American citizens born in the 21st century do not think much of capitalism. A growing share of young people supports socialist candidates, and policies such as wealth taxes. There are many reasons why young people are soured on capitalism, but one that is often overlooked is the burden of federal debt they inherit.
The federal debt burden inherited by younger generations has increased dramatically compared to that inherited by older generations. The last time that the federal government balanced the budget was in 2000. In that year the total debt burden was $5.6 trillion, equal to 55.5 percent of GDP. Each citizen inherited a debt burden of about $20,000, and that inherited by each household was $53,600. Since 2000 the debt burden per person and per household has increased five-fold. This year the total federal debt increased to more than $40 trillion, equal to 123 percent of GDP. A child born in 2026 inherits a debt burden of $116,480, and a household inherits a debt equal to $295,494.
To put the public debt burden in perspective, the average mortgage is $264,000. The average household inherits a public debt burden that exceeds the mortgage on their home. They will pay more taxes to service the public debt over their lifetime than they will to pay on their home mortgage. There is of course a significant difference, households choose to purchase a home and assume mortgage debt; they do not have a choice in paying taxes to service the public debt that they inherit. It is no wonder why younger generations are reluctant to marry and purchase a home.
Perhaps most discouraging for younger generations is the acceleration in the debt burden. The Congressional Budget Office projects that by midcentury the total debt burden will increase to double our national income, and rising interest rates are increasing the cost of servicing the national debt.
These numbers do not capture the full burden of federal debt on younger generations because they do not include unfunded liabilities in entitlement programs. The trust funds for Social Security and Medicare will be exhausted over the next decade. At that point younger generations will face either increased contribution rates and/or decreased benefits.
When federal debt increases more rapidly than national income this has a negative impact on economic growth. Indeed, the rate of economic growth over the past two decades has decreased compared to that over prior decades. Federal borrowing crowds out private borrowing, diminishing capital investments, productivity change, and economic growth. This means fewer opportunities for younger generations entering the labor force and lower lifetime incomes.
The intergenerational transfer of debt burdens from older generations to younger generations is a major factor in the negative view that younger generations have of capitalism. This is a moral as well as economic issue. Thomas Jefferson expressed this view, arguing that it is immoral for one generation to pass debt along to future generations. Working with Treasury Secretary Alexander Hamilton, Jefferson drafted a plan to pay off the national debt within one generation.
Jefferson and Hamilton endorsed the ‘Old Time Religion’ of balanced budgets. The federal government might borrow to finance a war, because it is difficult to raise sufficient taxes in a military emergency; but that debt must be paid off during peacetime. The ‘Old Time Religion’ of balanced budgets was accepted by elected officials for centuries. But in recent years politicians have abandoned the ‘Old Time Religion’ of balanced budgets. The last time that the federal budget was balanced was in the 1990s at the end of the Cold War. Today, resolutions calling for a balanced budget do not even make it out of Congressional committees.
The fact that we have given up on balancing the budget is not lost on younger generations. They ask the obvious question regarding intergenerational transfers of debt. Much of the federal debt was incurred to fund transfer payments to older generations; and younger generations will pay taxes over their lifetime to finance that debt. As Jefferson argued, this is equivalent to parents incurring debt that is inherited by their children that they must repay over their lifetime. The moral dilemma is not lost on younger generations and helps explain their disaffection with our capitalist system.
Barry W. Poulson is professor emeritus at the University of Colorado, Boulder, and on the Board of the Prosperity for US Foundation.