“inflation and high debt create a trap for policymakers: higher inflation could lead the Federal Reserve raise interest rates, which would increase the payments owed on the debt.”
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“the 24 lawmakers who signed [the] letter are asking for two policies that are the lowest of low-hanging fruit. First, they are seeking the creation of a bipartisan debt commission, similar to one implemented during President Barack Obama’s first term that helped trigger modest reductions in annual budget deficits following the Great Recession.
Commissions are a great way for lawmakers to make it look like they’re doing something without actually doing it, of course, but in this case, it might be a helpful exercise. It has been so long since debt and deficit politics have featured prominently in politics that it’s not clear whether there is a workable coalition in Congress to address the debt. A commission may help organize and focus those debates—and may raise further awareness among voters.”
“consider the public debt—especially the federal debt, which ballooned as a result of large budget deficits in recent years. (In 2020, the federal government raised $3.4 trillion in revenue and spent $6.6 trillion.) The interest cost of the national debt was $253 billion in 2008, equivalent to $325 billion in 2021 dollars; it remained around that level through 2015. Even though the debt doubled in those years, sharply falling interest rates and low inflation helped contain costs.
But that was yesterday. With today’s higher inflation and rising interest rates (perhaps with more to come), the Congressional Budget Office (CBO) estimates that the interest cost of public debt is $413 billion in 2021, stated in current dollars. Obviously, any dollar spent on interest cannot be spent on government benefits or services.
Looking ahead, the CBO expects more of the same. For 2026, it projects that the interest rate on 10-year Treasury bonds, currently 1.5 percent, will be 2.6 percent, and that the interest cost of the federal debt will rise to $524 billion. For 2030, the projections are 2.8 percent and $829 billion, respectively, all stated in current dollars for the noted years.
Now we are talking about real money. To put $829 billion into perspective, in 2020 the United States spent $714 billion on the military, $769 billion on Medicare, and $914 billion on all nondefense discretionary spending, all stated in 2020 dollars. Back-of-the-envelope calculations strongly suggest that some spending categories will have to give.”
“Lawmakers voted 50-49 to raise the debt limit by $2.5 trillion, a figure that’s expected to tide the government over until after the midterm elections next fall. Every one to two years, it’s vital for the US to address the debt ceiling to cover past spending and make sure the government doesn’t default; if it did, it would likely have catastrophic economic consequences globally.
Interestingly, the resolution succeeded because it did not require 60 votes to clear a filibuster in the Senate after lawmakers passed a bill last Thursday granting a one-time exception to the rule.
The deal to suspend the filibuster was bipartisan; leaders of both parties have hesitated to make exceptions to the filibuster, a procedural rule requiring a Senate supermajority to pass legislation, if it gets blocked by the opposition. Senators were willing to make an exception in this case, for two reasons.
One, it enabled Democrats to approve the debt limit resolution on their own, with no Republican support. Republicans wanted to withhold their votes in hopes of weaponizing Democrats’ vote to raise the debt ceiling in future campaigns. Two, the deal allowed a vote to be held quickly, narrowly avoiding the December 15 default deadline calculated by Treasury Secretary Janet Yellen.
This last-minute deal enabled lawmakers to avert a debt default and massive economic crisis while overcoming a partisan impasse on the subject. For some Democrats, too, it revealed that exceptions to the filibuster are possible — and an option lawmakers should consider for other bills.”
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“The debt ceiling vote has opened the door to questions of whether Democrats would consider filibuster exceptions for other bills, like voting rights protections. Activists, and some Democratic lawmakers, have called for this in recent months amid failures to advance voting rights protections, police reform, and a $15 minimum wage due to GOP opposition in the Senate. But a filibuster exemption for policy changes is likely to be difficult to secure.
This time around, Democrats were only able to get an exception because it was for something Republicans actually wanted. Though there was enough GOP opposition to raising the debt limit that getting 60 Senate votes was in doubt, Republican leaders like Senate Minority Leader Mitch McConnell did not want the US to default. Those leaders made sure the exception passed for the good of the domestic and global economy. Without Republican support, Democrats likely wouldn’t be able to approve another exception in this same way.
That leaves Democrats with another challenging option: banding together for a rules change. Those sorts of modifications can be done by majority vote. But that would require the support of all 50 Democratic caucus members, which party leaders don’t currently have. Moderate Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) have staunchly opposed such changes thus far.
Still, this development has made it clear lawmakers do have another option to consider for bills that can’t pass via budget reconciliation, and has set a recent precedent for such carveouts. Now that it’s been done once, expect to hear calls to do it again. In fact, this filibuster carveout has sparked new conversation about how else this tactic could be used.”
“it’s likely that many Americans don’t understand what the debt ceiling is or what raising it entails. Consider the high share of respondents who said they were unsure in The Economist/YouGov’s survey. Part of what’s tricky here is the debt ceiling refers to debt and financial obligations the U.S. has already accrued — such as interest on the country’s debt or previously authorized spending, like Social Security benefits. That is, the debt limit is not a tool that authorizes new spending, as such expenditures are decided in completely separate legislation, like a bill for the next federal budget.”
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“past polls back up the idea that many people don’t grasp what it is or what the risks are if it’s not increased. In a 2013 HuffPost/YouGov poll, for instance, 42 percent of Americans correctly responded that a higher debt ceiling allowed the country to pay interest on its debt and spending that’s already been authorized, but 39 percent mistakenly said that the debt ceiling directly increased government spending and the amount of debt the U.S. holds. This survey also found plenty of uncertainty, as 20 percent said they weren’t sure what raising the debt ceiling meant. A poll by the Washington Post/Pew Research Center from 2011 — when the debt-ceiling debate was particularly fraught — also reflected a misunderstanding of the consequences of raising or not raising the debt limit. In the poll, more Americans were worried about what would happen if the debt ceiling was raised than if it wasn’t: 48 percent were more concerned that raising the debt ceiling would lead to more spending and debt, while 35 percent were more worried that not raising the cap would force a debt default and cause economic harm.”
“On the current path, the CBO predicted in March that the debt would grow to 102 percent of GDP by the end of 2021, to 107 percent by 2031, and 202 percent by 2051. It also predicted that by 2051, the federal government will be spending more than a quarter of its annual budget just to pay interest on the principal. But those estimates came before President Joe Biden signed the $1.9 trillion COVID-19 relief bill, which made the long-term budget outlook even worse.
What is the risk to the U.S. economy? Fiscal hawks have been sounding the alarm about rising debt levels for decades, but their nightmare scenario of runaway inflation hasn’t come to pass.”
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“As the industrialized world racked up debt through the 2010s, inflation and interest rates stayed low—contrary to the warnings of the doomsayers.
This situation, Furman and Summers say, implies that the U.S. government has much more leeway to borrow money, spend it on government projects, and grow its way out of the debt than fiscal hawks have led us to believe. Furman argues that the story is much the same regarding the pandemic-era economy.”
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“John Cochrane, an economist at Stanford University’s Hoover Institution, disagrees. “If you wait until the crisis comes, everything is much much worse,” he says.
As a fiscal hawk, Cochrane acknowledges that his doomsaying has been wrong for the past decade, but he says that doesn’t mean he’s wrong now.
“I live in California. We live on earthquake faults.” Cochrane says. “We haven’t had a major earthquake, a magnitude nine, for about a hundred years.” It would be foolish to consider someone a doomsayer for preparing for an earthquake in California, he says, despite the fact that major earthquakes aren’t a common occurrence.
“That’s the nature of the danger that faces us. It’s not a slow predictable thing,” says Cochrane. “It is the danger of a crisis breaking out. So I’m happy to be wrong for a while, but that doesn’t mean that the earthquake fault is not under us and growing bigger as we speak.””
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“”If it costs you…zero to borrow and something does more than zero, it’s worth doing,” says Furman. “It then needs to do a decent amount more than zero such that when you tax it…it pays itself back.” Furman claims that the expenditures that do this are limited, but says that the evidence points to the value of investing in children in areas like preschool and child health care.
Cochrane agrees that government spending on certain projects theoretically can boost growth, but he is skeptical of the government’s ability to spend the money wisely.”
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“Furman and Summers’ paper also expresses concerns about debt projections beyond 2030 absent Social Security and Medicare reform as baby boomers retire en masse. Simpson and Bowles recognized that the bill on eldercare would eventually be the item to bust the budget.
“All else equal, addressing entitlements sooner is better than addressing entitlements later,” Furman says. “If you want to address it more on benefit reduction, then you probably do want an earlier start, I’m comfortable doing it on the tax side. I understand others probably want to do it on the benefits side. And if I were them, I’d want to get started sooner too.””
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“”The question is where do you want to stabilize the debt,” says Furman. “People used to think it should be 30 percent of GDP. Is that what we need to do in order to be safe? I think if you’re asking that question without looking at interest rates, then you’re in danger of a very incomplete answer.”
“Most people acknowledge that there are limits but they envision slow, steady warnings. That you’ll see the problem coming and you’ll have plenty of time to fix things,” says Cochrane. “And I looked through history and I noticed that when things go wrong, they go wrong in a big crisis.””
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“”Things always go boom all of a sudden, and so the key to fiscal management is to keep some dry powder around to have some ability to be able to borrow more,” Cochrane says. “Imagine if world war breaks out, and we’ve already borrowed the 100 percent debt-to-GDP ratio that we ended World War II with. Well, once we’re at a 100, 150, 200, our ability to meet that next crisis with borrowing is gone and then that next crisis is a catastrophe.””
“In a world in which economic reality mattered to politicians, grandiose spending plans coupled with soaring government debt would pretty much preordain grim tax policy. But we don’t live in that world. In ours, tax and spending proposals are crafted based on their appeal to target audiences of voters, with no regard for balancing books or averting financial catastrophe.”
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“It’s necessary, though probably pointless, to emphasize that neither Trump’s nor Biden’s tax plans come close to paying for the federal government’s anticipated spending spree in the years to come.”
The Real News Podcast – Modern Monetary Theory – A Debate Between Randall Wray and Gerald Epstein The Real News. 2019. https://www.spreaker.com/user/therealnews/the-real-news-podcast-modern-monetary-th Is MMT “America First” Economics? Gerald Epstein. 3 20 2019. Institute for New Economic Thinking. https://www.ineteconomics.org/perspectives/blog/is-mmt-america-first-economics On Modern Monetary Theory
“In 2016, Trump had campaigned on eliminating the national debt in under a decade. Yet by June 2020, the federal budget deficit had reached $864 billion…for just the month. That was more than the entire budget gaps in either 2017 or 2018. By September, the nonpartisan Congressional Budget Office (CBO) was projecting a $3.3 trillion annual deficit in 2020. Federal debt levels, which equaled just 35 percent of the economy in 2007 and 79 percent of the economy in 2019, would reach 98 percent. The CBO had previously warned that persistently high debt and deficits would have consequences: slower economic growth, an ever-increasing share of the budget consumed by interest payments on the debt, and reduced capacity to act should a major crisis arise.
And yet as the virus consumed the nation, even many deficit hawks were recommending more spending, at least in the short term.”
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“In the early ’80s, some lawmakers had come under the influence of a macroeconomic theory that would come to be known as “supply-side economics.” This theory held that tax cuts could, in budget parlance, “pay for themselves” by boosting economic growth so much that the federal government would actually raise more revenue if it reduced rates.
There was some trivial truth to this. Imagine a world in which loaves of bread are taxed at 99 percent. This is a world in which not many loaves of bread are produced or sold and thus not much revenue is raised from the bread tax. Reduce the rate to, say, 50 percent, and you would probably see a marked increase in the production and sale of bread—and higher bread tax revenues as a result. Reduce the tax further, and the bread market would probably expand even more. Supply-side effects are real, but they typically offset only a small percentage of lost revenue.
Some Republicans took this to mean that tax cuts of just about any kind would often, and perhaps even always, result in higher federal revenues. At some point, however, lowering rates does in fact end up lowering revenues. A 0.001 percent tax on bread might unleash a powerful market in artisanal breadmaking. It would probably not produce higher total levels of tax revenue than a somewhat higher rate would.
In reality, this simplistic version of supply-side orthodoxy was not a macroeconomic theory so much as a convenient excuse for Republican lawmakers to give their voters what voters tend to want: tax cuts without spending reductions, i.e., a government they didn’t have to pay full price for.”
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“As with many diets, it worked—for a time. Bill Clinton began his presidency by raising the top income tax rate from 28 percent to 36 percent—an increase, but still far lower than the top rate at the beginning of Reagan’s presidency. And then, following the Republican takeover of Congress, Clinton negotiated with GOP lawmakers to lower projected federal spending—when politicians talk about spending “cuts” they are often referring to reductions of planned future spending—particularly on welfare assistance. Accordingly, the deficit dropped from $203 billion in 1994 to $22 billion in 1997.
Forced to work across the aisle, Clinton and the Republican Congress had done what their predecessors had failed to do: reduce the deficit. Federal spending dropped as a percentage of gross domestic product, which boomed under the first wave of internet-induced investments—the 1990s tech boom. The rapidly growing economy kept voters from revolting, and Clinton framed the budgetary contraction not as a reduction in government services but as an end to federal overreach.
“We know big government does not have all the answers,” he said in his 1996 State of the Union address. “We know there’s not a program for every problem. We have worked to give the American people a smaller, less bureaucratic government in Washington. And we have to give the American people one that lives within its means. The era of big government is over.”
In Clinton’s second term, the already shrunken deficit ceased to exist. By the year 2000, the federal government was running a $236 billion annual surplus. Finally, the deficit problem seemed to have been solved.
The trouble with diets is that even when they work, they’re hard to stick to. That is especially true when the diet must be renegotiated among a rotating cast of 535 lawmakers and a new president every four to eight years.
And so, under President George W. Bush, deficits returned”
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“Simpson-Bowles consisted of 18 people—a bipartisan mix of a dozen members of Congress and six private citizens—tasked with producing a set of recommendations for deficit reduction. There were difficult choices ahead. The committee’s job was to suggest which ones should be made.
The commission was a classic Washington gambit in that, outwardly, it was an attempt to solve a policy problem, but in reality, it was a politically motivated attempt to avoid solving that very problem.
Nominally, the problem the committee was tasked with solving was how to reduce the deficit. But that wasn’t the actual problem it was trying to solve, because since the 1980s the solution had remained fairly obvious: To reduce the gap between outlays (spending) and revenues (taxes), Congress would need to either increase tax revenue, reduce spending, or do some combination of the two. To be genuinely effective, the tax hikes probably would have to hit the middle class and the spending cuts probably would have to hit entitlements.
The actual problem the committee was intended to solve, then, was that, despite occasional protestations to the contrary, neither congressional lawmakers nor the president wanted to do any of this.
In the end, Simpson-Bowles recommended cutting spending and increasing taxes. In particular, it recommended cutting spending on entitlements and raising some taxes on the middle class in order to broaden the tax base.”
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“of course, neither the president nor congressional lawmakers agreed to any of it.”
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“a problem with Congress—is that it can’t tell itself what to do. Not for very long, anyway. The 112th Congress in 2012 has no power to bind the 113th Congress, which means that if Congress in 2013 does not like the instructions passed down from its forebearers, it can tell the 112th Congress to go get stuffed.”
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“Trump, like most Republicans, had run against the federal debt. His promise to eliminate it completely in eight years was deeply unrealistic, backed by no specific plan, and predicated in part on Trump’s confusion of the trade deficit (which measures inflows and outflows of goods between the United States and other countries) and the budget deficit (which measures how much more the federal government spends than it takes in). But it was, at least, a rhetorical concession to the Republican fiscal politics of the Obama years.
In early 2018, House Democrats negotiated a budget deal with Senate Republicans that suspended sequestration caps and authorized $300 billion in spending above previously allowed levels. The particulars were complex, as budget deals often are, but in broad strokes, the agreement was straightforward: Democrats got more funding for domestic spending, while Republicans got more funding for the military. Trump signed the bill, proclaiming, “We love and need our Military and gave them everything—and more.” The bill, he tweeted, would also mean “JOBS, JOBS, JOBS.”
For years, Democrats and Republicans had bickered over budget priorities. With the 2018 spending bill, they resolved their differences—by agreeing to spend more on everything.”
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“What Democrats saw not only in the 2017 tax bill but in the decadeslong deficit wars was that Republicans had found a political advantage in arguing that tax cuts paid for themselves. There was a clear pattern to federal budgeting: Under Republicans, tax rates would go down, spending would increase, and the deficit would rise. Under Democrats, tax rates would rise slightly, spending would hold more or less steady, and the annual deficit levels would decline. The GOP, which had long branded itself the party of limited government and fiscal responsibility, was the party of neither.
To the party’s base, this didn’t just mean that conservatives were hypocrites. It meant they could pursue their priorities without pressure to make concessions or tradeoffs. They had an argument, a rhetorical strategy—or, at the very least, a convenient and self-serving pretext—that insulated them from the understanding of shared pain and shared responsibility.
To rectify that political imbalance, the left—particularly the young, online left, which increasingly favored aggressive spending programs far more expansive than even many lifelong Democratic politicians would dare contemplate—would need a pretext of their own. And they would get it, in the form of Modern Monetary Theory (MMT).”
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“As with supply-side economics, the central insight of MMT is both true and trivial: The U.S. budget is not, strictly speaking, like a household budget or a business budget, because unlike a household or business, the federal government can print its own money. From this single observation, MMT theorists have constructed an entire macroeconomic worldview, which says explicitly that deficits don’t matter and, consequently, the government can and should print money to fund federal spending projects on a massive scale.
In this understanding of the economy, debt is not a constraint; nor are interest rates charged by bondholders. Debt can be paid down with a few congressionally authorized keystrokes on central bank computers generating new dollars. Bondholders will have little recourse but to accept these newly created dollars, because America’s currency is the global reserve.
The only real constraint MMT proponents recognize is inflation, which serves as a signal that there are too many dollars in the economy and that some should be recalled by the government. But inflation has been running low for years.
The upshot of all of this is a belief not only that current deficit levels are sustainable but that they are actually too low. Congress, MMT proponents argue, should be spending far, far more. Fears about accumulating a large national debt should disappear entirely.”
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“The supply-siders had triumphed on the right, and the MMTers were winning crucial battles on the left. The deficit had always been a bipartisan problem. At last, America’s politicians had found a bipartisan solution. Lower taxes. Higher spending. And the biggest deficit ever. Finally, Washington had found its balance.”
“When the federal government’s fiscal year ends on the last day of September, America’s national debt will nearly match the size of the nation’s economy for the first time since the end of World War II, according to projections from the Congressional Budget Office (CBO).”
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“spending under President Donald Trump surged by $937 billion in less than four years—and that was before Congress authorized trillions in emergency coronavirus spending. The Trump administration’s tax cuts, while well-intentioned, also added to the budget deficit because they were not offset by spending cuts. It’s true that Trump inherited a budgetary mess, but he (and the Republicans who controlled Congress during most of his tenure) have undoubtedly made the mess worse.”
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“the main driver of America’s debt problem is the federal entitlement programs—Social Security, Medicare, and Medicaid—which account for about half of all federal spending. In a separate report also released Wednesday, the CBO projected that the federal trust for those entitlement programs will fall by $43 billion in the current fiscal year. The economic downturn caused by the coronavirus pandemic has caused payroll taxes, which fund entitlement programs, to decline. Unless Congress takes action, those trust funds will be exhausted within 10 years, the CBO warns.”
“The annual budget deficit—the gap between government spending and tax revenues—would run about $900 billion in 2019, and it would push beyond $1 trillion every year starting in 2022. Debt as a percentage of the country’s total economy would rise steadily, reaching 93 percent of GDP by 2029, the highest level since the years directly following World War II.
Automatic spending on major entitlements would keep government spending high and make reductions difficult. Interest payments on the nation’s rising debt would become one of the country’s largest spending categories. The persistently high levels of debt and deficits, meanwhile, would serve as a drag on economic growth. Overall debt levels were on track to reach the highest levels in the nation’s history.
All of this was reason to worry. “Such high and rising debt would have significant negative consequences, both for the economy and for the federal budget,” the report warned, with reduced national productivity and total wages plus an increased likelihood of a fiscal crisis. In an emergency scenario, policymakers might be more constrained from responding in the most effective way. Debt and deficits were a modest burden on the economy in good times. And the higher they ran, the more economic risk accumulated.
Again, this was the outlook in 2019, when the unemployment rate was below five percent, when the deficit was projected to run about $900 billion over a 12-month span, when daily viral death tolls and case-count heat maps weren’t posted on major news sites like especially grisly weather reports.
In June of this year, the federal deficit was $864 billion.”
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“the United States is in uncharted waters in terms of both public finances and their effect on the economy. And no one really knows where we’ll go from here.”