The Coming US Government Financial Crisis

More government spending is not the correct solution; nor is increased taxation.

In fiscal year 2023, the federal government collected $4.7 trillion (USD) in revenue—but that includes amounts that would later have to be refunded as over-payments.

In fiscal year 2023, the federal government spent $6.13 trillion (USD)—a deficit of more than 1 trillion (USD.)

Habitual, annual deficits (spending more than revenue collected) has resulted in a national debt of $34.59 trillion through March 2024.

The Congressional Budget Office projects that the US Federal government will have to pay $870 billion in the 2024 Fiscal Year on the interest on the US national debt. That's getting close to size of the annual budget deficit.

In other words, most of the annual budget deficit is simply the interest on the current national debt. And it will soon (in the next year or two) exceed the annual budget deficit. That's why Congressional fights over the debt ceiling are happening with ever greater frequency. The purpose of the debt ceiling was to prevent this from happening. Obviously, the debt ceiling idea is not serving its purpose.

As the annual interest payments increase, the pressure on Congress to either cut spending or raise taxes also increases. The increasing debt-to-GDP ratio causes the interest rate that the US Treasury must pay to borrow more money to increase, thus increasing the annual interest that must be paid.

Also, if Congress tries to "fix" the problem by raising taxes, that will reduce the tax base by reducing taxable economic activity (because it will deprive the economy of the capital needed to maintain current economic activity, let alone what would be required to increase it.) That would make the problem worse, not better, in a way that's very analogous to what happens when someone lost at sea tries to solve his or her thirst problem by drinking sea water.

“We have tried spending money. We are spending more than we have ever spent before and it DOES NOT WORK...I say after eight years of this Administration we have just as much unemployment as when we started...and an enormous debt to boot.” ~ Henry Morgenthau, FDR's Secretary of the Treasury

Government spending for things other than enforcing the rule of law and the obligation of contracts cannot possibly help the economy, for the following reasons:

1) Every cent the government spends was either taxed or borrowed from those who earned it. 

If investment capital was taken by taxation, it makes those taxpayers permanently poorer, reduces their available capital, and thus reduces the pool of available private capital by an amount that is actually greater than any increase in the pool of public capital available for public investment. 

Why? One reason is because funds cannot be collected as taxes and then spent by bureaucrats at zero cost. A substantial percentage of the taxed capital must be wasted on the salaries of government workers, who will consume most of their salary, and not invest it. Another reason will be discussed later.

If the government borrows capital instead, it still reduces the available capital of the lenders. 

So both taxing and borrowing reduce the amount of capital the private sector has to invest or spend themselves. So there isn't even any net change to the supply of money in circulation, let alone any change in the wealth that exists. Instead, taxation and/or borrowing by government creates a net loss of investment capital, for the reason given above, and for the one given below (which is the more fundamental reason.)

Even if those with capital don't spend it and don't invest it, that capital still does useful work: Either it's put in a bank so that it's available to be lent to those who will spend it or invest it, or it's removed from the active money supply. 

Money that is removed from circulation has the effect of increasing the value of the money that still circulates -- so that the aggregate value of all the money actively circulating is the same as it would have been, had the money removed from circulation been spent, invested or loaned out, instead. Why? Two reasons:

a) The amount of money in circulation is economically irrelevant, as Ludwig Von Mises conclusively and comprehensively proved in his masterwork, "The Theory Of Money And Credit"; and

b) Fiat money is not wealth. It only symbolically represents it. You cannot create wealth by creating more symbols to represent it, just as you cannot increase the amount of available land by printing more maps. Conversely, you cannot destroy wealth by removing fiat currency from circulation, for the same exact reasons: The map is not the territory, and a symbol is not the thing it represents.

It is therefore impossible for government spending to increase the total economic value of the money that would have been spent or invested anyway. And, unless the funds come from fiat money creation, government spending can't even increase the face amount of the money in circulation. If the funds the government spends come from newly created money, the net effect is still zero, since increasing the money supply by X% reduces the purchasing power of the money that already existed by that exact same X% (again, as proved by von Mises in his seminal treatise cited above.)

2) Government spends money differently than the private sector would. It spends it based primarily on political considerations, and not based on economic considerations. That means a far greater percentage of the money is wasted or spent far less optimally. This is the fundamental issue. Here's why it's true:

Government spends money to buy votes and to fund wars. Wars are very destructive economically. Wars occur far less often when they have to be paid for using money that the sovereign cannot create as needed. And using money to buy votes is best done by giving token amounts to as many voters as possible, most of whom--in order to create a voting majority--are mostly consumers, and so the recipients of the taxpayer-funded bribes-to-vote-for-more-bribery generally use the money for personal consumption, and not for creative work or investment. That extra money mostly given to those who mostly consume drives up the prices of the necessities of life, which means the net help the extra money actually provides asymptotically goes to zero over time, and ends up hurting those who are not poor enough to qualify for the payola.

That’s the fundamental reason that poverty increases over time in response to ever-increasing social spending—an effect that has been mostly masked over the past century by the effects of ever-advancing science and technology.

"Even if economic inequality was an ailment, punishing effort and success would be no cure. Coercive measures to redistribute wealth prompt the smart or politically well-connected 'haves' to seek refuge in havens here or abroad, while the hapless 'have-nots' bear the full brunt of economic decline. A more productive use of time would be to erase the mass of intrusive government that ensures the 'have-nots' are also the 'can-nots'" ~ Lawrence Reed.

Redistributionist "government is inherently regressive: It tends to distribute power and money to the strong, including itself.

Government becomes big by having big ambitions for supplanting markets as society’s primary allocator of wealth and opportunity. Therefore it becomes a magnet for factions muscular enough, in money or numbers or both, to bend government to their advantage." ~ George Will

"When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices. Now, is it the most unfortunate who gains from this struggle? Certainly not, but rather the most influential and calculating." -- Frederic Bastiat

"Whence does [the State] draw those resources that it is urged to dispense by way of benefits to individuals? Is it not from the individuals themselves? How, then, can these resources be increased by passing through the hands of a parasitic and voracious intermediary?" ~ Frederic Bastiat

References:

The Forgotten Depression: 1921: The Crash That Cured Itself

A Contradiction in Keynesian Fiscal Policy

Keynesian Predictions vs. American History

The Theory of Money and Credit

Socialism: An Economic and Sociological Analysis