Before his death on February 6, George P. Shultz, a former U.S. Secretary of the Treasury and Secretary of State, co-authored a final commentary warning of the dangers posed by the vast increase in U.S. government spending in recent years, including during the Covid-19 crisis.
Many in Washington now seem to think that the U.S. federal government can spend a limitless amount of money without any harmful economic consequences. They are wrong. Excessive federal spending is creating grave economic and national-security risks. America’s fiscal recklessness must stop.
The Covid-19 crisis has provided the latest impetus for government spending, even to the point of steering the American mindset toward socialism—a doctrine that has always harmed people’s well-being. But some say there is no need to worry about excessive spending. After all, they argue, record-low interest rates apparently show no sign of increasing. The economy was humming along just fine until the pandemic hit, and will no doubt rebound strongly when it ends. And is there even a whiff of inflation in the air?
This thinking is dangerously shortsighted. The fundamental laws of economics have not been repealed. As one of us (Cogan) demonstrated in his book The High Cost of Good Intentions, profligate government spending invariably has damaging consequences.
High and rising U.S. national debt will eventually crowd out private investment, thereby slowing economic growth and job creation. The Federal Reserve’s continued accommodation of deficit spending will inevitably lead to rising inflation. Financial markets will become more prone to turmoil, increasing the chance of another big economic downturn.
Financial markets’ current relative calm and low consumer-price inflation are no cause for comfort. Previous periods of sharp increases in inflation, rapidly rising interest rates, and financial crises have followed periods of excessive debt like a sudden wind, without warning.
Shultz and Taylor’s book Choose Economic Freedom shows that economic indicators in the United States gave no hint in the late 1960s of the subsequent rapid rise in inflation and interest rates in the early 1970s. Likewise, financial markets during the years immediately preceding the 2007-09 Great Recession provided little indication of the calamity that would ensue.
So, what should today’s U.S. policymakers do? Higher tax rates are not the answer. Even before the pandemic hit, every federal tax rate would have had to be increased by one-third in order to finance the current level of federal spending without adding to the national debt. Such an increase would have harmful effects—similar to those of mounting public debt—on economic growth and job creation.
Congress may be tempted to reduce defense spending to help close the deficit, as it often has done in the past. But these previous efforts demonstrably failed. Rather than reduce the budget deficit, Congress instead used the savings from lower defense outlays to finance additional domestic spending.
Unless policymakers abandon their misguided beliefs about budget deficits, cutting defense expenditure now would produce the same result. More importantly, it would be a grave strategic mistake, weakening U.S. national security and emboldening the country’s foreign adversaries—particularly now that China is flexing its muscles in Asia and investing heavily in its military.