The debt ceiling talks are a sideshow
The real question is what we do to make the cycle of debt addiction end
In 2011, when the sequester kabuki introduce the modern version of the debt ceiling political sideshow, Barack Obama said of federal red ink, “We can’t keep kicking the can down the road.” Then he and Congress gave that can a good swift kick. The White House and Congress have kicked the can down the road every year since, sometimes kicking it more than once annually.
Give it a good swift kick!
It’s 12 years since what was supposedly a debt-ceiling crisis. Nothing’s been done about the underlying problem, while unfunded spending keeps rising – demanded by, and engorging, both Democrats and Republicans who claim to loath borrow-and-spend.
In 2011 U.S. public debt – the serious kind, contractual obligations rather than vague promises Congress could repudiate – was $20 trillion. (All money numbers here are converted to 2023 dollars.) Today public debt is $28 trillion. Thus since 2011, while the political class of Washington D.C. staged elaborate rituals of denouncing debt – anybody remember Nancy Pelosi’s much touted “pay-go?” – public debt has risen almost 50 percent.
When Bill Clinton took office, U.S. public debt was $9 trillion. Thus in the last 30 years the United States has borrowed more than twice as much as in its first 222 years. By 2033, the Congressional Budget Office expects U.S. public debt to reach $46 trillion – compared to the first Clinton budget, a fourfold increase in a half century.
Population is rising, but borrowing per capita rises much faster. A feedback loop has begun regarding interest: merely in the first five months of this year, rising interest rates added $107 billion to the public debt.
And there’s not the slightest hint of discipline.
Last summer Joe Biden won congressional approval of his Inflation Reduction Act, which, at face value, cut federal debt by $238 billion. It took Biden less than a month to blow through the entire savings with at least $400 billion in student loan forgiveness. The Inflation Reduction Act was justified as cutting federal debt – and almost immediately federal debt increased.
Attention will be on the current debt ceiling standoff, and whether the can is just kicked down the road again. The question ought to be – how does this end?
Any person, company, organization or government can borrow for a while. Eventually the waiter presents the bill. So how does the addiction of the United States to borrowing its way out of problems end?
Here in fast forward are the four possibilities:
1. Financial collapse. (Like a household becoming insolvent.)
2. Tax the middle class. (Soaking the rich won’t fix it.)
3. Cuts in entitlements, especially Social Security, Medicare and Medicaid. (The Pentagon budget should be reduced but cutting defense won’t fix it.)
4. Big rise in economic growth.
About 1). Any household with good credit – and the United States has good credit – can splurge for a while. Take a first-class vacation, buy a $107,000 668-horsepower Cadillac, order Bollinger ’59 by the case. (James Bond’s favorite.) For a while everything will seem perfectly normal.
Then mortgage payments are missed. The supercar is repossessed. Credit cards are cancelled. Eventually it all falls apart and you think, “But we were borrowing and everything seemed normal!”
Because the United States is the world’s #1 country and has a flawless credit rating, it has been able to splurge – undisciplined borrowing began about two decades ago under George W. Bush – without seeming impact. But the waiter always presents the bill. Now there’s inflation, declining strength of the dollar, rising debt-service costs.
This is happening as the Baby Boom goes deep into retirement. We’ve known the moment was coming for years – here is a warning from a quarter century ago -- and should have been saving. That’s what a well-run household does. Instead splurge after splurge after splurge.
About 2). Everyone including wealthy elites like Joe Biden (who himself uses tax dodges when he files) says “Tax the rich!” Though the top earners are way ahead of everyone else, they don’t command enough total income to fix the debt.
Today the top rate is 39.6 percent and the effective top rate is 26 percent. Economist William Gale of the Brookings Institution calculated in 2015 that raising the top rate to 50 percent would add $95 billion annually in federal revenue.
The economy has grown, now a 50 percent top rate would add about $200 billion in revenue for Washington D.C. annually. That would help – but only dent the growth of national debt.
The Congressional Budget Office calculates debt will rise by about $2 trillion a year for the next decade. That’s with current law, not taking into account any new splurges Congress may enact. Soaking the rich would drop growth of the debt to $1.8 trillion per annum. Helps, but not the solution.
If you want to tax our way out of national debt, more taxes on the middle class are needed. Wishful thinking doesn’t make this problem disappear.
Wishful thinking in the form of Modern Monetary Theory – Bernie Sanders’s fav, which holds the United States can borrow forever and never repay – seems to have come home to roost with the rebound of inflation. Then again classical economics can’t explain much if anything about the last 20 years, so maybe it’s all a shot in the dark.
About 3). Somewhat less than a third of federal spending is “discretionary” – for the military and for all federal agencies (EPA, air traffic control, national parks etc.). Defense is the largest portion of discretionary at 12 percent of federal spending, so though the Pentagon could be cut and the country remain safe, the debt would linger because the lion’s share of borrowing is for Social Security, Medicare, Medicaid and other entitlements.
On paper entitlements are guaranteed to recipients – but funds can run out or Congress can change the laws. The latest estimate is the Social Security will become insolvent in 2033 while Medicare goes insolvent in 2031.
Saying “but we were promised this money would always be there” doesn’t help anyone. The system’s trustees (the link above) estimate that Social Security benefits will be reduced 23 percent in 2033, Medicare payments reduced a like amount in 2031.
This can be lessened by means-testing federal entitlements, which would lower Social Security checks and Medicare help for the affluent (possibly eliminate, depending on details) and increase Social Security taxes paid by the affluent. This is only a patch, though.
Modern Monetary Theory be as it may, under current conditions there isn’t any magic way to sustain entitlement spending without reducing benefits, raising taxes or both.
This is the core reason the White House and Congressional leaders of both parties have been kicking the can down the road for 12 years. Under current conditions there isn’t any magic way to sustain entitlement spending without reducing benefits, raising taxes or both.
No politician wants to take the blame, each party wants to blame the other. So both mutually agree to kick the can down the road hoping to postpone the inevitable.
The sooner entitlements are reformed, the less traumatic the next steps will be. The current political system wants to postpone all difficult decisions indefinitely while borrowing to provide ice-cream sundaes. That’s how pols cling to power and to their donations (which are not officially bribes).
Which leaves 4). Growing the economy is the only means to slay the debt monster without painful sacrifice. Economic growth causes tax revenues to rise in a manner that makes everybody happy – every business, every person comes out ahead by paying more taxes on rising income.
Around 4 percent is the number that reduces debt without sacrifice. The fourth quarter of 2022 saw 2.6 percent growth, the first quarter of 2023 limped in at 1.1 percent.
Considering population is rising and primary resources are plentiful, you’d expect American growth to be higher. There are many issues; the number-one issue is a generation-long Democratic Party campaign against growth.
More regulations, more agencies, more rules, restrictions on energy use: these discourage growth. Some on the left – usually, those already with plenty of money of their own – shake fists against growth.
The “climate emergency” declaration the left craves (climate change is real and a genuine hazard but can be handled with pragmatic steps) would bring economic growth slamming to a halt.
For generations the left has viewed growth as in and of itself bad. Now the left controls much of the administrative state, and is – purposefully or not – impeding growth. The leading example is the Environmental Impact Assessment, mandated by Congress in 1969 with the explicit purpose of preventing construction. Usually construction of housing, bridges, highways, industrial facilities is necessary for economic growth.
The package of rules and laws around environmental impact statements lost force over the past generation, which upset the anti-growth left. About a year ago Biden brought them back, and the result was slower growth.
Senator Joe Manchin of West Virginia thought he had a deal with the White House to soften these rules in return for Manchin’s vote on the IRA. Biden went back on his word.
Now Kevin McCarthy is asking for Biden to keep his word as part of the debt ceiling talks. Let’s hope this happens.
Economic growth is bad for hard-left ideology, good for everyone else. It’s the only way to slay the debt monster without entitlements cuts and/or middle class tax increases that will make practically everyone miserable. The sooner we stop kicking the can down the road, the better.
Bonus: What About Seizing Fortunes? The calculations here concern income. Then there is “wealth” – property held, stocks owned. Wealth can be worth a bundle without generating income in any particular year. That’s why Senator Elizabeth Warren of Massachusetts proposes to tax wealth.
In the United States there is a political consensus since 1913 (the 16th Amendment) that federal government may confiscate a share of income. No modern government can function without such a consensus.
Limiting the confiscation to income does allow for the accumulation of offensive pools of wealth, such as the many tens of billions held by Washington Post owner Jeff Bezos. That wealth could be confiscated – there’s no conceptual reason why not. But societies that have allowed their elites to confiscate wealth have, in every case, become wretched.
This is why Senator Warren is dishonest about her proposal. In speeches she chants, ”Two cents! Two cents!” to make it sound as though she’s saying each American would contribute two pennies to her fund. This is so ridiculously small it couldn’t matter, of course.
What Warren wants is for government to confiscate 2 percent of American wealth each year. At that rate with wealth would be exhausted in….
Thank you for pointing out the problem and the possible solutions; the American public could use someone like you in political office to help bring this to general public knowledge. I know I'd vote for you! One minor point to make: Social Security is already 'means tested', in fact twice...the first time is in the calculation of the benefit, which is (justifiably) tilted in favor of replacing lower income levels at a higher rate. The second time is at the point of taxation of benefits: upon the glorious day that one hits 62, or 65 (full benefits), or 70 (like someone we admire very much) and begins to receive the benefit, should you have meaningful additional income to report during a year in retirement, your SS benefits now become taxable. So, perhaps instead of saying that SS should be 'means tested', perhaps we should say it needs to be 'more means tested'.