The United States government has $13.9 trillion in debt, and I feel fine.
You should, too. That's because, despite what Jim Grant tells us on the cover of Time magazine, this doesn't mean that every man, woman, and child has to pay $42,998.12 themselves. All it means is that we have plenty of debt to roll over — which we will. The government, after all, is immortal. It doesn't have to pay back everything it owes like you or I do. It just has to pay back the interest it owes, so that investors will keep lending to it on good terms.
And, as you might have noticed, they are. The government can borrow for 10 years at 1.77 percent, for 20 years at 2.16 percent, and for 30 years at 2.58 percent. It'd be hard for those to get any lower. And that's what makes Grant's debt doom-mongering not just wrong, but world-historically so.
Think about it like this: The reason we care about the debt is that lenders might. In other words, if the debt got to be too big a share of the economy, then investors might demand tougher terms to make up for the fact that we looked a little riskier. Reducing the debt, then, is about reducing interest rates. Indeed, that was the rationale behind Bill Clinton's big deficit-reduction package in 1993. But that's impossible when interest rates are already as low as they can go, like they are now. So what would be the point of cutting the debt?
Easy: cutting the government. That, more than the debt, is what Grant really cares about. You can tell by the fact that his solution to what he thinks is too much red ink is ... a big, fat tax cut? Actually, yes. "Are we quite sure," he asks, that "we want no part of the flat-tax idea?" What he doesn't say, though, is that if you're going to cut taxes by, say, $8 trillion over 10 years — that's how much Ted Cruz's flat tax would cost — then you're going to have to get rid of a lot of the government to bring the debt down. So goodbye Social Security, goodbye Medicare, goodbye Medicaid, goodbye Obamacare, and probably goodbye food stamps and unemployment insurance, too. (The actual debt is $19 trillion, but that includes obligations we owe ourselves, like Social Security.)
But the problem is that cutting taxes for the rich to cut spending for everybody else isn't exactly a popular political platform. Just try telling people that we can't afford a safety net anymore because — again, looking at Cruz's plan — the top 0.1 percent need a $2.2 million tax cut. So instead, Grant says that this is all about helping the economy over the long-term. Because, don't you know, "sound money and a balanced budget were two sides of the coin of American prosperity."
Well, except that they weren't. Now, it isn't easy to compare the economy today to the economy 100, 125, or even 150 years ago, but economist Christina Romer has tried by putting together her own measure of unemployment going back that far. And even though it tells a slightly different story from the official — and more accurate — numbers we have now, the important thing is that it tells a consistent one. That lets us make at least some kind of comparison across eras.
Specifically, we can look at how the economy did during laissez-faire's heyday between 1880 and 1933 — when small government and the gold standard went hand-in-hand — and how it's done in our postwar period of activist governments and central banks. There's one final caveat, though. We also need to adjust the numbers, as economist Brad DeLong does, to see what's happened with nonfarm unemployment.
The idea is that those are the people who would have been thrown out of work when the economy got thrown off track. Farmers, on the other hand, would have been somewhat shielded from the ups and downs of the business cycle to the extent that, as DeLong puts it, "they can always find a place of some sort as a hired hand." So if we want to know how well the economy did for people who needed it to, we shouldn't let the fact that so many more people used to work on farms obscure the overall picture.
And, as you can see below, things have been a lot better in the postwar period than they were in the pre-New Deal one. So much for laissez-faire being the path to prosperity.
Now, I've used the 10-year average to smooth it out a little, but, in any case, the picture is pretty clear. Nonfarm unemployment averaged 9.5 percent during the libertarian golden era of 1880 to 1933, but has averaged a much more manageable 6.1 percent since 1946. It's almost as if having the government and central bank try to fight recessions makes recessions less frequent and less severe.
So there's no reason to cut the debt today, and no reason to cut the government down to a pre-New Deal size. At least not any economic reasons. And that's why the best Grant can do is try to scare people by pointing out that our debt is in the trillions — did you know that's a million millions?!? — without mentioning that our economy is in the trillions, too.
It's not the government that's bankrupt. It's Jim Grant's fear-mongering.