While there is wisdom in emphasizing the importance of incentives and economic expansion, Laffer's position on debt is flawed in both theory and practice. The federal debt is not only a long-term burden - it is already producing measurable costs that Laffer's framework largely ignores or minimizes. Laffer believes that rising economic output will make federal debt manageable. But this view ignores the opportunity cost of interest payments, which are no longer abstract or future-oriented - they are ballooning today. Laffer's thesis rests on the assumption that growth can outpace debt accumulation. But the U.S. is running structural deficits - deficits that persist even when the economy is strong. Debt is growing faster than the economy. In 2024, real GDP increased by 2.8%. Not bad. But debt held by the public increased 7.4% last year. Laffer's optimism underestimates the mathematical momentum of compound debt. Both Tamny and Laffer are counting on politicians to reduce future spending. But there's the rub... This is wishful thinking in the extreme. Government spending is not going to be reduced tomorrow. Or next month. Or next year. It's going to be increased. That's the weakness of their argument: it depends on ambitious politicians making hard choices. When I say "hard choices," I mean choices that will not win them re-election. It's easy to point out that all the folks in Washington D.C. have to do is cut this spending, reform those entitlements, or raise this revenue. But voters - and especially Democrats - don't want these things. They want their government benefits expanded not reformed or cut. Oh, and in case you haven't heard, they don't want Americans making less than $400,000 a year - or 98% of the population - to pay for those increases either. Meanwhile, pro-growth policies - like the flat tax - have been staples of conservative campaigns for decades. Yet even when Republicans control the House, the Senate, and the White House, it never happens. One reason is that they don't want their opponents claiming that their policies benefit "the rich." Another is that Republican politicians - just like Democrat politicians - enjoy tweaking the tax code to reward constituents and donors. Bottom line: the hyper-growth policies don't get enacted. The economy doesn't expand fast enough to throw off enough extra tax revenue. And the debt continues to grow. I agree with Winston Churchill's claim that democracy is the worst form of government, except for all the other kinds that have been tried. Yet there is a flaw at the heart of our democratic system. And it's this: eventually the mob gets whatever it wants. The majority of Americans don't want to pay for all the government services they receive. Ergo, they don't. That means the deficits continue. And the debt mounts. So, what will happen eventually? As in the children's story, Americans are going to have a "terrible, horrible, no-good, very bad day." Or, as JPMorgan Chase CEO Jamie Dimon put it recently, "There is going to be a crack in the bond market." When the bond market cracks, interest rates will go up and the stock market will go down. Consumer interest rates - on mortgages, auto loans, and personal loans - are heavily influenced by U.S. Treasury rates, which serve as benchmarks for the broader credit markets. (For example, consumer loans are generally set by adding a "spread" over the relevant Treasury rate.) The mounting fiscal imbalance will cause U.S. Treasury holders to demand more interest on their bonds. As rates go up, bonds go down. So do stocks, since higher rates make it more expensive for consumers, businesses, and governments to borrow. And, of course, higher bond yields make fixed-income investments more attractive relative to stocks, putting further pressure on equity markets. In short, Laffer and Tamny's pro-growth policies - positive as they are - will not be enacted. And the debt will keep rising. Eventually, we will have higher borrowing costs, a weaker economy, lower stock and bond prices, and less national security since everything from tax revenue to corporate earnings to technological innovation is based on economic growth. It's not that Tamny and Laffer don't have good suggestions. It's that they depend on politicians abandoning their self interest. That's why I argued that the national debt is a danger not a delusion. (And the audience agreed. After the debate, not a single hand in the room went up in support of Laffer and Tamny.) And in my next column, I'll suggest what investors should do to protect themselves. Good investing, Alex |
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