Federal Crash Will Hurt North Carolinians

By John Hood

RALEIGH — America’s ship of state is huge, ornate, cluttered, and bound for calamity. Will North Carolinians just go along for the (perilous) ride? Or will we demand action before it’s too late?

The federal government is currently borrowing a quarter of every dollar it spends. The national debt now exceeds the nation’s annual economic output. A decade from now, this ratio of debt to GDP will be 120% — if we’re lucky! If not, if economic or military disaster strikes, Washington’s debt load will expand to the 140% mark and beyond.

I’m hardly the first to employ a nautical analogy for the federal budget. As with a big ship, it struggles to execute sharp turns. The most-effective way to avoid fiscal shoals or icebergs is to spot them way ahead of time and steer accordingly.

For decades, fiscal conservatives of both parties tried to pull this off. The coming crisis was entirely predictable, and untiringly predicted. Budget analysts in and out of government correctly fingered entitlements as the primary driver of federal deficits, even as they also correctly observed that the time would come when everything would have to be on the table.

These arguments proved somewhat persuasive during the 1980s and 1990s. On a bipartisan basis, presidents and congresses enacted some Social Security reforms, constrained discretionary spending, slimmed down the Pentagon after the end of the Cold War, and, for a fleeting moment, balanced the federal operating budget.

After the turn of the century, however, politicians and voters alike shifted their priorities. Political debates devolved into partisan bickering. Fewer grownups won elections, and those who did shied away from responsible budgeting. Rather than pass uncomfortable but necessary changes to Social Security, Medicare, Medicaid, and other transfer programs — such as means-testing benefits for retirees, limiting or conditioning benefits for others, and introducing vastly more competition into medical markets — federal politicians pretended the problem was exaggerated, or could be evaded with faster economic growth, or papered over by taxing billionaires.

As for state and local politicians, including here in North Carolina, they failed to do their jobs, too. Most happily sought federal funding for education, health care, transportation, and other programs, describing it as “free money” coming in at no cost to us. What utter nonsense. Washington takes our money, borrows some more, then hands the funds back to us with strings intricately attached and we’re supposed to be happy about it?

Unfortunately, it is now too late for moderate course changes to avert catastrophe. A new report from the Committee for a Responsible Federal Budget focused on a leading edge of it: the rapid depletion of the Social Security Trust Fund.

Now, just to be clear, this trust fund is a legal fiction, not an independent source of income government can tap to pay benefits. If I borrow a million dollars from myself, my net worth doesn’t change. For years now, Social Security has been paying out more in benefits that it receives in payroll taxes. The difference has come from general revenues, with the annual differences credited against the trust fund.

When that account reads zero, likely in 2032, current law requires immediate cuts to benefits. Researchers estimate that here in North Carolina, the average beneficiary will receive $501 less a month in Social Security benefits. Some two million North Carolinians will sustain benefit cuts of some amount.

I doubt the scenario will play out this way, however. Congress will change the law to push off most or all of the benefit cuts. The committee’s figures are best thought of as further quantification of how much our current entitlement state costs — and how much more we’ll be going into debt to finance it.

Federal borrowing isn’t a perpetual motion machine. Future investors will grow increasingly doubtful the debt will be paid, demanding far higher interest rates to offset the risk. The peril is no longer far off, swathed in mist. It is clearly visible. Hard, jarring turns are coming.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).