No One in Washington Is Serious About the Debt
No One in Washington Is Serious About the Debt
The Wall Street Journal has a piece today about how rich country governments are set to issue a record $17 trillion in bonds in 2025, up from $16 trillion in 2024 and $13 trillion in 2023. This is partially a product of the insanely large response to Covid but also the rise in financing costs due to the rise in interest rates (itself due to inflation). The story highlights that five countries (the U.S., Japan, France, Italy, and the U.K.) will account for 85 percent of total issuance, with the U.S. alone responsible for over two-thirds.
The U.S. alone will have to roll over and sell more than $10 trillion in government bonds this year. Repeat that every year. This is happening at the time when central banks, which previously bought large amounts of government debt, have reduced their holdings, leaving households and foreign investors to fill the gap — though geopolitical risks could disrupt this delicate balance, which would likely mean higher interest rates.
The takeaway should be that the U.S. should get serious about its fiscal path because, eventually, it will get dicey. Unfortunately, Washington’s so-called debate over deficit spending is a complete joke. Neither party is serious about America’s unsustainable debt, and both sides play their own version of fiscal fantasy.
As Doug Holtz-Eakin put it in yesterday’s Daily Dish:
At the moment, the Washington, D.C. world is engaged in a fake debate over deficits and controlling spending, with Congress and the administration collectively pretending they will turn from the path of debt accumulation – without touching Social Security, Medicare, Medicaid, and national defense. Bollocks.
On one side, Democrats refuse to acknowledge the debt crisis. Holtz-Eakin highlights, for instance, that Senator Bernie Sanders is back out on the campaign trail arguing for Medicare for all. As he writes:
This would be a budgetary disaster, with AAF’s Center for Health and the Economy estimating that a Sanders-style reform would raise federal spending by $44 trillion over the next 10 years. This is a sharp turn in the wrong direction.
Sanders isn’t alone. The whole Democratic party is very invested in the idea that any cuts to entitlement spending, even fraudulent spending cuts, would be devastating and, hence, unacceptable. Their solution is based on the delusion that the fix for every economic problem is more government spending paid for by rich people while wishing the debt away.
On the other side, Republicans try to convince voters they care about the deficit, but their entire fiscal plan rests on their own delusion: They want us to believe that they can balance the budget without touching entitlements—the biggest drivers of spending and future debt. Not to worry, they claim that cutting discretionary spending alone — though here, too, it remains to be seen if any cuts really take place — will somehow fix the problem, ignoring the reality that Social Security and Medicare alone will constitute close to half of non-interest federal spending over the next decade. Meanwhile, we will accumulate a deficit of $25 trillion between 2024 and 2035.
The math simply doesn’t work, but that hasn’t stopped them from pretending otherwise.
Not to worry. Republicans have many budget gimmicks up their sleeves that they aren’t afraid to use. After using expiration dates rather than spending cuts to pass the 2017 Tax Cuts and Jobs Act (TCJA) under the reconciliation requirements, the Senate is now moving to pretend these expiration dates don’t exist. They do this by offering to use a ‘current policy baseline’ gimmick — as opposed to current law — to extend the expiring provisions of the tax cut, which would have the main benefit of making it look on paper as if the whole exercise has no budget cost.
I think it is important to extend the tax cuts. But this is not the way to go about it. The reality is that making those tax cuts permanent will have a cost. That’s okay, but the right thing to do is cut spending. If you listen to Elon Musk and his DOGE team, there is plenty of that around and polling shows that Americans want that stuff gone.
For those who believe some revenue should be on the table, there are plenty of options, too. For instance, Congress should place the numerous tax expenditures — that carve the tax code and only benefit special interests — on the chopping block. There are over 170 of them, and most of them should be eliminated or reformed.
Here are some suggestions. A new study by the Cato Institute shows that the upper-bound 10-year cost of all the electric vehicles and green energy giveaways in the misnamed Inflation Reduction Act is a staggering $1.97 trillion. The lower bound cost is $936 billion over ten years. Surely, some of that should be used to pay for the extension of the tax cuts. Besides, over 30 years, the subsidies could cost between $4.7 and $2.2 trillion.
I get that Republicans are annoyed at the CBO bias against tax cuts — especially compared to spending. I have written about this here. But two wrongs don’t make a right. The correct approach is to ask the CBO to start scoring spending changes like they score tax changes — using current law. Not to make the system worse than it is.
I also get that Republicans are frustrated because they believe the CBO doesn’t give the tax cuts enough credit through dynamic revenue. But the House Budget more than compensates with frankly unrealistic growth projections that, at the very least, offset the CBO failure.
And, of course, I know that Democrats use budget gimmicks to pass their spending programs, which rarely bother the mainstream media. They used gimmicks to pass Obamacare. They also did it to pass the Inflation Reduction Act, to name a couple of examples. But that doesn’t make it okay for Republicans to do the same.
Besides, if Republicans use this gimmick, they will effectively throw away the only leverage they have to cut spending. In fact, if they go ahead with the gimmick, they will probably give up on cutting any spending and pretend that revenue lost to the tax cuts will be made up by selling gold visas and hammering consumers and businesses with tariffs.
There is also a serious chance abandoning this budget norm for the sake of extending the tax cuts will backfire when Democrats are in office. It always backfires.
But then again, one can wonder how much Republicans really care about fiscal responsibility when the president goes all out trashing Representative Thomas Massie for voting against the deficit-increasing spending CR. As David Stockman reminds us, the bill “provides spending authority of $1.658 trillion, which is 47% more than Big Spender Obama’s last budget. It will virtually cancel every dime DOGE has allegedly saved.”
The reality is that neither party has a real plan for fixing the debt. Until someone in Washington is willing to face reality — entitlement reform is the only way to rein in spending — the debt crisis will only get worse. Everything else is just political theater.
Post a Comment