So who gets stiffed, and how?

Congress, after endless months of haggling and posturing, finally got around to putting together another COVID relief package. It is, of course, packed with all sorts of goodies for special interests and the wealthy (racehorse owners got a special tax break, for example).

But the legislation does at least put some money in the ordinary person’s pocket. Since about 70% of the US economy comes from consumer spending, and since a large portion of the country is in financial distress, most of this money will go right back into the economy helping, we hope, to avert a 1930’s-type depression. So on balance I think this was the right thing to do, and no doubt the Biden administration will try to do more next year unless the economy shows signs soon of a sharp rebound.

But this is almost a trillion dollars more added to the burgeoning national debt, added to the $2+ trillion from the March stimulus package, and the $1+ trillion budget deficit that we already had in 2020 before COVID hit. With an official federal debt (now about $27 trillion) greater that the entire nation’s annual GDP (about $21 trillion in 2019), and additional off-books unfunded obligations (mostly in Medicare and Social Security) totaling somewhere between $125 trillion and $200 trillion, depending on what one counts, we have an exceedingly large debt load. The federal income in a good year is only about $3.5 trillion, and that doesn’t even cover our current expenses, let alone begin to pay down any of the debt.

So I have been wondering, in the end who gets stiffed, how and when? Clearly someone is going to get left holding the bag eventually, and history suggests it won’t be the wealthy or the politically well-connected.

I see only three ways this can end:

One. Congress raises taxes (and restrains its proclivity to spend) enough to actually cover the current federal budget and also begin to pay down the debt. That would mean at least doubling everyone’s taxes, if not more. Pigs will fly before that happens!

Two. The fed lets inflation rise to begin to eat away at the debt. Suppose we try to get the real total debt (assume it is about $150 trillion in todays dollars) down to no more than the annual GDP – say about $25 trillion in today’s dollars. That is reduction to 1/6^th its current size. A 6.2% inflation rate would reduce the real value (buying power) of the current debt to one-sixth its size in 30 years. (the dollar denomination of the debt stays the same, but they are cheaper dollars by a factor of 6). That assumes Congress doesn’t add any more debt during those 30 years, a highly unlikely assumption.

Of course a 6.2% inflation rate would also destroy the buying power of everyone’s investments, savings, and retirement plans as well.  In effect it is exactly the same as simply confiscating 5/6th of everyone’s assets to pay down the debt. And a high inflation rate would have other troublesome aspects. The government would have to offer higher interest rates to roll over Treasury notes, which would increase the annual interest payments and hence the federal budget. And higher interest rates would put a damper on business investment and expansion, reducing growth and hence federal tax revenue.

Three. The government simply defaults on the debt. Promised pensions get reduced or not paid at all. Medicare/Medicaid and Social Security disappears. Pension funds invested in Treasury notes lose their investments, so they go under. And investors get very skittish about loaning any more money to the US government.

If there is another alternative I don’t see it. A mature economy like ours is unlikely to grow fast enough to increase federal income by enough to pay down the debt, and if it did Congress would likely simply spend the additional revenue. There is no dearth of expensive new programs that the left or the right would dearly love to fund.

So the question remains, who gets stiffed in the end? Probably those who can least afford it, and who have the least political power, as usual.

 

Returning to normal?

It will be a relief not to be embarrassed internationally by our president, to be deluged with floods of misinformation from Trump’s endless tweets, and to have some sort of consistency coming from the presidency. But Democrats need to get real about this election. While Biden won the popular vote by many millions, it is the electoral college vote that matters, and he won those by the slimmest of margins – just over 81,000 votes in four battleground states (Nevada, Wisconsin, Arizona, and Georgia) gave him the presidency, just very slightly more than the razor-thin margin by which Trump won the 2016 election. And Democrats performed miserably in the House and Senate races, and disastrously at the state level.

Looked at that way, Democrats have by the slimmest of margins won a short 4-year window to try to reverse their fortunes. If they don’t the next president is likely not to be a Democrat, is very likely to be another populist, and might even be Trump again.

There is a palpable sense of relief among the chattering classes that Washington is hopefully going to return to “normal” again.  But Robert Reich, who was U.S. Secretary of Labor from 1993 to 1997, and served in the administrations of Gerald Ford, Jimmy Carter  and Bill Clinton, wrote an article recently entitled Beware going 'back to normal' thoughts – normal gave us Trump. (if you don't want to read his book, you can watch his 12-minute video on YouTube summarizing his book here , or you can watch his hour-long movie Saving Capitalism on Netflix - it covers much the same argument) He has a point worth considering, a point he has been arguing in a series of good books, the latest of which is The System: Who Rigged it, How We Fix It (2020). His argument is that the American system is currently rigged for the rich elite, and the rest of the country is in the process of revolting against them (a point I have been making as well).

Biden is filling his top spots, naturally, with the experienced people he has been working with for years. The problem is that these same experienced people are the ones who got us into and kept us in the endless Middle East wars, who promoted the globalization that has put out of work and  impoverished million in Middle America, who abetted the disastrous CIA ”rendition” and torture programs, whose policies helped the Chinese to exploit the world's trading rules to their advantage, who arranged after 2008 for the “too-big-to-fail” banks to get even bigger, who promoted the probably-illegal drone assassinations, and who failed to understand or deal with the destruction of the American middle class. As Reich argues, this “normal” was what gave us Trump in the first place. And if we return to it we may be setting the stage for another Trump, or worse.

The question is whether Biden and the Democratic party will understand that they won by the slimmest of margins and could well lose the next election if they don’t pull up their socks and pay attention to the unrest in the country that produced a record number of votes for Trump in this election. I’m not hopeful. The party didn’t appear to learn much from the 2016 election, and managed to delude themselves thoroughly before this election.