“While some nations tremble at the thought of high indebtedness, we Americans bask in the warm, comforting glow of $34 trillion in government IOUs. Why worry about a debt crisis when everyone wants to buy U.S. debt?
Those of us who advocate fiscal prudence have been asked that question repeatedly in the past 15 years. We would point to the host of unfunded liabilities looming in our future. They would respond by pointing to the trend of declining interest rates over time. Low rates, they said, meant we should be able to handle interest payments on outstanding debt while growing the economy with smart investments. Indeed, thanks to low interest rates, payments on federal government debt as a share of GDP dropped from more than 3 percent in the early 1990s to 1.5 percent in 2021. Debt seemed cheap and manageable, so why worry?
As the 10-year Treasury rate hit 5 percent this year, with interest payments on the debt rapidly increasing and bondholders’ interest in buying U.S. debt declining, it’s tempting for us fiscal hawks to simply say, “We told you so.” But it’s more productive to understand how we ended up in this quagmire, in hopes of avoiding similar mistakes in the future.”
“In the last 50 years, when the budget process has been in place, Congress has managed only four times to pass a budget on time and through the regular process. Seventeen times, members of Congress haven’t bothered to pass a budget at all. That hasn’t stopped them from spending money they didn’t have, or from making promises to voters they wouldn’t be able to fulfill. I doubt I need to remind you that it’s gotten worse. In the last half-decade, Congress added $5 trillion to the already elevated and growing federal debt with no plan for repayment.
Nor should I need to remind this column’s readers that government interest payments are growing quickly, propelled by higher interest rates applied to an expanding debt level. That’s the result of years of excuses that interest rates would remain historically low.
While you might see how legislators chose to believe that inflation and high interest rates were things of the past, there’s no excuse for ignoring the upcoming insolvency of programs like Medicare and Social Security. This looming calamity has been warned of for decades in government reports and scholarly publications.”
“At the heart of the commission’s charge must be a commitment not just to reduce some deficits but to put the government back on a sustainable track. As my colleague and former CBO Director Keith Hall convinced me, the commission will fail if it doesn’t have a clear target from the start.”
“What can a bipartisan commission on the debt accomplish? The Committee for a Responsible Federal Budget (CRFB), which has been advocating for such a commission, argues that special congressional task forces can focus discussions, generate greater public awareness of major issues, and create the opportunity for lawmakers to put all ideas on the table.
In 1983, for example, Social Security was approaching insolvency—a problem that sounds pretty familiar today—when a commission of congressional leaders and presidential appointees worked out a series of potential fixes. Afterward, Congress enacted many of those reforms, making Social Security solvent for another five decades.
More recently there was the National Commission on Fiscal Responsibility and Reform, formed by President Barack Obama in the aftermath of the 2008 recession. It produced a plan that could have reduced the debt by $4 trillion over 10 years by raising taxes, cutting spending, and selling off federal property. Even though most of those proposals were never enacted, the CRFB points hopefully to the fact that 11 of the 18 commission members supported the final recommendations, including five Republicans and five Democrats.”
“Inflation has fallen from the shocking highs that were reached last year, but the Federal Reserve’s efforts have not successfully returned the beast to its cage.
If rising prices are to be fully tamed, it increasingly looks like Congress will have to get the deficit under control first.
Prices are up 3.7 percent over the past year, according to new inflation data released by the Bureau of Labor Statistics on Thursday morning. But so-called “core inflation,” which filters out the more volatile categories like food and fuel prices, rang in at 4.1 percent in the newest report. Some smaller categories have seen considerably faster price hikes over the past 12 months—shelter prices, which include rents and hotel costs, are up 7.2 percent.
In an attempt to control inflation, the Federal Reserve had raised interest rates at 11 consecutive meetings starting in March of last year. Since July, the central bank has left interest rates unchanged—the Fed’s current base rate is 5.5 percent, up from 3.25 percent a year ago. Higher interest rates seem to have brought inflation down, but prices are still rising nearly twice as fast as the Federal Reserve’s target of 2 percent annually.
It’s possible that we’ve reached the limit of what the Federal Reserve can accomplish in terms of taming inflation through monetary policy. The federal government’s $33 trillion national debt and rising budget deficits are creating inflationary pressure in ways that remain underappreciated.
The big problem is that, while higher interest rates are helping curb inflation, they are worsening the federal government’s deficit. Writing at CNBC, Kelly Evans gets at the heart of this conundrum: “If we don’t quickly close the gap between spending and revenues, the debt load will keep growing, and interest costs will keep on rising, and the deficit will thus stay elevated, which grows the debt load even more.””
“Changes to monetary policy have brought inflation down from last year’s near-record highs, but the monetary theory upon which that policy is built assumes that fiscal policy will finish the job by reducing deficits. Congress, so far, doesn’t seem interested in cooperating—so expect prices to keep rising at an annoyingly fast rate.”
“The yields on U.S. Treasury bonds are now hitting levels not seen in decades. The 10-year Treasury bond is nearing 5 percent, while the 20-year bond has already crossed that threshold—and some analysts expect higher yields to be coming”
“Unlike most mortgages, which have fixed interest rates, much of the U.S. government’s debt is tied up in short-term bonds which periodically “roll over” into new bonds with updated interest rates. As a result, higher interest rates mean higher interest payments—and those funds come directly out of the federal budget, leaving less revenue for everything else the government might aspire to do, whether funding welfare programs or buying more fighter jets.
“That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6 percent,” the CRFB explained last month. “Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.”
Interest payments on the debt will be the fastest-growing part of the federal budget over the next three decades, according to the Congressional Budget Office’s (CBO) projections. In the shorter term, interest payments are set to triple by 2033, when they will cost an estimated $1.4 trillion—a total that will only grow higher if more unplanned borrowing takes place before then, or if interest rates rise higher than the CBO expects.”
“It doesn’t have to be like this; the whims of House Speaker Kevin McCarthy and the Republican Party’s hard-core members don’t have to determine whether federal workers get paid or not. Instead, we could eliminate shutdowns altogether using something called an automatic CR.
Usually, when the federal government shuts down or is on the verge of shutting down, the issue is resolved in the short term by passing a “continuing resolution” (or CR): a bill saying, basically, that the government should stay the course and keep spending what it’s been spending, maybe give or take a few minor tweaks. In the average year, CRs fund the government for 137 out of 365 days.
By extension, we could eliminate government shutdowns forever by enacting an automatic CR: a law that says that in the event that Congress fails to authorize funding for the government, things will just keep going along the way they’ve been.”
“While controlling discretionary spending is important for fiscal responsibility, for reducing government waste, and for negotiating the proper size and scope of federal activities, the current shutdown debate is largely symbolic. America’s biggest fiscal challenge lies in the unchecked growth of federal health care and old-age entitlement programs. Repeated shutdown fights and a slew of temporary continuing resolutions have gotten us no closer to reforming Social Security and Medicare.”
“The longer Washington waits to fix autopilot spending, the more damage they’ll do. The Congressional Budget Office’s latest long-term budget outlook projects that U.S government spending will consume nearly 30 percent of the economy by 2053—almost 40 percent higher than the historical average. Congress is expected to rack up more than $100 trillion in additional deficits over those 30 years—more than four times what the U.S. government has borrowed over its entire history. Who will lend the U.S. government such vast sums?
The main drivers of this increase are heightened interest costs and the growth in health care and Social Security spending. With Medicare and Social Security responsible for 95 percent of long-term unfunded obligations, according to the Treasury Financial Report, there’s simply no way any serious fiscal reform effort can leave these programs untouched. Every other part of the budget will either stay steady or decline slightly. Other so-called mandatory programs, including various welfare programs, retirement benefits for federal employees, and some veterans’ benefits, are projected to decline as a share of the economy. Discretionary spending depends on what Congress decides to spend each year; if historical trends hold, this part of the budget will decline by one-sixth. And yet this is the part of the budget that all this shutdown fuss is about.”
“The hike in bond yields and subsequent rise in mortgage rates caught some people off-guard since there was no comparable reaction after the Standard & Poor’s downgrade. But that took place in different economic times when the U.S. government had more room to maneuver.”
“”Inflation is the economic equivalent of a partial default. The debt was sold under a 2% inflation target, and people expected that or less inflation. The government borrowed and printed $5 Trillion with no plan to pay it back, devaluing the outstanding debt as a result,” he cautions. “Yes, this is not a formal default. And a formal default would have far reaching financial consequences that inflation does not have. Still, for a bondholder it’s the same thing.”
Having been burned by the U.S. government’s policies, investors perceive it as an increasingly risky borrower, just as Fitch (and S&P in 2011) say. As a result, they demand a greater price to loan the feds money—hence higher bond yields. And since 10-year Treasury yields serve as benchmarks for other borrowing rates, such as mortgages, that means higher cost for average Americans who have little say in D.C.’s financial shenanigans but have to suffer the consequences.”
“”Such high and rising debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook,” according to the CBO.
That means unpleasant consequences not just for government officials, but for those of us who live in the economy they hobble. The government will have to pay more to borrow, and so will we. We’ll do so in a country less prosperous than it should have been.”
“Fitch Ratings..downgraded the U.S. government’s credit rating due in part to Congress’ erosion in governance. Indeed, year after year, we see the same political theater unfold: last-minute deals, deficits, and, all too often, the passage of gigantic omnibus spending bills without proper scrutiny, along with repeated debt ceiling fights and threats of shutdown.
But these are just symptoms of a budget-making process that remains in desperate need of reform. With legislators chronically delinquent about following their own rules, the change may need to be as much cultural as procedural. No matter how good the rules are, they’re useless if politicians ignore them. And in a world where politicians are rarely told no when it comes to creating or expanding programs, most simply refuse to have their hands tied or behave as responsible stewards of your dollars.”
“What we need is a comprehensive budget process under which programs like Social Security, Medicare, and Medicaid are no longer permitted to grow without meaningful oversight. Combined with other mandatory, more-or-less automatic spending items, they make up more than 70 percent of the budget. Thus, they must be included in the regular budget process and subjected to regular review. Only then will our elected representatives be forced to stop ignoring the side of the budget that requires their attention the most.”
“Enter a “Base Closure and Realignment Commission (BRAC)”-style fiscal commission, an idea promoted by the Cato Institute’s Romina Boccia. This commission would be staffed with independent experts appointed by the president. It would be “tasked with a clear and attainable objective, such as stabilizing the growth in the debt at no more than the GDP of the country, and empowered with fast-track authority, such that its recommendations become self-executing upon presidential approval, without Congress having to affirmatively vote on their enactment,” Boccia explains.
I’m uneasy about delegating the president power to appoint “experts.” Unfortunately, Congress has proven they will never seriously address the problem unless forced to. The idea is not unprecedented. Congress has already delegated a lot of its legislative power to administrative agencies and the executive branch. It’s also how the political class dealt with the closures of military facilities after the Cold War—another set of hard choices they refused to make on their own.
What’s more, Congress would retain some veto power. If they disapprove of the proposal, the House and Senate can reject it through a joint resolution within a specified period. Whether it’s the best solution to address our fiscal problems remains to be seen, but it’s worth considering.”
“Making continuing appropriations automatic in case of a lapse could remove the threat of shutdowns.”