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

Since the 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 actions 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 grandstanding.

Very quietly
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.

Larger deficits

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.

Everybody knows

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. 

No, US overspending is not about “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 related 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

The problem about these programs (most of them) 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 Lyndon Johnson was president).

Clearly that was a different America, with completely different demographics. The programs as designed were solvent and meant to be self-sustaining. But this is no longer the case. 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 are supporting the benefit for a larger number of retirees, while health care costs for seniors have been increasing. Simply stated, the programs are no longer self-sustaining.

Kicking the can down the road

This trend of the growing cost of entitlements, year after year, both in absolute terms and as a percentage of the federal budget, 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

For example, back in 2010, then President Barack Obama created a bipartisan commission to review federal spending and make recommendations on ways to reduce deficits in the future. 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 government.

Well, nothing, 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 and Medicare”. 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 political is made up mostly of blue-collar white workers. And these are precisely the people who need these programs aimed at low income 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 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 as a percentage of GDP. Yes, while America spends 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 military. Which is to say that current defense spending levels are not an aberration.

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. This includes all that is needed to keep at least a percentage of a large force ready. Think of training, housing, food, deployments, fuel for an enormous fleet of vehicles, airplanes and vessels, and a lot more.

While we can and should have a sensible discussion about better ways to spend defense dollars, do not expect even significant savings to make a big difference. Indeed, our federal budget deficits are so huge that even if we abolished the Defense Department altogether, (an unlikely scenario), Uncle Sam would still be in the red.

Well, what about other areas of spending? Where else could we cut in order to achieve big savings? Well, no fat targets out there. As a percentage of total federal spending, transportation, energy, agriculture, commerce, and so on, claim relatively 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 budget 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 eagerly buy our Treasury Bonds. They believe that America will be able to meet all its financial obligations.

Still, unless 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 2020 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?

One last 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 bizarre “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 are not an issue. According to these economists, Washington can just keep borrowing and borrowing and nothing bad will even happen. 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.

The US National Debt Just Passed The $ 18 Trillion Mark — And Nobody Cares

WASHINGTON – With almost no comment by national leaders, major media, economists, financial analysts or federal budget experts, the Unites States’ national debt just reached and then passed the $18 trillion mark.

$ 18 trillion, and counting

Yes, that is $ 18 trillion. And, yes a trillion is equal to a thousand billions (1,000 X 1,000,000,000); or, if you prefer, a million millions (1,000,000 X 1,000,000).

You multiply this nice figure by 18 and you have the total obligations of the United States government. This is horrendous. And it keeps getting worse.

While it is true that the Federal Budget deficit has gone down substantially in the last few years, we are still in the red, year after year. Smaller deficits are certainly better than larger ones. But a deficit is still a deficit. The national debt keeps growing, even though a bit more slowly. Indeed, the trend is the same: more red ink, year after year. Hence the $ 18 trillion milestone we just passed.

A non event

In all this what is most disturbing is the general indifference that accompanied getting to this amazing $ 18 trillion debt figure. The President said nothing. And nobody else in a position of authority said anything.

This is a non event. Unfortunately, this indifference sends the wrong message. The implicit message is that these days the growth of our national debt has magically become a normal, physiological development, with no harmful effects. “We, the experts, know what it is. Not to worry. This debt is OK. The situation is totally under control”.

Sure enough, the experts appear to be right. There is no sign of an impending catastrophe. This is not the Fall of 2008, with major Wall Street financial institutions just one step away from the abyss. None of that. In fact, the opposite. Most international investors keep buying US Treasury Bonds. America has always been a strong country. Therefore it will pay its debts. Right?


And yet, the idea that the national debt can grow, and grow, essentially for ever, and that this will have no consequences because we can handle it, is insane.

That said, it is really hard to have a rational conversation about the impact of a fantastically large and growing national debt, because it is not very clear, as it manifests itself over time, in small, incremental changes.

No money for discretionary spending

The most obvious consequence is no more money for discretionary federal spending. Due to unchanged entitlement spending patterns, these days most of the tax revenue that the US Federal Government takes in goes to pay for Social Security, Medicare, Medicaid, defense spending and interest on this huge debt. Now, everything else being equal, even assuming very low-interest rates, as the national debt keep getting bigger, we spend more of the little that is left to pay interest on this debt.

As a result of existing spending patterns regarding entitlements and defense, there is almost no money left for any other type of spending: medical research, space exploration, new infrastructure, or education. This is what the budget analysts call “non defense discretionary spending”.  As the cost of debt service grows a bit every year, there is less and less for discretionary spending. The problem is that the consequences of not investing in our future are not immediately apparent. They do not jump at you.

Yes, wise people know that if we fail to invest in our future, in the long run we get a weaker country and economic stagnation. But since there is a very long road from here to there, it is very easy to ignore or dismiss early warning signs. We are going downhill. But it is a gentle slope, not a precipice. As an economist put it long time ago: “Debt is not like a wolf at the door. It is more like termites in the basement”.

Got that? You do not see the debt problem until it is too late.

Nothing will happen

Because of all this, those who point out the negative long-term consequences of a growing debt are ridiculed as doomsayers who keep predicting a catastrophe that has yet to happen, and probably never will.

And elected leaders specialize in ignoring hard realities. After all, they are not concerned with what the country will look like 20 years from now. Their level of concern is dictated by the political calendar. As long as there is no catastrophe between now and the next election, all is well.

Well, all the others have no such excuses. And only a stubborn case of denial can explain our collective ability to ignore reality, and keep insisting that a suffocating debt does not matter.

Look at countries with high debt

Just look at Greece, Italy, France or Japan. Even if we leave Greece out, because it is a rather extreme case, all these heavily indebted countries –in Japan the national debt is now 240% of GDP! — are in major trouble. These are stagnating societies in which it is impossible to launch anything major, in large part because of the weight of the debt burden. And what is the source of their debt? Extremely expensive, inefficient public sectors and out of control social spending –read entitlements– no longer affordable due to higher costs and changed demographics.

America is different

Many would argue that America is different. Yes, we also have large entitlement programs and a huge national debt. But this is not Italy. Our economy is bigger, and much more resilient. Just look at the most recent numbers. We keep adding jobs, while GDP is growing. Wall Street is at record highs. So, where is the problem?

Well, the problem is that, while right now things are getting a lot better, our long-term trend is not that good. We used to grow at about 3% a year. Now it is more like 2%. That is 30% less growth, year after year.

The number of Americans now in the active work force is at a historic low. Productivity gains are negligible. And a larger number of older Americans will mean even higher entitlement spending, as we move forward. And, yes, we just passed the historic $ 18 trillion debt milestone, while there is not even a shred of a plan to change our social spending patterns that are at the root of all of this debt.

Bending the curve requires a political agreement

The only way to get the US debt under control is to stop having federal deficits and start generating surpluses that will allow us to slowly but steadily retire this massive obligation. We do not need miracles. But we need a little bit less debt every year.

However, such a transformation would imply bending the federal spending curve. And this could happen only via a major political agreement on real federal entitlements reform. But there is not even a small sign of this happening any time soon.

In the meantime, we keep going down the gentle slope.