The big political news from last week was David Brat’s upset win over Eric Cantor for Congress. Brat is an economics professor at Randolph Macon and from his research it’s clear that he has strong political views embedded in his economics. It’s perfectly fine to be a political economist, but when it leads to an obviously flawed understanding and presentation of reality then it becomes a real problem in my opinion. For instance, in his website Brat says the following:
“Our national debt has skyrocketed, reaching over $17 trillion dollars. What our leaders in Washington fail to mention is the $127 Trillion dollars in unfunded liabilities (see U.S. Debt Clock). This lack of leadership on both sides of the aisle threatens our nation’s stability and long term growth and forces an undue burden on our children and grandchildren. We must balance the federal budget by reducing spending. I will support a balanced budget amendment which will force Congress to reign in the out of control federal spending and to restore confidence in the American economy.”
What does any of that actually mean though? It makes for fine talking points, but it’s intentionally vague rhetoric with no real meat behind it. After all, what does it mean that there are $127 trillion dollars in unfunded liabilities when you don’t even mention the asset side of the balance sheet? What does it mean that our nation’s stability is threatened? Is he saying we’re like Greece? Or that hyperinflation is coming? And what is this burden on our children and grandchildren? Are our children born with a debt bill on their toes? Let’s explore these points a bit.
I’d begin by pointing out that Brat is being very misleading when he mentions the $127 trillion in unfunded liabilities. the IER estimates that total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone and as I discussed previously, the assets of the USA likely exceed $200 trillion so this discussion is flawed if we don’t also discuss the asset side of the balance sheet. And when you look at both sides of the balance sheet it becomes clear that Brat’s views are intentionally narrow.
Regarding the government’s debt position Brat appears to hold contradicting views. In an interview with Sean Hannity last week Brat referred to the USA as the “wealthiest country in the world”, but cites the government’s debt as a huge burden on the country. His website goes on to say:
“David Brat understands that an economy cannot thrive with such a crushing national debt, and will oppose the efforts of status quo politicians like Eric Cantor to continue to spend money we do not have.”
These positions are obviously contradictory. If the USA is the wealthiest country in the world then the US government is the entity that exists to enact public policy by transferring some of this wealth at times. If the private sector is wealthy then, by definition, the government must be as well since its ability to spend and issue bonds is ultimately a direct function of the prosperity of the underlying private sector. In the case of the USA, we produce 22% of all global output and issue the risk free asset in the global economy so it makes no sense to argue that the USA is spending “money we do not have” while also claiming that the USA is the “wealthiest country in the world”.
Now, I should be clear that the USA is a unique case in many ways. The USA has a certain “exorbitant privilege” due to the size of its economy and its status in the global economy. But when we discuss these matters we should be clear and not resort to vague political rhetoric that misleads people about our reality. The fact is, the US government isn’t running out of money. The US government isn’t $127 trillion in the red. The government isn’t bankrupt. And so scaring people about the solvency of the government is an extremely disingenuous way to pass one’s political agenda.
Don’t get me wrong – there are very legitimate arguments for reducing the size of our government, cutting spending and encouraging private sector investment, but these factually incorrect and fear based approaches not only mislead people, but result in fundamental misunderstandings about the way our monetary system works which leads to poor policy decisions. That doesn’t help anyone understand potential problems with government spending or what the risks could be. We should expect more from our politicians. Especially those with an econ background.
- Why the US government isn’t going bankrupt
- The US government is not “$16 trillion dollars in the hole”
- Understanding the modern monetary system
- The biggest myths in economics
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.