I Guess We're Doing the Debt Limit Again
Plus, the economics of debts and deficits
Because we live in a political system that seems, at times, to possess all the grace and maturity of a pageant mom potluck, we are back to talking about a problem that shouldn’t exist.
This isn’t a politics newsletter, so I try to be as fair as possible when I talk about economic issues. But, it also wouldn’t be fair to you if I tried to do the DC media dance and pretend this current crisis is anything other than Republicans being dangerously stupid, and assuming their voters aren’t informed enough to catch on. Then, if their voters don’t catch on and the economic house burns down, they can try to play it off as “Ya, we brought the matches, but what responsible boyscout doesn’t always have matches? You never know when you might need a fire to cook or keep warm! BuT tHe DeMoCrAtS sOaKeD eVeRyThInG iN gAsOlInE!!!!”
This is absolutely not true, and I’ll get to that in a minute. But first, I want to make sure to define the key terms here.
Debt - This is the total amount of money the US government owes for all of the money it has borrowed. Currently about $31 Trillion.
Deficit - This is the amount of money the government had to borrow this year only to pay for spending commitments they did not have enough tax revenue to pay for. Last year this was about $1.3 Trillion. This number gets added up with all existing previous deficits to get to the debt number.
Debt Limit - A stupid and useless law that basically says “the government cannot borrow more than this amount”. This is stupid and useless because this law says nothing about how much the government can spend. Spending decisions have already been made, and the money has already been appropriated. What the debt limit is doing is stopping the government from paying the bill for money that was already spent.
Republicans are counting on voters to confuse these three things so they will be mad at Democrats if things go bad. Essentially what they are saying is something along the lines of this: Democrats are too fiscally irresponsible, so we are using this opportunity to hold their feet to the fire and make them more responsible.
This is both wrong and stupid. This is wrong because, for at least as long as I have been alive, Democrats have been the more fiscally responsible party. This is stupid because failing to increase the debt limit will open a pandora’s box—we have no good idea what will happen, but it is reasonable to expect the worst possible outcomes.
First I’ll address why it’s wrong. It’s easy to do with a few graphs.
This first graph is the annual deficit. Deficit here is depicted as a negative surplus, so when the blue line is below the black zero line, the US government has run a deficit. The further below the line the larger the deficit. Now, look again at my altered graph which shows Republican administrations in red, and Democratic administrations in blue.
What you are looking at here is deficit by Reagan and Bush 41, then by Clinton, then by Bush 43, then by Obama, Trump, and finally Biden. The graph is a bit weird where it plots the points at the federal fiscal year (beginning of October), but plots the dates at the calendar year (beginning of January). So, the dates on bottom don’t completely line up with the dates in the blue line. For instance, that really low trough just after 2020 is actually the deficit number for 2020, even though it comes after 2020 on the X axis. I’m only saying this so nobody can accuse me of trying to fudge the numbers. Go play with the graph yourself, you’ll see what I mean. I have to make sure nobody can accuse me of fudging the numbers because what this graph shows is clear. The deficit is consistently larger, and gets worse for all three Republican presidents in my lifetime. Then, the number gets consistently back up closer to the zero line for all three democratic presidents.
So, the debt actually grows much faster when Republicans are the ones spending. But the wrong isn’t even as bad as the stupid. The stupid happens when the debt limit isn’t increased—meaning that Congress does not allow the government to pay its own bills.
What we really have here would be something like if a husband and a wife were fighting about money. They are fairly well off, so they have a lot of money to spend. The husband spends way too much money on things like golf, guns, and sports cars; while that doesn’t make the wife completely innocent, he does spend more money than she does. One day, she decides she would like to go buy a sweet new electric Volkswagen hippie van to drive the kids around—I mean, just look at this thing, it’s awesome. The van actually costs less than what the husband normally spends, but he hates electric vehicles and gets mad. He tells his wife that he doesn’t want to pay the mortgage and the family will be homeless because of this van. Note, it isn’t that they can’t afford to pay the mortgage, it’s just that the husband is mad that he didn’t get his way. But the wife remembers that part of their wedding vows to each other were to never go bankrupt. Now, the wife has to start dipping into the 401(k) to make sure they don’t lose the house and go bankrupt because the husband is…well…stupid.
If that seems like a bit of an over dramatization, let me quote for you Section 4 of the 14th Amendment to the Constitution.
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
That’s right. Shall not be questioned.
It is unconstitutional for Republicans to allow the government to default on its debt, but they, the party that loves God and the Constitution more than anything else, are ready to devour widows’ houses in order to break the Constitution. If you have a better word to describe this than stupid, I’d love to hear it.
That is the situation we are in right now. Republicans, who are the least fiscally responsible of the two parties, are refusing to pay the bills because they are mad about what Democrats have spent. Right at this moment, Treasury Secretary Janet Yellen is having to dip into things like Social Security and Medicare in order to pay the government’s bills because Republicans are running the train at full speed down the track to bankruptcy.
So, what happens if the United States goes bankrupt?
Honestly, I have no idea. Honestly, nobody has any idea. In the past, when other countries have defaulted on debt they have been spiraled into financial catastrophe—like 1,000% inflation almost overnight type catastrophe. It’s not entirely clear this would be the case for the United States because the US dollar is the largest global reserve currency. More US dollars are held in reserve than all other currencies combined. Because of this, if the US defaulted it wouldn’t just be an economic inconvenience like if Argentina or Greece defaulted. It would ripple through every single corner of the global economic system.
Other countries use the dollar as a reserve because the dollar is assumed to be as good as gold—literally. The dollar has always been so stable, and US debt so reliable, that other countries use it to make sure their own financial system is functioning. So, there is some possibility that a US default on debt might not actually destroy everything because the rest of the world might sort of look the other way for a while because they don’t want everything to burn down. But that is by no means a guarantee; it might be equally as likely to see the entire world crash at the same time in the same way smaller countries have when they have defaulted. The Great Depression might just be a starting point for an event like this.
But even if the very best case scenario played out, everything would still change for the global financial system, and the US economy. US debt would no longer be considered a “sure thing”. Lending money to the United States would become risky—after all, our childish politicians might decide—make the conscious choice—that you should lose your investment. After a US default, it would make a whole lot less sense for the dollar to serve as a reserve currency, and the best place to safely buy government bonds would probably be the European Union. In short, interest on US debt would definitely go up, and that can have huge economic consequences.
What is it that Republicans want in return for permitting the US government to keep its constitutional mandate and not go bankrupt? Spending cuts.
I know it’s rich for the party that runs up the debt so much to suddenly want to cut spending. But, like I said, they are hoping that voters will be confused and get mad at Democrats. The United States should always, always, ALWAYS, ALWAYS, pay its debt. Using the financial security of the United States and the economic security of 330 million Americans as a hostage is stupid. It should never be done. We shouldn’t even have a debt limit.
The question about debt is an entirely separate question from paying for the debt. And, even though Republicans are the party which consistently grows annual deficits, running large deficits every year might not be the best idea.
The economics here are really long and complicated, but i’ll try to make it as easy to understand as possible. Imagine that $1 in taxation equals $1 in useful government spending for economic development.
This isn’t really the case, it’s actually nearly impossible to get a good taxation to useful spending number because of all the different types of spending. For example, a dollar spent on infrastructure is generally thought by economists to create $2 of economic development or more; people and businesses use new roads, bridges, or ports to do more economic stuff. For research and development there is a different number; for healthcare spending there is a different number; things like spying and intelligence gathering are probably really low returns on tax dollars, but they provide great value in difficult to measure places like security. Long story short, I am unaware of any good measurement of the value of $1 of taxes spent on other things. Government haters might try to tell you the return for a dollar is 30 cents, but measurements like this are usually not using good methods when making the claim.
Government haters also love to say that “you know how to spend your money better than the government does”. And this, too, vastly overshoots the reality. For someone who doesn’t have a lot of money, an extra dollar might go toward food, housing, clothing, or education. For that person, they certainly spent their money better than the government would if it were taxed. For someone trying to get a small business up and running an extra dollar might be spent on payroll, or capital, or insurance; this too is probably better spending than the government would do if that dollar were taxed. But this becomes less true the higher up the income scale you go. If you gave me an extra dollar, I’d probably spend it on golf. The economic productivity of that spending is not going to be as high as if the government taxed that dollar and built a road or paid a teacher with it. Now think about the super rich? What would LeBron James do with an extra dollar? I don’t know the guy, but people in his peer group often buy another yacht, or jet, or limited edition car. That is probably even less economically productive than my golf spending. We’ll come back to this in a bit, but for now, let’s just pretend that $1 in taxes equals $1 in productive spending.
But, in the United States, this can’t be the case anymore because of all our debt. We have to pay the service on that debt—kind of like paying the minimum balance on a credit card each month.
Side Note: There are economists who also argue that government debt crowds out private investment, so there is an economic cost just for the fact that debt exists. This is definitely true, but may not play as big a role as it was once thought to. For instance, when Japan’s debt to GDP ratio went over 1 (meaning more total debt than total productivity) it was thought by many economists that this would mean total financial catastrophe for Japan. It didn’t. In fact, it really didn’t change much of anything. Economists were so shocked about how wrong they were there even started to be discussions about whether debt mattered at all. It probably does, but how much isn’t clear, and it’s also now clear that debt matters less if you are a country other people want to invest in, like Japan or the US. So, there is likely some investment crowd out, but it’s difficult to know how much, or how to really think about this in the modern context, so I’ll leave this here as a side note and move on.Every dollar spent servicing this debt is a dollar that isn’t spent for useful productivity. Right now the interest the government pays on debt is about 6.8% of total government spending. This is money the government doesn’t use for useful stuff, now our $1:$1 ratio is falls. $1 in taxation only leads to 93.2 cents in useful spending. Debt is already costing the economy a big chunk. Maybe 6.8% doesn’t sound like a lot, but it comes out to about $396 Billion this year. To put that in context, depending on how certain spending is classified, the US government spends more money servicing debt than it does on transportation and education combined. And this debt being serviced is older debt, as newer debt comes due, this cost will only increase because deficits have been getting larger and larger, which means more and more debt will come due.
The new debt the US government accumulates, will cost more and more money in future debt service spending. But the debt service is also heavily influenced by interest rates. With interest rates up, even the government has to pay more interest to borrow money. As the interest costs get higher, more and more tax dollars have to go toward debt service. There are some estimates that project that if the current path of deficit spending continues, debt service might be as high as 40% of all federal spending in 30 years. If that were to happen than $1 in taxes only nets 60 cents in useful spending. That would be a massive economic punch in the gut.
Hopefully I’ve made it clear by now that it actually is a good idea to have a mature discussion about deficit spending. I emphasize mature because using the debt ceiling as a chip in this fight isn’t mature—it’s stupid. Suppose the US misses a debt payment, and it isn’t just shrugged off by everyone using the dollar as a reserve currency. Well, interest on new debt might climb really fast. We might be paying 20% interest pretty quickly, then we suddenly approach disaster at a rapid pace as new debt is required to pay for this debt, and things can spiral pretty quickly from there.
So, what does a mature discussion look like? Well, if you ask Republicans, the answer is completely in spending cuts; absolutely no new taxes. That all sounds great, until you ask for details about where to cut spending.
When it really gets down to the nitty gritty details, nobody really wants to cut anything. Even the 2010 Tea Party crowd really didn’t have a good answer to this question. Rick Perry sunk his own presidential campaign because he couldn’t even remember the cuts he wanted to make—clearly it was all just a campaign message and not a core belief.
If Social Security, Medicare, and Medicaid are off the table, well guess what? You’ve just taken about 53% of all federal government spending off the table for cuts. How about military spending? Most of the time that is off the table too. That’s another 20% of federal spending. Interest payments can’t be cut out, so that’s another 7% of untouchable spending right there. If I’m doing my math right, we’re now at 80% of all federal spending that isn’t eligible for spending cuts. Well, take a guess at how much of the federal government’s spending was from deficits last year?
The government spent $6.27 trillion last year, and $1.38 trillion of it was new debt.
That’s right. We could cut every single dollar of federal spending that politicians haven’t taken off the table, and it still wouldn’t have balanced last year’s budget. Good luck telling voters why they don’t have anymore education spending; food assistance; national parks; research and development (like Covid vaccines); or foreign aid; but they are still gonna see more debt piling up. This is why simply naming spending cuts isn’t sufficient if we want to seriously tackle debt, and get to a place where we aren’t at a serious risk of debt service payments spiraling out of control.
Inflation seems to have been tamed this time around. As I detailed this a while back, having several months (about 6 now) of really low month over month inflation is the best measurement for inflation trends. The high year over year number is just due to measuring against previous high inflation, not current disinflation. Click the link if you want a refresher. Anyway, what if something else happens, and inflation comes back but sticks around for a really long time? I’m not in the hardcore Rand Paul group that says the government should never have debt, but $31 Trillion with about 20% of all spending being deficit spending opens us up to some pretty big risks. Our public debts have quite a lot of exposure to interest rates right now, which is why most people (including me) expect the Federal Reserve to start lowering rates later this year.
So, how do we fix this? Unfortunately, we have to make everyone mad to do it. But if you want to get mad at someone, get mad at the boomers. It’s probably a whole book in itself, but that generation really screwed the whole country. Essentially, they have gotten more from the government while giving less back than any American generation ever. Now their kids are stuck with the bill.
To really take care of debt we have to both cut spending and raise taxes. Nobody wants to hear it, but because Social Security, Medicare, and military are the three biggest spending programs; that is where we get the most mileage out of our cuts. Notice I’m leaving Medicaid out, but that is because Social Security and Medicare should be more like Medicaid; I’ll explain. Medicaid is a needs based program. The most economically and medically vulnerable Americans are the ones who qualify for Medicaid use. Social Security and Medicare are not this way. Everyone gets them, no matter how wealthy they are, or how little they need them. In fact, the way Social Security is run, the more money you make while working the more money you get when you retire. I’m not suggesting that Social Security and Medicare be limited to only the economically vulnerable, but some sort of means testing would go a long way. If someone made $200,000 a year for 20 years, they should have been responsible and saved for their own retirement—they don’t need a full Social Security or Medicare benefit. Means testing would change these programs so that those who need the program the least don’t get oversized benefits.
An additional change to these programs is to increase the retirement age. Currently people are eligible for benefits between 62 and 67 years old. Life expectancy at this retirement age is much higher now than it was when these programs were created, meaning people are taking benefits for much longer than they once did. These days, so many boomers are refusing to retire until passed age 70 anyway, so why not move the eligibility age back? Unfortunately, this would mean that younger workers (like me, I realize I’m screwing myself with these recommendations) would get less from the government than their parents get, but hey, we ought to be used to it by now anyway. It’s just one more of their messes we have to clean up.
Military cuts are difficult to discuss. I’m not a military or foreign policy expert, so I can’t really point to a place and say, “right there, cut that military program right there.” But, in 2021 the US spent $800 Billion in military spending, and we’re looking at something like $1.2 Trillion this year. That is something like 3x what China spends, and more than the next 10 highest countries (China included) combined. If someone tells me that we have to spend 3x what China spends in order to stay safe, it seems like what they are actually saying is that China has a better military than we do—I find that hard to believe. Again, since I’m not an expert here, I’m not sure where to cut, or how much, but I’m really skeptical of anyone claiming that we have to spend as much as we do in order to avoid being blitzkrieged like France in WWII.
I have a suggestion for the military, and for that matter, all government spending. Right now, every government agency needs to spend every penny of their budget whether it is useful spending or not. If every penny isn’t spent, so the thinking goes, it would suggest to the lawmakers in Congress that they don’t need all the money they get. To keep their own budgets from being cut, agencies have an incentive to spend every penny, and then some. I would suggest a new budgeting law that eliminates this incentive. If an agency, or branch of the military, operates efficiently, saves money where they can, and comes in under budget, they get rewarded. The reward is a simple guarantee that their next year’s budget cannot be cut without a supermajority vote from their appropriations committee. So, if the Air Force comes in under budget, their next year’s budget cannot be lower unless 3/5 or 2/3 the both Congressional committees in charge of their budget in the House and Senate vote for it to be cut. This ensures responsible spenders never get punished—a cut would likely only come in extreme circumstances like a depression. I would also suggest automatically pegging an inflation increase for every agency that comes in under budget, or giving them back their savings in a next year’s budget, but even without these it would be a massive improvement over the current system.
But, as I have identified, trying to do this with spending cuts alone is going to be nearly impossible. Taxes have to be higher.
I’m not going to go through all the details again, but higher taxes don’t ruin the economy, and tax cuts don’t pay for themselves. This is abundantly clear to economists, and for the most part the only economists who argue otherwise are the ones whose paychecks are written by people who tell them to argue otherwise. Even Republicans in Congress already understand this. So, if you want to read the details, I’ll leave you with what I wrote a while back.
Tax rates similar to what we had in the 90s, combined with some spending cuts would actually get debts taken care of, and it wouldn’t really hurt the economy. That way we wouldn’t really have to worry about interest rates compounding debt problems. But, this would require Congress to actually do something.
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