James Rogan, Washington Examiner, 9/26/22
“The U.S. faces a challenging fiscal outlook,” to quote the Congressional Budget Office.
Since that CBO statement in late July, the deficit problem has become more acute. The United States is hemorrhaging debt. The principal cause of consumer price inflation running above 8% on an annual basis is too much federal government spending. Before the pandemic, federal debt held by the public was already on an unsustainable trajectory. It is largely caused by overly generous entitlements and a shrinking working population to pay for benefits for an increasing number of elderly citizens.
Borrowing to deal with the pandemic accelerated the federal government’s walk to the precipice of a national debt crisis. The Trump administration enacted over $3 trillion of new borrowing. Responsible post-pandemic action would have been a fiscal pivot to entitlement reform, but Joe Biden became president. His administration instead embarked on helicopter drops of money on the economy. The Committee for a Responsible Budget recently projected that new policies “will add more than $4.8 trillion to deficits” over the next decade.
Today, the federal debt held by the public stands at 98% of gross domestic product, up from just under 80% on Sept. 30, 2019, just before the pandemic. Biden likes to tout the deficit-fighting credentials of his administration. In his March State of the Union address, Biden claimed he would be “the only president ever to cut the deficit by more than $1 trillion in a single year.”
That’s laugh-out-loud material. In reality, the policies that reduced the deficit were set in stone; Biden did nothing positive in that regard. Moreover, what Biden won’t acknowledge is that his free-spending policies will contribute importantly to ever-increasing deficits. The CBO projects that federal deficits over the period 2022-2052 will average 7.3% of GDP. That’s double the average of the past 50 years. The CBO explains that interest payments on the federal deficit are the most significant factor in out-of-control spending. The math is straightforward now that the deficit is effectively 100% of GDP and rising. As the deficit moves above 100% of GDP, interest outlays rise proportionately. Each 1% rise in borrowing costs increases the federal deficit by 1% of GDP.
Unfortunately for the country, the end of July projections by the CBO are too optimistic. The CBO expected that short-term interest rates would climb from 0.5% at the end of 2021 and rise to 2.6% by the end of 2025. Today, the yield at the short end is around 4%, and the Federal Reserve tells us that short Treasury maturities are going to 4.5% or higher. Put simply, the CBO did not anticipate the Fed’s aggressive fight against inflation. Equally important, the CBO did not assume that a recession was just around the corner. That matters because, in a recession, tax revenues fall and federal government expenditures rise. Those expenditures are explained by increased unemployment benefits and more food stamps, for example.
The country thus faces a three-headed hydra: increasing spending, rising interest outlays, and falling revenues. When the dust settles, the federal balance sheet will be a sea of red ink. Soon, interest outlays as a percentage of GDP will exceed federal government spending on research and development, education, and infrastructure. It’s a pathetic failure of both government and patriotism. The nation is borrowing more and more and leaving its children and grandchildren with nothing but debt.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.