“Never spend money before you have earned it.” Thomas Jefferson
Thomas Jefferson may not be the best person to quote on the dangers of debt—His slaves weren’t freed upon his death because his estate owed too many debts. And my Italian economics history professor lectured on the cause of the fall of the Roman Empire. Its empire collapsed when it was bankrupted because its armies had run out of territories to invade and loot.
Might our American empire might end up in a similar situation? We have transferred as much of our national wealth as possible to the top 10 percent of American households by lowering their taxes. The other 90 percent of American households are tapped out, having accumulated massive debts as household incomes have stagnated since the 1970s.
The FRED graph dating from 1980 shows when our debt-to-gdp ratio began to bulge—in 1980 from 31% to 51% of GDP creating the first $400 billion national debt total.
Our national debt has now ballooned to 121 percent of GDP since because we can’t agree on how to pay for it. We may soon lose our last Aaa rating from Moody’s Investors Services who has already warned it is in danger because “Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” as quoted by Barron’s Randall Forsyth.
But the real debt culprit is what the political polarization has led to—our record income inequality, worst in the developed world and many of the developing countries. It is mainly because majority Republican congresses have managed to push through successive tax cuts without the means to pay for them.
The U.S. was in 106th place of the 149 countries in income inequality as ranked by the CIA’s World Factbook with a Gini inequality index of developing countries like Peru and Cameroon when I first wrote about it. Whereas Finland and the Scandinavian countries are at the top of equality rankings, Germany and France are 12th and 20th, respectively. The higher the index, the greater the gap between wealthy and poorer citizens of a country’s population.
Is our bankruptcy immanent? It is becoming increasingly difficult to pay our bills with increasing deficits, since much of the deficit is funded by other countries investing in U.S. Treasuries because the US Dollar is a world currency. But it will become increasingly expensive as foreign investors in US Treasuries will demand higher bond yields for the increased risk of default, as Moody’s Investor Services has warned.
Defaults happened in 1932, when national markets collapsed causing the Great Depression. Americans had borrowed too much and in the words of Roosevelt’s Federal Reserve Chairman Marriner Eccles, “The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”
Part of the solution would be to restore the tax rates for the highest income earners that prevailed before President Reagan cut them to downsize government and enrich his Big Business supporters. The first tax cut (Economic Recovery Tax Act of 1981), cut the highest personal income tax rate from 70% to 50% and in the second tax cut (Tax Reform Act of 1986) to 38.5% among other things, per Wikipedia.
But most of the taxes would have to be paid by those he enriched, maybe even a tax on the wealth they had accumulated, i.e., the wealthiest 10 percent that benefited from all those tax cuts since 1980. Is that possible when the incoming administration wants even more tax cuts?
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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