“I wish it were possible to obtain a single amendment to our constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its constitution; I mean an additional article, taking from the federal government the power of borrowing.”
THOMAS JEFFERSON, letter to John Taylor, November 26, 1798
“You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.”
Vice President Dick Cheney – Remarks to Paul H. O’Neill – Treasury Secretary (January 9, 2004)
Last week President Trump issued his proposed FY 2020 budget. It was an all-time record $4.75 T proposal (that is $4.75 TRILLION dollars – or $4,750 BILLION dollars). There wasn’t much talk about it but the budget predicts at least four more years of $1T deficits. In 2015 as a presidential candidate, Donald Trump tweeted that if the debt topped $21 trillion, “Obama will have effectively bankrupted our country.” In March 2016, Mr. Trump told the Washington Post that he could eliminate the federal debt within eight years. The federal debt recently ticked past $22 trillion, an all-time high and based on what is proposed for 2020 and beyond it will go significantly higher. Uhhh, what happened there?!?!?! We really haven’t heard a lot of budget talk since. But was the record budget and the deficit the leading story on the 6:00 PM news? Not really – if the deficit was reported at all it was probably down the list. As Vice President Cheney maintained, apparently it doesn’t matter, once you have been elected. In fairness to Mr. Cheney I think he was saying that it didn’t matter POLITICALLY, but then again that doesn’t make me feel any better. Is the measure of political expediency how decisions get made these days? It makes me shiver but I think that is true.
As noted before in this blog, neither political party seems to care about debt reduction, except to bludgeon the other party when they are not in power. President Trump certainly didn’t address it in the State of the Union address. During the first two years of the Trump administration, the debt increased by more than $2 trillion, in part because of the $1.5 trillion tax cut and large spending increases the president has signed into law. But Democrats left the issue largely untouched too. In her State of the Union speech response, Stacey Abrams made no mention of debt. Several of the NUMEROUS Democratic presidential candidates have proposed tax increases, but not to reduce the deficit – but instead to come up with new programs which won’t be funded with revenues but simply added to the ballooning debt.
There has been a lot of discussion recently about the “power of the purse” that Congress has. Indeed, spending must for the most part be authorized by spending bills that come from Congress to the President. But to hear some of our congressman talk you would think that these massive debts have been foisted upon us by the Kremlin!! Hopefully, perhaps, some members of Congress now feel the need to at least talk about this. Sen. David Perdue (R) Ga. and Rep. Andy Biggs (R) Ariz. and others, have introduced resolutions declaring the national debt a “national security crisis” and called for stern measures. Funny – this has been the position of many in the national intelligence community for several years. I’m sorry, I have become too much of a cynic, but this makes me laugh. Doesn’t Congress HAVE the power of the purse? Aren’t they in charge of how much money is authorized for spending and the amount of taxes that we raise? This strikes me as a hapless cry to “protect us from ourselves”!!
Where I came from, debt was inherently to be avoided to the extent it could be. I transfer this principal to how we run government. (My friend Tom Jefferson and I agree on that). But is that right? Maybe I am getting all cranked up for nothing.
• After all, Trump administration officials said that while the president was “concerned” about the rise of the debt, the debt level was not a concern. They are going to get tough on NEXT year’s budget. And MAYBE in ten years or so we may actually achieve a balanced budget.
• And along with their supply-side friends, they argue that tax cuts and spending increases will lift economic growth which will in turn result in more revenues.
• Democrats come at if from a different angle but they don’t think federal debt is an urgent problem either – except that those darn Republicans are hypocritical in not reducing the debt.
• While we are borrowing more and more, some “experts” say that we just need to measure the debt as a share of the nation’s economic output – the Gross Domestic Product (GDP). And it’s true by most measures the economy is doing well so presumably we can afford to borrow more.
• All this federal borrowing might drive rates up, but interest is still relatively low.
• China still seems to be ready to lend money to the United States. They are not worried about our debt.
• Its true that our debt has grown but interest payments as a share of Gross Domestic Product (GDP) have actually declined.
• And then there is the line of reasoning that says that our national debt is for the most part an “internal” debt. That is, we owe it to ourselves. Our bond holders count their US Savings bonds and T-Bills as valuable assets. So, we are just moving assets around, I guess the thinking goes.
But somehow all of this just doesn’t make me feel any better. And by the way there ARE some opposing view-points.
• Using that percentage-of-the-GDP metric, total federal debt has climbed from 31 percent of the GDP in 2001 to 76 percent this year. And the fact that the interest cost percentage of the GDP is low relates to low interest rates. As I recall from personal experience, sometimes interest rates go up – sometimes a lot. What if people start to think that those T-Bills are NOT such a solid investment and they refuse to buy them at low rates?
• Some economists warn that all this federal borrowing WILL limit private sector borrowing, constraining economic growth.
• The government’s borrowing is not FREE!! We still need to make interest payments to investors. And that is getting more and more expensive – interest payments now exceed $1 billion a day.
• With the amount of the budget committed to debt, defense and other “entitlements”, budget cutting is very difficult. Discretionary, non-military spending is not a big part of the budget – around $500 – $600 billion. So even significant decreases to these categories do NOT provide huge opportunities for debt reduction.
• Borrowing costs HAVE increased because of raising interest rates. Ten-year Treasury notes, which reached a low of 1.38 percent in July 2016, have nearly doubled since then. They are 2.61% today and I notice that they have been over 3% within the last few months. And there was a time in the bad old days when they were way over 10%.
• The Congressional Budget Office (CBO) says that if we don’t do something the debt will rise to 93 percent of the GDP within the next decade.
• China might like our debt but apparently not ALL foreigners do. The share of federal debt held by foreign investors has declined from 49 percent in 2008 to just 39 percent last year.
• A few years ago, the CBO predicted that by fiscal year 2022 the deficit would exceed $1 trillion – but as noted above we have already hit that!! Amazingly to me, this level HAS been hit before, but only in catastrophic economic times, not in times of a robust economy as we now have. What will we do if the economy cools, as it inevitably will?
• The CBO says that the fastest-growing component of federal spending is interest on the debt.
• And because of our reduced corporate and other reduced rates our tax receipts are down. In fairness some other receipts like excise taxes and tariffs helped to offset some of the losses.
• The CBO really never bought into the viability of the reduced tax scheme and unfortunately based on the early returns it appears that they were right.
So, what is my point? Authority and Responsibility go together. You can’t have one without the other. You can’t be held responsible for an outcome if you haven’t been delegated the power to address the root-causes of the outcome. But conversely IF YOU HAVE THAT POWER, you ARE RESPONSIBLE for the outcome. Congress has the power of the purse. Congress has AUTHORITY to control spending and revenues and it has the RESPONSIBILITY to control spending and revenues. For a whole bunch of reasons, it has failed miserably to meet its responsibilities in this regard and I swear sometimes it wishes it didn’t have the authority or the responsibility. And by the way, the Executive branch of government plays right along. In the end the taxpayers are left holding the bag.
Craig-very interesting take on the federal deficit. One of the reasons people don’t take it seriously is that politicos have been yelling about the deficit my whole lifetime and well before that and no disaster has happened. Therefore it is like crying wolf.
Yes, it is true that we have been talking about it so long that nobody notices it. My fear is that by the time we notice it, we will be in really deep weeds!!