US Fiscal Irresponsibility Will Lead to Bankruptcy
WASHINGTON – The Democrats in Congress and Republican
President Donald Trump agree practically on nothing. Therefore, it is
impossible to think of any major piece of legislation that can be passed between
now and November 2020, when Americans will go the polls to pick a new President
and a new Congress, and new political majorities may be formed.
Sharply divided government
Democratic control the House of Representatives, while the Republicans control
the Senate and the White House, and considering the increasingly toxic
political climate that makes compromise impossible, we have not just a divided
government. We have a sharply divided government. So, do not hold your breath.
No significant legislative changes between now and the next presidential and
congressional elections in November 2020.
The spending deal
That said, there
is a huge exception –and a very shameful one—in this political stalemate. And
that is federal spending. Very recently, and very quietly, Republicans and
Democrats hammered a major spending deal. There was no fight. No public posturing
to defend this plan and attack the other side spending priorities. No
the two arch enemies came rather quickly to a spending agreement. How so?
Because they decided to increase spending across the board. Essentially, the Republicans
got some more money for Defense. The Democrats got a bit of this and that in
other areas of non-defense discretionary spending.
In case you
were wondering, these increases will not be offset by spending cuts in other
areas. This means that a large and growing US Federal Budget deficit, for
decades now a structural feature of our public finances, will become much bigger
much sooner than expected. Think of a $ 1 trillion billion deficit, (that is 1
thousand billion), year after year, unless something rather drastic is done.
This is a
colossal figure. In simple language, this means that Uncle Sam every year
spends more money –a lot more– than it takes in via tax revenues. In principle,
overspending could be justifiable; but only when the government goes into
overdrive with extraordinary fiscal stimulus in order to counter a major
recession, like the most dreadful one we had beginning in 2008. Borrowing money
could also make sense if the funds are to be invested in important capital
projects, (new highways, ports or airports, for instance), that would improve our
national infrastructure networks this way benefiting the economy. But we are
not doing any of this. Indeed, this is not money borrowed for stimulus or for
financing needed infrastructure. This is mostly money to be used to finance
current spending. In other words, as a nation, we are living beyond our means, while
we obviously think that we can keep our lifestyle by borrowing the difference –indefinitely.
By the way,
everybody in Washington who is even remotely familiar with federal spending
trends knows this. But the fact is that nobody seems to care. The sad and
worrisome conclusion is that chronic overspending is now accepted by most Washington
policy makers –both left and right– as the normal way to run the government of
America, a major modern country which used to be run according to established
principles of fiscal balance. Namely: in the long run you should not spend more
money than you can raise through taxation. By the same token, if you have
accumulated a large public debt, you must change tax and spending patterns in
order to return to a healthy balance.
The roots of the US deficit and debt
Now, as to
the actual roots of this systemic overspending, obviously they are not in the
deal just struck by the two political parties. This recent deal just made a bad
situation a lot worse.
The roots of
US overspending are in the incremental but steady growth of large entitlement
program that cannot possibly be funded as they are currently structured, unless
taxes will be substantially increased and/or benefits reduced.
overspending is not in “fraud, waste and abuse”. It is not about too much
foreign aid, as many believe. It is mostly rooted in our big federal entitlement
programs. Social Security, Medicare Food Stamps and other minor programs,
absorb about 2/3 (yes, that is a lot more than half!) of the US total federal
budget, currently at $ 4.7 trillion (again: a trillion is 1,000 billion).
Good programs designed in a different
about these programs aimed at providing for our senior citizens is that they
were designed in another era, (Social Security goes back to FDR in the 1930s,
Medicare goes back to the 1960s when Johnson was president).
That was a
different America, with completely different demographics. The way the system
works, the payroll taxes paid by current workers and their employers go
directly to fund the benefits for the retirees. The problem is that the US
population is slowly shrinking, which means fewer active people supporting a
larger number of retirees, while health care costs for seniors are increasing.
Kicking the can down the road
This trend of
the growing cost of entitlements, year after year, is not news. This has been
going on for decades. But lawmakers and presidents of both parties simply
ignored the problem, in large measure because they believe you cannot tell the
truth to the American voters. Even talking about serious reforms that would
modify or potentially decrease benefits to retirees is deemed to be political
suicide in Washington.
The Debt Commission recommendations went
back in 2010, then President Barack Obama created a bipartisan commission to
review federal spending and make recommendations. It became known as “The Debt
Commission”. The two co-chairmen were Erskine
Bowles (Democrat) and Alan Simpson (Republican). These two elder statesmen took
the job very seriously, without any partisan animosities. This was no Washington
wishy-washy anodyne process marked by generalities and obfuscations. Indeed, their
59-page report was entitled “The
Moment of Truth”. It included actionable plans to reform entitlements,
while also raising taxes; so that these key programs providing needed benefits to
millions of American retirees would remain solvent and available to all
beneficiaries, now and in the future, without bankrupting the federal
absolutely nothing, happened after the report was issued. President Obama, just
like all the other presidents before him, did not want to kill his chances of
re-election in 2012 by becoming “The
president who killed Social Security”. So, notwithstanding the serious work
done by these two elder statesmen whom I consider true American patriots, no
action to reform entitlements, defense spending and raise some taxes was
undertaken under president Obama.
And, by the
way, no action whatsoever under President Trump. Trump fully understands that
his base of mostly blue-collar white workers are precisely the people who need
these programs aimed at retirees the most.
How else could we save money?
Well, if we
cannot reform costly entitlements, what else could be done to restrain public
spending, this way reducing the deficits, and down the line slowing down the
monstrous growth of the US national debt? Well, not much. “Oh come on, many would scream. We could cut start by cutting our
gigantic defense budget!” Sure we could. But it would not solve our
structural fiscal imbalance.
And by the
way, believe or not, US defense spending is now close to a historic low. Yes,
while we spend more than $ 700 billion on the Pentagon, this large figure is
only 3% of GDP. During the Cold War the US routinely spent close to 10% on the
While it may
be possible to spend less or at least more wisely on defense, contrary to
popular opinion, most of the Pentagon budget is not devoted to procuring new super
expensive, unnecessary weapons. Most of the money goes to salaries (we must pay
for an all-volunteer force) and operations and maintenance, which includes all
that is needed to keep a large force ready: training, housing, food,
deployments, fuel, and a lot more.
While we can
have a sensible discussion about better ways to spend defense dollars, let’s
keep in mind that even if we abolished the Defense Department altogether, (an
unlikely scenario), Uncle Sam would still run an annual federal budget deficit.
about other areas of spending? Not much there: transportation, energy,
agriculture, commerce, and so on, claim very little money. Again, even if we
abolished the Departments of Education or Energy, we would still run a large deficit.
By the same token, cutting 10% or 15% here and there would impair basic functions
without saving much money.
And do not
forget another line item that keeps growing and cannot be cut: that is the interest
on the existing national debt, now about 10% of total federal spending. To put
it in perspective, this enormous number is about half of all defense spending.
Not on the verge of bankruptcy
To put all
this in perspective, America right now is not –I repeat is not—on the verge of bankruptcy. Investors and foreign
governments still buy our Treasury Bonds. They believe that America will be
able to meet all its financial obligations.
federal spending is seriously reformed –and by that I mean mostly a serious
revision of our key entitlement programs, via a bipartisan agreement– we are
definitely headed towards bankruptcy.
More money for everybody
If not today,
pretty soon something drastic will have to be done. Either we cut spending, (remember:
the fat target is entitlement reform), or we raise taxes, or a combination of
both. But, right now, we are going in exactly the opposite direction. With no
public debate, and in a completely irresponsible fashion, our national leaders,
in both parties, one year before the elections have decided that they want to
tell voters that the free money party is still on. “Cheer up everybody! More spending, therefore more goodies for
everyone: Mid-West farmers and Boeing”.
Deficits do not matter?
note. While our elected leaders act myopically to pursue the immediate goals of
currying favors with the voters ahead of a major national election, at least some
academics have come up with the theory that –guess what— in America federal deficits
do not matter. When you have a country like the US that can borrow in its own
currency, assuming tame inflation, large deficits just do not matter.
this new “theory” America can keep
borrowing –essentially forever. There are no limits. Apparently, our growing
national debt (the cumulative result of chronic annual deficits) does not have
to be paid back. Got that?
I would say
that if this preposterous idea is accepted as a sound foundation for managing
our public finances, then we truly deserve to go bankrupt.