Don’t Let the Government-Shutdown Charade Distract You From the Debt Crisis

“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.”

https://reason.com/2023/09/14/dont-let-the-government-shutdown-charade-distract-you-from-the-debt-crisis/

The U.S. Credit Rating Just Dropped. It’s Time for Radical Budget Reform.

“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.”

9 questions about the debt ceiling, answered

“The US government doesn’t have to work this way.
Congress could pass legislation doing away with the debt ceiling, and the president has options to ignore it as well, though they’d likely prompt legal challenges. As mentioned above, the president could invoke the 14th Amendment and ignore the debt limit, or Congress could approve an increase to the debt cap that’s so high it basically nullifies the ceiling.

Abolishing the debt limit altogether would prevent either party from using this process as political leverage. Doing so would greatly reduce the uncertainty that comes around every time there’s a deadline like this and prevent significant market volatility that results.

“There are zero downsides to getting rid of the debt ceiling,” said Bivens from the Economic Policy Institute.

Other economic experts note that eliminating the debt ceiling could take away an opportunity for Congress to debate fiscal policy. But many feel like that’s a moot point, given debt ceiling standoffs are rarely about any specific spending anymore, but rather about weakening the party in power.”

The Biden Administration Reduced the Debt-to-GDP Ratio in the Worst Possible Way

“Public debt since 2020 has grown by $3 trillion. According to the latest Monthly Treasury Statement, government spending in March of 2023 alone was twice the revenue collected. The deficit in the first six months of FY 2023 is about 80 percent as large as the deficit for the entire FY 2022. Our mid-year deficit is $1.1 trillion, compared to $667 billion at the same point last year. Falling revenue collection is responsible for only 17 percent of this difference. The other 83 percent is overwhelmingly due to excessive and increased spending.
In simpler terms, the decline in the debt-to-GDP ratio cannot be attributed to spending cuts, even as we move away from what’s now widely regarded as an excessive fiscal response to the pandemic.”

“Government debt as a share of the U.S. economy is falling.”

“The main driver behind the reduction is inflation”

The Debt Ceiling Fight Is a Reminder of America’s Dire Fiscal Future

“The debt ceiling standoff has people concerned about what will happen if the U.S. defaults on its debt. I certainly hope both sides will come together to avoid this outcome. But it is still worth reminding everyone how incredibly precarious the status quo is, and why something needs to change.
You’ve heard the warnings about our debt levels, to the point where they might be easy to tune out. I make these all the time. When assessing how much we should worry, it’s wise to look both at our current situation and where we’re heading. This year, our budget deficit will likely be $1.4 trillion. What’s more, the deficit will reach about $2.8 trillion in 2033. And that’s assuming peace, prosperity, relatively low interest rates, no new spending, and that some provisions of the 2017 tax cuts will expire as scheduled.

That’s $20 trillion in new borrowing over 10 years. So far, Uncle Sam has “only” accumulated $31 trillion in debt over the course of our entire history. But it gets worse fast. Congressional Budget Office projections show that the federal government will accumulate about $114 trillion in deficits over the next 30 years, which would place our debt at nearly 200 percent of gross domestic product (GDP). Most of this predicted shortfall is due to Social Security and Medicare. Together these programs will consume 11.5 percent of GDP by 2035.

This is a lot of borrowing. In theory, it might not lead to a debt crisis if the government can find people to buy the debt at low rates or Congress develops a serious plan to repay it. Yet even assuming the best case scenario, borrowing like this has a cost. Debt is a drag on economic growth, which means less tax revenue to pay it off.

A large debt also means higher interest payments. We already spend more on interest payments than on Medicaid, and 17.4 percent of our revenue goes toward interest payments. These payments will balloon to $1.5 trillion, or 22 percent of federal revenue, by 2033. Within 30 years, interest payments will consume half of all tax revenues. By then a lot of the spending that people like will be crowded out.

Even these estimates are rosy. They don’t take into consideration the inflation that could result from all this debt accumulation. Most of our debt has a maturity of less than four years. As Congress gives up on controlling debt, once-confident investors might worry that the Fed will stabilize the debt with inflation. History provides some examples, and today’s debt-to-GDP has fallen since the pandemic in part due to inflation. Investors, sooner rather than later, could demand higher interest rates as an inflation premium.

Research confirms the impact of debt on long-term interest rates. Every percentage point increase in the debt-to-GDP ratio is associated with an increase of three basis points (0.03 percent) of the long-term real interest rate. So, if the debt ratio rises by 100 percent over the next 30 years, it will put upward pressure on interest rates of about three percentage points.

Because of the dollar’s unique role in the global economy, the United States may have more legroom than other countries. Still, it’s wise to worry that if the debt-to-GDP ratio rises from 94 percent to roughly 200 percent in three decades, we could face some serious interest rate hikes.

If interest rates rise by just one percentage point, that will add $3 trillion in interest payments over 10 years, on top of the $10 trillion we’re already scheduled to pay. That’s an additional $30 trillion over 30 years. Add a few more interest rate hikes and soon all your tax revenue is consumed by interest payments, not to mention the negative impact these rate hikes can have on the larger American economy.

A better question is this: Is it credible to bet on investors agreeing to buy $114 trillion in debt over the next 30 years? China and Japan have already reduced their holdings of American bonds, while the Fed already holds 25 percent of our debt. It’s unclear that domestic investors will step up to the plate. What happens then? Taxes can only be raised so much. Under the current tax system, on average, the United States has raised about 18 percent of GDP in tax revenue. But in 30 years, spending will be 30 percent of GDP.

My hope is that if you’ve read this far, you now understand that Congress should start working diligently to stop our debt from growing. No side is going to like what’s required, but it must be done. And the longer we wait, the more painful it will be.”

Pentagon chiefs: Debt default is bad for troops, good for China

““China right now describes us in their open speeches, etc., as a declining power,” Milley said. “Defaulting on the debt would only reinforce that thought and embolden China and increase risk to the United States.”
Austin added that a default would mean a “substantial risk to our reputation” that China could exploit.”

Why the debt ceiling problem never goes away

“The reason Congress continues to land in the same place is that raising or suspending the debt ceiling, much like funding the government, is something it must address on a regular basis. Every few years or so, Congress has to either increase or suspend the country’s debt ceiling as it accrues more debt. This debt comes from covering government expenses including paying for the military, health care programs, and Social Security.

If it fails to address the debt ceiling, Congress would ruin the US credit rating and put its ability to pay its bills in doubt. That would likely trigger a domestic economic crisis, if not an international one. Were the US to default, interest rates would probably go up and unemployment would increase, potentially putting thousands or even millions of people out of work.

Because it’s must-pass legislation and requires the backing of both chambers, the party that’s out of power in the White House or in the minority in Congress has often used this measure as leverage to extract policy concessions or send a political message. That has erased any incentive to reform the process, even though Congress could do away with the debt ceiling if it wanted to.”

“In recent years, Republicans have been more aggressive in demanding concessions from Democratic administrations in exchange for their support for a debt ceiling increase, though both parties have utilized such votes in the past to make a point. That’s left the US in a dangerous cycle in which the minority party tries to squeeze every concession it can out of the process, debt ceiling negotiations go down to the wire, and any miscalculation on the part of lawmakers could inadvertently cause a default.”

“the United States is unique in having a debt limit that lawmakers need to suspend or raise every few years.

A debt limit was first established in 1917 in order to “make it easier to finance mobilization efforts in World War I,” per the Brookings Institution. That enabled the US government to take on debt without Congress approving each individual expenditure, which meant it could more quickly and efficiently finance the military. Since the 1960s, Congress has raised the debt limit more than 70 times; 20 of those times have been in the last 23 years. The debt limit effectively caps how much the US is able to borrow from federal agencies, foreign countries, and banks, so if the country defaults, it isn’t able to pay its bills.”

“The US government doesn’t have to work this way.
Congress could pass legislation doing away with the debt ceiling, and the president has options to ignore it as well, though they’d likely prompt legal challenges. As Vox’s Dylan Matthews has reported, the president could invoke the 14th Amendment and ignore the debt limit, or Congress could approve an increase to the debt cap that’s so high it basically nullifies the ceiling.

Abolishing the debt limit altogether would prevent either party from using this process as political leverage. Doing so would greatly reduce the uncertainty that comes around every time there’s a deadline like this and prevent significant market volatility that results.

“There are zero downsides to getting rid of the debt ceiling. It is utterly meaningless as a policy guide or institution; it is good only for gridlocking government. And, in the modern age, gridlock is an enormous problem, given the huge pressing needs policymakers should be addressing,” said the EPI’s Bivens.

Other economic experts note that eliminating the debt ceiling could take away an opportunity for Congress to debate fiscal policy. But many feel like that’s a moot point, given debt ceiling standoffs are rarely about any specific spending anymore, but rather about weakening the party in power.”

“It’s unlikely there’s enough political will to make any of these changes happen. Instead, it seems as though lawmakers are comfortable getting right up to the brink — and running the risk of a default again and again.”