpetual-motion machine about a thousand years ago.

Debt per se is neither good nor bad, though less is usually better than more. How it’s priced and how it’s used are what tips the scales. If chocolate cake cost a penny a slice, the best of us would be tempted to break our diets. Well, government debt is priced at less than 2%, and Washington fell off the wagon years ago.

The public debt will fall due someday. (Some of it falls due just about every day.) It will have to be repaid or refinanced. If repaid, where would the money come from? It would come from you, naturally. The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone.

Just visit the Treasury website, which posts the debt to the penny, then the Census Bureau’s website, which reports the up-to-the-minute size of the population. Divide the latter by the former and you have the scary truth: $42,998.12 for every man, woman and child, as I write this.

In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense — $654 billion — than it does for national defense. At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security.

We always need protection against cockeyed economic experimentation. Once a national consensus on money and debt furnished this protective armor. Money was gold and debt was bad, Americans assumed. Most credentialed economists today will smile at these ancient prejudices. Allow me to suggest that our forebears knew something.

Keynes himself would recoil at 0% bank-deposit rates, chronically low economic growth and the towering trillions that we have so generously pledged to one another. (All we have to do now is earn the money to pay them.)

How do we escape from our self-constructed fiscal jail? According to the Government Accountability Office, unpaid taxes add up to more than $450 billion a year. Even so, according to the Tax Foundation, Americans spend 6.1 billion hours and $233.8 billion each tax season complying with a federal tax code that runs to 10 million words. Are we quite sure we want no part of the flat-tax idea? An identical low rate on most incomes. No deductions, no H&R Block.

Impractical? So is the debt.

So is the spending, and the promises to spend more down the road. We need to stop the squandermania. How? By resuming the principled fight that Vivien Kellems waged against the IRS during the Truman Administration. It enraged Kellems, a doughty Connecticut entrepreneur, that she was forced to withhold federal taxes from her employees’ wages.

She called it involuntary servitude, and she itched to make her constitutional argument in court. She never got that chance, but she published her plan for a peaceful revolution.

She asked her readers — I ask mine — to really examine the stub of their paycheck. Observe how much your employer pays you and how much less you take home. Notice the dollars withheld for Medicare, Social Security and so forth. If you are like most of us, you stopped looking long ago. You don’t miss the income that you never get to touch.

Picking up where Kellems left off, I propose a slight alteration in payday policy. Let each wage-earning citizen hold the whole of his or her untaxed earnings — actually touch them. Then let the government pluck its taxes.

“Such a payroll policy,” wrote Kellems in her memoir, Taxes, Toil and Trouble, “is entirely legal and if it were universally adopted, in six months we would have either a tax revolution or a startling contraction of the budget!”

Black ink, sound money and the spirit of Vivien Kellems are the way forward. “Make America solvent again” is my credo and battle cry.

You can fit it on a cap.