In this month's series on the national debt, I've come to three conclusions:
- When governments default, it's really, really bad.
- When governments choose to divert money away from investing for the future to pay down debt, it's really, really bad.
- When governments issue debt in the currency they print, they don't need to default, as they can just print the money they need to pay their creditors.
All of the above would seem to indicate we just pick a bunch of public works projects with an anticipated payoff in the long run, and everything will turn out fine, right? Kinda, sorta, not really.
See, while we've focused on the size of the national debt and deficit over the last few episodes, we haven't discussed inflation - the process by which a dollar buys less and less over time. The Fed's target for inflation is 2% - and printing more and more money would make keeping inflation at that target rate harder and harder to achieve.
To help me navigate this thicket, I invited Tara Sinclair, Associate Professor of Economics and International Affairs at George Washington University, on this week's episode of You Don't Have to Yell to offer some insight into why we should be concerned about adding to the national debt and how to address it. Here are some of the more noteworthy observations:
- There's an argument that the Fed has actually fallen too far below its target of 2% inflation - While the projected rate of inflation in the US seems to be at or a little above the two percent mark, depending on who you ask, the rate of inflation is currently below the Fed's target. So, just print more money, right? Don't pop the champagne until the end of this post.
- Demand for US debt will slow as more and more people retire, and more and more people will retire - Much of our debt is held by retirement funds who need to invest large portions of their money in stable assets, and we're about to enter a period where people at retirement age comprise the largest percentage of the population ever seen. This means more and more treasuries being sold on the market, which adds to inflationary pressures on the dollar while also reducing demand for US debt.
- Those retirees also use a lot of healthcare - The second part to the demographic time bomb awaiting us is the fact that retirees will consume a lot of healthcare without putting that money back in taxes, meaning more and more of government expenditures will be consumed caring for those age 65 and up.
So - bottom line - we need to cross the whole "print money and everything will work out fine" strategy off the list. The above problems also point to two really obvious solutions for addressing the debt:
- Reduce the rate of healthcare inflation - The rate of healthcare inflation has dropped by almost half since 2007 (which is great) but is currently at 6% (which is bad) and - at either rate - is still unaffordable to many Americans (which is worse). Taking measures to address healthcare inflation would help the economy, by dedicating less GDP towards healthcare spending, and reduce government expenditures for the long term.
- Immigration - While the percentage of the population at working age in the developed world is shrinking, it's growing in Latin America and Sub-Saharan Africa. An immigration policy focused on bringing younger people just entering working age could help offset this long term demographic trend and set us up for the future.
There's also always taxes - you know, the whole thing we used to use to fund government with - but who needs shade when the trees grow to the sky?
Listen to the episode below, on Apple Podcasts, Spotify, Libsyn, or wherever your bad self gets your podcasts.