Creating Chaos
The Republican’s misguided effort to keep Trump’s supporters
Remember when the Republicans were the party for grown-ups and the Democrats were the bleeding-heart spendthrifts. Yeah, me neither, but that’s how the Republicans used to try and brand themselves. The GOP has morphed into an outrage machine whose principle governing philosophy is to create chaos and see what happens. Trump might be gone (maybe), but the GOP can’t seem to get past his use of misinformation to dupe uninformed voters. That ended poorly for Trump in 2020, and risks ending poorly for America in 2023.
The latest example of this is House Speaker Kevin McCarthy’s vow not to allow a straight-forward vote on increasing the national debt limit. Of course, they’d like you to forget they nearly doubled the deficit even before the pandemic when Trump was President. Even worse, they did it during an economic expansion when paying down the debt from the “Great Recession” should have been the priority. Instead, they made rewarding their billionaire campaign donors priority number one. That reward came in the form of a reduction in taxes on corporations and the top 1% of earners, which drove the deficit through the roof. In case there was any doubt that their latest faux outrage is all politics, they voted to increase the debt limit three times when Trump was President. McCarthy votes “yes” each time.
The Deficit
Despite the Republican hypocrisy, there is a serious underlying question. Is the national debt a problem? First, we have to define the current situation. Anytime the government spends more than it takes in during a fiscal year (FY) the country has a deficit. It’s been over thirty years since the last time we didn’t have an annual deficit. However, America’s ability to borrow money at a low interest rate and the growth in size of the economy over time has enabled us to run a deficit without it being a major concern. In 2015, we had a deficit of $439 billion, which seems like a big number, yet it only represented 2.4% of the Gross Domestic Product (GDP). Generally, economists consider that to be a sustainable level of deficit.
The next couple years the deficit increased slightly but remained manageable. However, by 2019, the first full year of the Trump tax cuts, the deficit was up to $984 billion and 4.6% of the GDP. The Congressional Budget Office predicted the country would continue to incur annual deficits in excess of a trillion dollars for the foreseeable future. Even Trump’s hand-picked Federal Reserve Chairman Jerome Powell testified before Congress that the deficits were unsustainable. This was before the pandemic threw the economy into recession. The 2020 FY more than tripled the deficit to $3.1 trillion (15% of GDP). COVID continued to play havoc with the budget in 2021, but we’re finally now starting to get back to near pre-COVID budget deficits. Keep in mind though our current deficit is still 75% higher than Obama’s last full year.
The Debt
Each year we have a deficit, that excess spending is added onto the national debt. The current national debt stands at over $31 trillion dollars. Much like the annual deficit, the numbers are so large it’s difficult to wrap your head around. Economists often refer to the debt as a percentage of the GDP to get a number that’s easier to understand and ultimately more useful. Following World War II the debt percentage reached 118% of GDP, but over the next 25 years we paid down the debt until it was less than a third of the GDP by the early 1970s.
It stayed at that level until the Reagan tax cuts caused it to soar to 50% during his Presidency. It finally topped out at 60% in 1990 and stayed around that level until the Great Recession of 2008/2009. The stimulus bill that prevented an economic collapse caused the debt to balloon to 100% of the GDP. After the Trump tax cuts it edged up to 106%. The pandemic caused the Debt-GDP ratio to rocket to record levels before falling to about 120% now, still higher than our WWII level of debt.
The Debt Ceiling
For much of our history America didn’t have a debt ceiling. It was just assumed that if Congress passed a budget, that the government had the authority to finance the paying of those obligations. This is still true in nearly every other country. Congress created the debt ceiling in 1917 so the government could issue war bonds for the First World War without needing to approve each new series of bonds individually. Unfortunately, they didn’t set this law to expire at the end of the war. However, raising the debt limit was generally a formality until Republicans decided to make it an issue during the Obama administration. Since then the Republicans have claimed the debt ceiling is necessary to control spending, at least when there’s a Democratic president. This completely ignores the fact that Congress already controls spending through the budget process. The debt ceiling is simply a matter of paying the obligations they have already approved.
A Concern, or Certain Doom
So, is our level of debt a problem? The short answer is yes. How serious of a problem depends on which economist you talk to. David Wessel, who is a senior fellow in Economic Studies at The Brookings Institution, isn’t that worried. He reasons that America can borrow money at extremely low interest rates and as long as the economy continues to grow, we can manage the debt for the foreseeable future. However, even he acknowledges there are limits to the amount of debt we can incur without negatively affecting the economy. What that limit is, isn’t clear. His position is we do need to reign in the growth of the debt, but as long as Congress takes some prudent measures over the next several years there’s no immediate crisis.
As reassuring as Wessel’s analysis is, it seems to be in the minority. Stanford economist John Cochrane doesn’t dispute Wessel’s math, but points out he’s making risky assumptions. America’s ability to borrow money at near zero interest rates isn’t an unchanging law of nature. There’s currently plenty of money managers looking for a safe place to put their money and American Treasury bonds seem to fit that bill. If the supply of bond buyers dries up and/or faith in America’s ability to pay falls we could easily see higher interest rates. Even a relatively modest interest rate hike could effectively double our deficit with no additional spending.
Cochrane describes a catastrophic doom loop where higher interest rates leads to more borrowing which leads to higher interest rates. Fortunately, he doesn’t foresee this as imminent in America. He does caution that Greece was in a similar predicament of managing a large debt when a spike in interest rates caused their economy to collapse. Greece’s economic spiral was long in the making but came to a head unexpectedly fast. America’s parallels with Greece are stark and we won’t have Germany to bail us out.
What nearly all economists agree on is Congress should repeal the debt ceiling, and that defaulting on our obligations would be catastrophic. Defaulting would likely lead to an immediate 10% decline in the American economy, and the damage would extend beyond our shores as well. Half of all the foreign currency reserves in the world are in U.S. Dollars. A sudden devaluation of the dollar would likely crash the world’s economy. The debt Republicans pretend to be so concerned about would go through the roof. The certain downgrade in the U.S. credit rating would lead to trillions of dollars of new debt in interest alone, even without any additional spending. This could easily trigger a Greece-like doom loop that John Cochrane warned about.
The Math
Many economists are warning we’re sleepwalking our way into an unprecedented crisis. Even those in opposition recognize the need to get the deficit under control. However, failing to increase the debt limit only exacerbates the problem. It has only been 30 years since we had both a strong economy and a balanced budget under Bill Clinton. The math isn’t that complicated. We need new tax revenue focused on the very wealthy. Since the Trump tax cuts went into effect we’ve seen the cash-on-hand for corporations and the ultrarich increase dramatically. Those stockpiles of cash aren’t doing anything for the economy. We can use revenue from taxes on that wealth to reduce the debt and promote economic growth.
The other side of the equation is spending. The Republicans increased defense spending at a time we were decreasing overseas military operations. The Department of Defense has hundreds of billions of dollars in overseas spending that we should reduce. This would result in a massive saving to the budget. It’s likely Republicans will want to cut entitlements such as food stamps, housing vouchers and other public assistance. There may be some waste in these programs that we can target. However, any cuts to entitlements will directly lead to less consumer spending and less economic activity. The best way to cut entitlements is to encourage prosperity so fewer people qualify for assistance.
Conclusion
Even the rosiest outlooks make assumptions about getting the deficit under control. Looking at the dysfunction in Congress over recent decades it’s hard to be optimistic about that scenario. They also seem to overlook the entirely likely situation that there will be new crises to deal with. The national debt is a real problem which will require bipartisan cooperation to address. But using the debt ceiling as leverage only makes the situation worse.
Our national debt represents a ticking time bomb that we ignore at our own peril. Instead of looking for real solutions, the Republicans are playing politics over the debt limit. It’s in the budget negotiations over expenditures and revenue that the solutions to the deficit are going to be found. If we’re going to defuse this debt time bomb it’s going to take Democrats and Republicans working together to get the job done.
NOTE: This article is an updated and expanded version of an article I wrote 2 years ago. Click here to see the original article.
Partial list of sources:
How Worried Should You Be About the Federal Deficit? — David Wessel
US Stimulus Will Boost Growth at a Cost of Higher Deficits — Fitch Ratings
Yes, the National Debt Is Still a Problem. Always Was. — Ryan Bourne
McCarthys Biggest Foe in the Debt Ceiling Fight? Math. — Hayes Brown.
What Happens When the U.S. Hits the Debt Ceiling — Noah Berman
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