On behalf of the Baby Boomers, I would like to issue a hearty "Thank You" to our parents' generation who saved the world from Hitler and Tojo, and to our kids and grandkids who will pay for our profligacy over the past few decades. We've been in the sweet spot.
Democratic leadership has chosen to make huge further debt increases a hallmark of the Biden administration with the $1.9 trillion Covid bill, which has little to do with fighting the disease, and a subsequent $2.0 trillion Infrastructure Bill. Their political gamble: independents and Democrats who claim to be "fiscal conservatives" don't mean it; voters are addicted to "free stuff".
How bad is it?
- For those who love numbers, the National Debt Clock shows a concise summary of federal, state, and local income, spending, and debt. Currently Federal debt is 129% of the value of all of the goods and services produced and sold in the United States annually (up from 104% in 2016). Official Federal spending is 193 % of revenue (up from 115% in 2016.) For every dollar that the Federal government takes in, it spends two.
- As a baseline pre-Covid, the Federal Fiscal Year 2021 budget of $4.829 trillion projected a deficit of $966 billion. Spending was 60% mandatory (Social Security; Medicare; Medicaid; food aid), 20 % military; 1 % interest on debt, and 20 % all other (Health and Human Services; Education; Housing; Transportation; Parks; whatever). Thus far, Congress (with Pelosi, Trump, and McConnell at the controls) has passed five Covid relief bills costing a total of $3.5 trillion.
- International comparisons are risky, but China reports about $8 trillion of debt, or about 55% of GDP, and the paths are diverging.
- Perhaps most disturbingly, Congress has given up on the budget process in place since 1974. Instead of Congress adjusting the President's proposals and negotiating trade-offs, eight of the last ten budgets have resulted from last minute Continuing Resolution Authorities, which just agree to keep on keepin' on with what the government is doing.
Let's try to distill the most common debt arguments from the cacaphony of special interests, doomsayers, and political panderers.
For the Democratic team who would layer on a few more trillion dollars:
1. Debt doesn't matter. Since the US dollar is the international Reserve Currency (generally used for global financial transactions) the Federal Reserve can just print more money. In a different era the Federal Reserve saw a primary obligation to protect the value of the currency; today's chair emphasizes the "twin mandate" to maintain full employment, and vows to keep interest rates low for years. The premise is that the economists will foresee the inflation problem before it arises, and take timely difficult political decisions when they need to. In essence, the financial world is full of fairies and unicorns.
2. We need to invest in infrastructure; it will pay for itself. This is true in some areas - notably the interstate highway system; perhaps the airline industry; broadly in education; perhaps in some aspects of "Green Energy". But some rigor in calculating a Return on Investment is necessary. California's High Speed Rail "train to nowhere" provides a cautionary tale of fraudulent promises and political corruption. Most of the Corona virus spending is designed to mitigate pain rather than to build lasting infrastructure for the future. Beware the lobbyists.
3. This is an opportunity to address wealth inequality. Substantial taxes on the super rich would help to close the gap. True, but a couple of cautions: the addition of a tax on existing wealth is problematic, so we are probably talking about income taxes which would produce much less, and the likes of Bezos, Zuckerberg, Bloomberg, Gates, Steyer, and Benioff are not stepping up. Ditto the Wall Street donors who support the non-Elizabeth Warren wing of the Democratic Party. The days when the rich voted Republican are long gone, so the Democrats would need to gore their own ox.
And for the Republican / conservative folks who are concerned for their grandchildren:
1. Today's interest rates are about 1.3 % on the 10 year Federal bond; over the past 50 years they have been as high as 15%, averaging about 6%. When they return to "normal", there will be a brutal squeeze on funding for the "discretionary" 40 % portion of the Federal budget, particularly the 20% non-military portion.
2. Deficits will ultimately be solved by budget constraint with higher taxes (unlikely) or by inflation which targets people living on fixed incomes such as pensions, bonds, or Social Security. Older citizens vote disproportionately.
3. China has aspirations to replace the dollar with the yuan as the global reserve currency. In terms of global influence, it is far better to be a lender than a borrower.
Within the next few weeks the debt question will come to a head. Nancy Pelosi wants to give no quarter, passing the next Corona virus relief bill at $1.9 trillion, with Chuck Schumer relying on the "reconciliation" process in the Senate with 50 Democratic votes. The Democratic establishment has not allowed Biden to negotiate with 10 moderate Republicans who have a proposal which strips out the extraneous junk. The diversion of including a $15 minimum wage will apparently fall off - either because the Senate Parlimentarian does not think it qualifies for reconciliation, or because Joe Manchin and Kyrsten Sinema have vowed to vote against it. But Democratic leadership wants a fight and the $1.9 trillion boondoggle is it unless Manchin or Sinema signal otherwise.
A few decades ago our politicians realized that they could have both guns and butter with lower taxes if they just passed on the bill to future generations. The virus accelerated the process, but the direction has been clear for awhile.
bill bowen - 2/25/21