When I was growing up an ice cream cone was a nickel a scoop. Now, a single scoop cone at my local Baskin Robbins is $3. That’s 60 nickels. So far as I am aware, there is no shortage of cows or sugar.
A British economist, John Maynard Keynes, promoted the idea that government should spend more money than it receives in tax revenue during an economic downturn, something that has been called “priming the pump.” Keynes also expected that government would raise taxes when the economy recovered to maintain a balanced budget. That practice seems reasonable for the purpose of relieving widespread suffering as during the Great Depression of the 1930s or for rapidly building the necessary war machinery required to win World War II.
During WW II, manufacturers stopped producing consumer goods and began manufacturing war materiel. People were encouraged to buy U.S. Savings Bonds. The war closely followed a decade of economic depression. Consequently, when the GIs returned from the war zones, there was a long-standing demand for consumer goods, e.g., houses, automobiles, and household appliances. America was the only industrial nation that survived the war with its industrial machinery in good condition. American industry produced at full throttle. Availability of well-paid jobs and a graduated income tax greatly expanded America’s middle-class population. The economic surge made the WW II debt manageable.
When governments spend more money than they receive in tax revenue, we call it deficit spending. The United States government has spent more than it collected in revenue every year, except four, since 1970. The U.S. national debt is now $26.7 trillion. The Trump administration increased the debt $7.8 trillion in four years. When money is put into circulation that does not represent produced goods or services, prices rise to capture the available supply of money. We call that inflation. If wages fail to keep pace with the inflation, that makes the problem worse for many people.
How much is a trillion dollars? If you were to spend a million dollars a day, every day, you would need 2737 years to spend a trillion dollars.
History reveals that humans have encountered many crises. There will surely be many more. If we encounter a crisis when we already have a large existing debt, it will be difficult to use the deficit spending instrument to address the issue. Or the deficit spending will cause runaway inflation.
The ultra-wealthy are sometimes beneficiaries of government deficit spending because it allows them to avoid higher taxes. Many of us receive some benefit from deficit spending, but we need to recognize that, unless deficit spending is following by a surge of productivity as was the case following WW II, the purchasing power of a dollar is going to diminish.
Interest rates are currently low. The interest on the national debt was only $522 billion in fiscal year 2020. If interest rates rise, the national debt will become a burden. The combination of debt interest payments and inflation could easily become a serious burden for many Americans. We should give that some thought.
Jack Stevenson, who served two years in Vietnam as an infantry officer, retired from military service, worked three years as a U.S. Civil Service employee and in Egypt as an employee of the former Radio Corporation of America (RCA). Currently, the retiree reads history, follows issues important to Americans, and writes commentary for community newspapers.