What to do with deficits, debts
The hawks of the federal budget found themselves in a quandary. Having predicted nine of the last zero debt crises, those of us who are concerned about the trajectory of US government spending must inevitably convince the public that this time it’s different. It will be hard to sell, but we must try. Uncle Sam’s expenses are overwhelming. This cannot and will not go on forever. Our time is almost over.
According to the Congressional Budget Office projectionsthe deficit in 2023 will be $1.4 trillion. Over the next ten years, it will average $2.0 trillion a year. US debt, already at record levels, will inevitably rise. The federal debt exceeds 120 percent of GDP. If spending trends continue, debt will rise to 195 percent of GDP in thirty years. These numbers are unprecedented in America, even in wartime.
There is no guarantee that the United States will be able to maintain such a high level of debt. Bond markets may get scared long before the middle of the century. If so, woe to the global financial system! A huge number of portfolios built on the “risk-free rate of return” of Treasury bonds will survive a terrible defeat.
We can’t taxes get out of the fiscal hole. For last fifty yearstax revenues ranged from 14 to 19 percent of GDP. Despite significant changes to the tax code during this time, there appears to be a relatively narrow window for federal revenue, determined by the underlying structure of the economy. Prudence requires that we treat 20 percent of GDP as the absolute maximum for government revenue.
Closing the gap means painful but necessary spending cuts or direct inflationary financing.
Modern Monetary Theory (MMT), until recently a hot topic for economic commentators, argues that governments do not face fiscal constraints, only real resource constraints. According to MMT, as long as the government can print money, it can always pay its bills.
Supporters of this absurd position have recently, for obvious reasons, quieted down. We tried to run printing presses to cover the public debt during the COVID years and the result was 40 years of inflation. But we have to put this into perspective. A 33 percent increase in the money supply from 2020 to 2022 covered about half of the government debt added over that period. Imagine how much worse it would be if we relied exclusively on the Fed documents because of our wastefulness!
This leaves the cost cutting. The current guerrilla bidding over the national debt ceiling may bring some profitable reforms, but you should not count on it. Both the Democratic president and the Republican House of Representatives have removed welfare reform from discussion. As anyone familiar with budget arithmetic knows, this ensures that the problem is never solved. Social Security, Medicare and Medicaid make up the bulk of “mandatory” federal spending, put on autopilot by politicians in the past. CBO projects by 2023 they will rise to 15.3 percent of GDP. In contrast, discretionary spending and interest spending would be 6.0 percent and 3.6 percent, respectively.
cuts must come from rights. In other places there is not enough fat to trim it.
The economic consequences of financial instability will be severe. Eventually, investors will suspect that Uncle Sam can’t pay his bills. They will demand higher real interest rates on government bonds to offset the increased risk. Once that happens, debt service will absorb an uncomfortably large share of government spending. Utilities will be compressed. As a result, partisan polarization will intensify. When there is less bounty left, the hyenas must fight even more fiercely for the leftover scraps.
“Society becomes great when old people plant trees in whose shade they know they will never sit,” says an ancient Greek proverb. For a self-governing republic to flourish, each generation must handle the public purse with great care. But for three generations, our “old men” preferred to cut trees rather than plant them. Now we bear the costs.
Intergenerational injustice has befallen us. But we have no right to increase this injustice towards those who follow us. When it comes to financial stupidity, this time is another. Let’s not transfer money. Instead, let’s make the necessary sacrifices to ensure the long-term integrity of the United States. Let’s plant trees.