This is the final article and summary of the “Deadly Sins” series. For those who missed the first six articles, we’ve combined a cold, hard look at the way the government presents its finances with a gaming challenge you might find in a third grade vocabulary book. We’ve been matching topics to “sins” in the diagram below.
But any suspense is clearly over. As you can see, the final sin is pretense.
The connection to the other sins is this: Each of the first six sins makes it easier for our political leaders to create the pretense that they’re committed to sound public finances. When in fact, their actions show they’re committed to no such thing.
To see through the “in-front-of-the-camera rhetoric” and understand the true scale of our debt predicament, we need to first empty the bag of tricks that’s used to obscure it. Here’s what you’ll find:
- Budget projections that are glaringly disconnected from reality:
- The economy is expected to revert to “full employment” and remain there forever, never again falling into recession (hypocrisy).
- Typical budget slippage of over 1% of annual economic output is ignored (neglect).
- Pension funding challenges are assumed to be met with heroic investment returns (denial).
- Financial information that’s brazenly incomplete and misleading:
- What entitlement program commitments? If you go by the income statement and balance sheet in the Financial Report of the United States Government, there’s no such thing as a commitment to pay back the amounts that we contribute to these programs (subterfuge).
- What entitlement program trust funds? Both the White House and Congress produce government debt projections that exclude the trust funds’ holdings of, well, government debt (chicanery).
- Official narratives (read: propaganda) that are shaped by destructive special interest groups such as the banking lobby, just as these same special interests lurk behind our nation’s laws, policies and regulations (treachery).
Inadequate entitlement program funding explains much (but not all) of our debt problem. Not because these programs are inherently bad. Theoretically, we should be capable of establishing fiscally sound social programs. But instead, we’ve either underfunded or overpromised (choose the criticism that best fits your political views). In either case, the generations that reached retirement age during the last several decades are beneficiaries of the government’s mismanagement, while later generations will pick up the tab.
Seniors stealing from seniors
Stanley Druckenmiller summarized it clearly in a recent interview: “[Seniors] are all taking out more than they put in, and it’s guaranteed under the system today that all the kids are going to get less than they’re putting in.” And he later added: “I am not against seniors … What I am against is current seniors … stealing from future seniors.”
Oddly, there may be some justice in this. Those who retired in the last half of the 20th century lived through some tough times – one or two world wars and a deep depression in between. Most of them made sacrifices that baby boomers haven’t had to make (with exceptions, of course, such as the early boomers who suffered Vietnam). Maybe there’s something equalizing about these pre-boomers, including those dubbed the “Greatest Generation,” benefiting from generous government spending that won’t be sustained in the future.
But this is the best justification I can make for irresponsible policies. Other justifications offered by pundits of the left and right just don’t make sense. Nor do those suggested by academics living in make-believe worlds of abstract theory and claiming that government debt is “just a number.”
Individual inheritances won’t fully compensate future generations for the debt burden, as some are fond of saying. And nor should there be any comfort in the fact that the government’s liabilities are someone else’s assets, which has been twisted into an argument that the net position is zero, so why worry?
And how about the assertion that government debt can’t do much harm because the central bank can simply print more money? Or the argument put forward by famous economists that an increase in debt pays for itself? Wrong again and again.
False theories about excessive debt abound, and they’re usually linked to political affiliations and ideologies. But unlike many of our leading economists and policymakers, the public generally understands that younger and future generations will be forced to make sacrifices because of our dependence on borrowed money. People understand the math involved in borrowing – the idea that you get do extra stuff today but you have to pay for it in the future.
Our future meets bad politics and bad politics wins
Even after suppressing the more ridiculous economic theories, though, we still have to contend with political justifications for fiscal irresponsibility. You’ve surely heard some variation on the following excuse for inaction:
It’s okay that policymakers aren’t dealing with our debt – they’re just waiting for a crisis. Once the crisis occurs, they’ll have the political cover they need to make unpopular decisions and they’ll take action. In the meantime, there’s no cause for alarm.
We only need to look at history to see the flaws in this argument. We have hundreds of years of evidence that governments tend to delay action until it’s too late and debt is too large to ever pay off. And they wait too long partly because they understate the size of the problem. Or, closer to the truth, they typically lie about the problem. Some combination of seven deadly “sins” is at play: hypocrisy, neglect, denial, subterfuge, chicanery, treachery and pretense. And they’re certainly at play in our country today.
But don’t just take my word for it.
In a Wall Street Journal article published earlier this week, William Poole, the prominent former head of the Federal Reserve Bank of St. Louis, discussed the “convoluted budget accounting that Congress and the White House use to obfuscate, dissemble and hide what is really being done.”
He went so far as to call on “journalists, commentators and policymakers” to “ignore” the budget projections scheduled for release by the White House today. And then he added that if any of these parties don’t take his advice, they’re “complicit in a fraud.”
Consider this excerpt:
For 50 years or so the federal government has deliberately and to an increasing extent misstated probable future budget deficits. Democrats and Republicans are guilty. The White House is guilty. And so is Congress. Private firms that deliberately misrepresent their financial statements in this fashion would be guilty of a crime… The magnitude of the misrepresentation is breathtaking.
Needless to say, Poole just moved up several spots on my list of famous people who “get it.” Not to mention the much shorter list of those willing to communicate with such honesty and forthrightness. I recommend reading his article in its entirety, although note that he doesn’t get around to some of the most egregious practices (those covered in this series) in the op-ed length piece.
Recognizing the “point-of-no-return”
What’s more, the sins I’ve described are compounded by the fact that public debt becomes harder to reduce as it rises. At some point, it becomes virtually impossible to return to safe debt levels without an eventual default. And governments that are on the road to ruin typically cruise past this threshold – which I’ll call the “point-of-no-return” – with few people taking notice.
In fact, the very existence of such a threshold is somehow absent from the public debate, despite its importance. Economists prefer to talk about an overall “debt tolerance,” which is where the ability to bear debt breaks down completely and actually triggers the default (which could be a unilateral default, bond conversion, or hyperinflationary money printing that wipes out the currency). But the point-of-no-return is typically much lower than the overall debt tolerance in large countries and far more relevant. (I offer an estimate for the U.S. in “Answering the Most Important Question in Today’s Economy.”) Once you’ve passed it, it may still be a long wait before a fiscal crisis actually occurs, but the real damage was done by ignoring the point-of-no-return in the first place.
Think of it this way: The deadly sins ensure that people underestimate the true public debt trajectory, while disregard for the point-of-no-return ensures that they overestimate the natural limits to that debt. And together, these errors are two of biggest factors explaining the frequency of government defaults (as I explore further in the “7 Fallacies About the Lengths of Things” series).
Pick any example of a default – from any time and place in history – and there’s an excellent chance you’ll find the problem was masked as it developed while critical thresholds went unrecognized.
This leads me to three thoughts that I’ll share to conclude the “Deadly Sins” series:
- Accounting for both the seven deadly sins and inattention to the point-of-no-return, we’re on a path that never ends well.
- Even if we successfully change paths, it’s already too late to prevent substantial costs being passed to younger and future generations.
- More optimistically, the public can limit these costs by learning the lessons of history while seeing through the various tactics that are used to make things look better than they actually are.