Touching the Third Rail
We’re all in the same boat.
Fishin’ in the same hole.
Wondering where the same time goes.
And money too.
Try to fix the same broken hearts.
Wishing on the same stars.
We’re all hoping hope floats
And we’re all in the same boat.”
Same Boat - Zac Brown Band (2021)
…..
The current status of U.S. Federal debt is bad. Very bad. And it is getting worse every day and with every bill Biden signs. Very few in Washington want to deal with it. That’s because the only cures available now are all painful and unpopular. The budget is like a patient with a totally gangrenous leg. The only cure is amputation, which the patient doesn’t want. But if you do nothing, the patient dies.
No good choices. That’s where we are, because we have waited too long.
First, let’s try and summarize the situation in one paragraph. Last week, the Treasury had the worst auction of 30-year treasury bills in decades. Buyers want more yield. And Treasury probably needs to issue another $3T in debt in the next year. The interest cost on the debt is now over $1T a year and comprises nearly 16% of total spending. You can’t cut that without defaulting on the debt, which would be the equivalent of the patient dying. If you eliminate all defense spending and all other government spending (parks, courts, CIA, Congress and all departments) the budget would still not be balanced. Almost 2/3rds of all government spending is the entitlements. These include Social Security, Medicare, Medicaid, Student Loans, Food Stamps, Unemployment payments, veteran’s benefits, federal employee retirement and literally hundreds of other smaller programs.
I think the federal Department of Education (DOE) is a worthless agency. The only federal schools are on military bases and those are run by the Department of Defense. But the DOE’s budget represents only about 1% of federal spending. It’s worth saving that money for sure. But the deficit is nearly 30%. You need a lot more.
If we keep going as we are, at some point, financing the debt will become hard to do without paying more and more interest. This is how a “debt spiral” happens. More debt means higher interest to get somebody to buy it, which means even more debt because of the higher interest expense. It’s like getting someone to loan you money just to pay the interest on your credit card debt, when you can’t even think about paying down the debt itself. It is hard to recover from that.
One way to solve this is by cutting spending and/or raising taxes. Most of the Trump 2017 tax cuts are scheduled to expire 12/31/25. So, there is a built-in tax increase in existing law that happens in two years.
If you want to cut spending, sure there are things like the Department of Education. But you can’t fix the problem without touching….the third rail – entitlements. That is amputating the leg to save the patient in our analogy.
Sometime between 2012 and 2014, I was in a private meeting with Congressman Paul Ryan (not yet Speaker Ryan) and a few other conservative members of congress. I clearly remember Paul saying something very close to this. “If we win the White House, the House, and the Senate in 2016, we will reform the entitlements to get to a balanced budget. We will then lose reelection after that, but we will have saved the country.” He was right. What he did not count on when he said that was that the Republican President elected in 2016 would be Donald Trump, who refused to touch any entitlements and who was unconcerned with the federal debt.
It's only been the last 20 years or so that things got so bad. The last time we had federal surpluses was in the late 90s with a Republican Congress and Bill Clinton as president. Things were not so bad then. George W. Bush spent a lot of money on the wars after 9/11. But, in the last two years of his term, he was headed towards a balanced budget. My one meeting in the oval office with the president was during that period, as I was quite instrumental in this effort (story for another day). Then came Obama and the “2008 Great Recession.” Deficits ballooned throughout the Obama years. Trump in his personal and business life loves debt. He ran up deficits even before the pandemic but his response to that brought in a whole new level of deficit. (Remember how Trump actually advocated for negative interest rates?) And now, Biden never met a spending bill he didn’t like.
In the GOP debate last week, a question was asked about entitlements. Three of the five (DeSantis, Ramaswamy and Scott) either ducked the question or said they would not touch them. We know that Trump won’t touch any spending and has no problem with increasing debt. I give credit to Christie and Haley who both honestly said we have to do something to reduce the costs. They touched the third rail. Bad politics but the right policy. At some point, you need to tell voters the truth, and those two did.
Messing with entitlements is not easy. Warren Buffett doesn’t need the money from Social Security and is still working at age 93. A construction worker or farmer or most anyone in a “blue collar” job cannot work that long. We don’t have to get all the money from any one program. If you make some tweaks to every program, you can save a lot of money.
And of course, you can raise taxes. Voters don’t like entitlements reduced, spending cut, or taxes raised. And I bet most of the readers of this blog believe that we should be increasing defense spending and not cutting it. If the wars raging around the world grow, we may have no choice there. That’s why the easy political path is just to keep borrowing. But that option is running it’s course and may not continue to be available.
So, what if we don’t do anything with taxes or spending? One age old plan used by many countries around the world is to let inflation run so you can pay the debt with “cheaper” inflation-impacted dollars in the future. Even the Romans practiced this method of fiscal repair in the first centuries after Christ. But people don’t like inflation either. It is actually just a tax in another form.
The last option is called financial repression. That is where you require people and businesses to buy government debt but they don’t get any interest on it. Again, this is a tax using a different mechanism.
Here is the bottom line. We have to stop the incessant “just spend more and borrow it,” so we don’t get further into the debt spiral than we already are. In other words, stop digging the hole deeper. Then, the cure will be painful. People have become used to a government that throws more money at them than it collects. None of the methods of leg amputation that I have described are fun. But, having the patient die is worse.
Remember, governments don’t make any money. They don’t create value. They get everything from the people. When governments have gotten in to trouble through the millennia, they have to get that money from the people, one way or another.
As Zach Brown says in the lyrics to this week’s song, we are all in the same boat. That boat is leaking. If it sinks, we all go down with it.
I will not send out a missive during Thanksgiving Week. Have a blessed Thanksgiving, and I will be back to you on the other side.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free