The debt ceiling, a good idea that didn’t work out

The debt ceiling is a good idea that never worked out. In fact it has turned into a political football weaponized by both parties against the other. Originally passed by Congress in 1939, its objective was to restrain Congress from going too far into debt. When first passed, the debt ceiling was set at $45 billion. On August 1 of this year it was reset to $28.4 trillion.

The problem is, it never did restrain Congress. Every time the debt ceiling was about to be reached, Congress just raised it or suspended it. Here is what that progress has looked like since 2000:

So now we are again about to reach the debt ceiling. Republicans want to force the Democrats to raise it this time on their own, without any Republican fingerprints on it. And Democrats can do that, using the same reconciliation process that they are proposing to use to pass their liberal bills without any Republican support. Democrats want to avoid that, so that they can claim any increase in the debt was approved by both parties.

It’s all a matter of trying to score points for the next campaign, but frankly I don’t think it will make much difference. The country has become so polarized that an issue like this seems unlikely to shift many votes. Indeed, recent polls suggest that while the media is breathlessly following every twist of the Washington Congressional drama, most of the country is ignoring it.

Since the idea never worked out, I don’t see why Congress doesn’t just do away with the debt ceiling altogether. It certainly hasn’t restrained either party from increasing the debt when they were in power.

 

Does the federal debt matter?

I was raised by parents who lived through the great depression, which has no doubt affected the way I think about money. And so for most of my life I have believed that excessive debt was a bad thing, to be avoided if at all possible. Politically I was a fiscal conservative, believing that except for emergencies like wartime or significant recessions the nation ought to live within its means and have a balanced budget.

Clearly that attitude is out of date today. Both political parties are happy for the federal government to spend more than it takes in. Oh, there are differences – the Republicans tend to increase the debt by cutting taxes, the Democrats tend to increase the debt by increasing spending – but the end result is essentially the same, more federal debt. Fundamentally Americans want more services from the federal government than they are willing to pay for in taxes, so politicians of both parties cover the gap, and try to buy votes, by simply borrowing more.

As of this morning (Oct 20, 2021) the “official” federal debt – the amount of outstanding Treasury notes and Treasury bonds – is just under $29 trillion dollars, or about 123% of the nation’s annual GDP, with currently stands at about $23 trillion. The real debt, including unfunded future promises for Social Security, Medicare and Medicaid, federal pensions, and military pensions and future veteran health costs, runs somewhere between $100 and $200 trillion, depending on how it is calculated. Yet the federal government’s total annual income runs to only about $3.5 trillion. To see current debt figures as well as a lot of other interesting fiscal statistics, go here.

Here is a graphic to put it all in perspective:

So my question is, does the federal debt really matter?

US dollars used to be backed by gold deposits, so in theory at least one could always go to the government and exchange paper dollars for real gold, so a dollar had real-world value. That ended in 1933, so since then there has been absolutely nothing backing US currency.  In that respect it is exactly like bitcoin – dollars have value if and only if we all agree to pretend that they have value. It also means that the government can always pay its debts by simply printing more dollars. Even that step isn’t really necessary in this digital age – the Federal Reserve just modifies a digital file and – presto – they have “created” new money. Here is a graph of how that has gone recently:

The euphemism for all this is “quantitative easing”, meaning the government buys federal or corporate bonds with the new money it has just created, thereby providing liquidity to the market.  It can in theory, of course, reverse this process at any time, by just not buying new bonds as the old ones mature, thereby contracting the money supply, but thus far it has not done that.

Now there are valid arguments for incurring federal debt to keep the economy going in a recession (or pandemic), to keep people employed, and to do things that need doing, like repairing infrastructure, even if we don’t really have the tax base yet to pay for it.  On the other hand, there is interest to be paid on all that borrowed money. At the moment, with the federal government paying about 2% interest on its outstanding debt, that interest, about $300 billion per year, amounts each year to about half of what we spend on the most expensive military in the world. Or about half of what we spend on all the rest of the government except for Medicare and Social Security.

So clearly we can always pay our national debts, because the government can always “print” more dollars to pay the debts. But what would those dollars be worth in buying power? How does this all end? Can we continue to increase the debt without limit? That seems unlikely, but it is not clear to me what the limit would be. Will it all end with hyperinflation, as has happened in the past to other empires that have overspent? As the country ages and the cohort of younger people, who are what drives consumption in the economy, shrinks, will this change the dynamic?   That is what puzzles me.

The liberal challenge

Lots of people have written lots of theories about why Donald Trump was elected president in 2016, and why he was almost re-elected in 2020 (and might even be re-elected in 2024). The question is complex and subtle, and no doubt there are almost as many reasons as there are Trump voters, but three main theories have emerged:

1.      The growing wealth inequality, income inequality, and lack of upward mobility in the nation, increasingly driven by the obvious corruption and insider-dealing in politics and the corporate world, has produced a backlash which populists like Trump can exploit.

2.      The displacement of jobs overseas from globalization, which has enriched the wealthy elites but impoverished and put out of work millions of working-class people, has producing a backlash which populists like Trump can exploit.

3.      Sandler’s thesis (see previous post), which is that our merit-based society produces hubris among the elites and humiliation among the rest, with the credentialed (ie - college-educated) elites looking down on the two-thirds of the country without college degrees, producing resentment which populists like Trump can exploit.

No doubt all three of these effects play their part, though how much each contributes can be debated. But let’s assume that together they account for a good proportion of the sentiment driving almost half of American voters toward populist candidates at both the federal and state levels.

I would argue that Trump got the loyal following that he got, and has largely maintained, by simply acknowledging the pain and resentment of the underclass. He didn’t do much of anything to actually help them, but just by not talking down to them, and by acknowledging their worth and their contributions to the economy and their resentments, he won their votes.

If liberals are going to gain and hold power at least occasionally in Washington and at the state level, which I would like to see them do, they are going to have to do at least that much, if not more. So how have they done so far? Poorly, it seems to me. Indeed, I can see no evidence that they even understand what they need to do. For example:

One main feature of the current liberal legislative plank is to provide free college to more people. This is simply an elitist view of the world from people who are themselves college-educated. The clear implication is that people without a college education are somehow inferior to those with a college education, and we ought to rectify that. It ignores the fact that the majority of people have no interest in sitting in college classrooms being fed an academic view of the world. Yet that majority feeds and clothes and shelters and warms and transports most of us, services of far more immediate and practical value than those provided by a stockbroker or economist or a professor.  

Along the same lines, the liberal push to forgive college loans is also an elitist proposal, focused only on people who went to college. How about all the loans everyone else has, for their tools or trucks or uniforms or, or, or…? Why are they less important, less worthy of being forgiven?

Taxing the rich more is another ineffective liberal proposal. Oh, it sounds good as a campaign sound bite, even though we all know the really rich will evade the new taxes just as they evade the current taxes.  But as a practical matter, taxing the rich does nothing to address any of the issues that breed underclass resentment. Soaking Elon Musk for another $50 million in taxes, fair as that might be, does nothing to help an unemployed steel worker in Pittsburgh, nor to deal with his resentments.

I could go on, but you can see the drift.  Think about all the current liberal proposals, and the issues, especially the social issues, they are focused on, and ask what they mean to a single mother working three jobs, or an unemployed oil-field worker, or a small family farmer, or a small struggling store owner in some small mid-western town.  How many of the current liberal proposals deal with the resentments that have fueled Trump’s campaigns? Almost none.

Until liberals can understand this, and face the changes they need to make in their own attitudes and outlooks, they are going to continue to be in a tenuous position politically. It isn’t that hard really. Trump has demonstrated that. He didn’t actually do anything to help people, he just showed some respect for those in the underclass (and it is a class issue). It just requires showing some respect and appreciation for those not among the elite, some recognition of their immense and critical contribution to the national economy and the well-being of all of us. Calling them “deplorables” (Clinton) “clinging to guns and religion” (Obama), depicting them as all knuckle-dragging racists who weren't smart enough to go to college simply won’t do it.

 

Recommended: The Tyranny of Merit

I have suggested before that while the country was obsessing about President Trump’s bizarre behavior, a much more important question was why half the voters in the country would vote for him (or a majority of voters in the UK would vote for Brexit, or The French “yellow jackets” would riot for weeks, or, or…)  What was the root cause, or causes, of the profound discontent sweeping the Western world?

While on a short vacation last week I was browsing in a small independent bookshop in Ouray, Colorado, when I stumbled across Michael J. Sandler’s new book The Tyranny of Merit. It escapes me why I have never run across his writing before. He is, as one reviewer notes, an international rock star of moral philosophy, and author of several really good books.

Trained at Brandeis and at Oxford as a Rhodes Scholar, Sandler is the Anne T. and Robert M. Bass Professor of government and political philosophy at Harvard University, where he teaches a widely-respected course on Justice (his 2007 book Justice summaries much of the readings for this course).

To give a flavor of his writing and views, let me suggest his short 2017 article in Project Syndicate entitled Lessons from the Populist Revolt, and the excellent 2020 article in Harvard Magazine entitled  No One Deserves a Spot at Harvard.  With respect to his latest book, let me suggest the review in the Guardian, which can be read here.  

Sandler echoes much of the views reflected in David Goodheart’s 2020 book Head, Hand, Heart: Why Intelligence is Over-rewarded, Manual Workers Matter, and Caregivers Deserve More Respect, and to some extent was foreshadowed by George Friedman’s theses in his latest book The Storm Before the Calm.

There was a concept in Medieval times of “noblesse oblige”, the idea that those born to privilege also inherited an obligation to those less fortunate. It wasn’t always followed, of course, but it was nevertheless a foundational moral principle of the times. We seem to have lost that, and Sandler argues for a return to something like it, along with a recognition that those of us with good educations and high-paying jobs don’t owe it all to anything superior about ourselves or our work ethic, but owe a good bit of it to the pure dumb luck of being born in the right place at the right time to the right sort of parents. We could have had the luck to be born, say, to a poor, low-caste family in India, and we might have remained poor and illiterate the rest of our short lives. Given that fact, the contempt that some elites feel toward those not so fortunate (Hillary’s “deplorables”) is wholly unwarranted, highly destructive, and quite possibly a major contributor to the current unrest.

So how corrupt are our elites?

Sarah Chayes’s books, which I have mentioned in recent posts, argue that corruption threatens our very nation. And the media almost always has a story or two running about elite corruption, whether it be wealthy parents paying bribes to get their children into prestigious colleges or members of Congress getting caught with insider trading, or..or…or.  But of course we are a big country, so out of 330 million people there will always be a few good current corruption stories for the media to pick up.

So how bad is corruption among the elites? Here are some recent stories to ponder:

A recent study from the White House entitled What is the Average Federal Individual Income Tax Rate on the Wealthiest Americans? estimates that for the period 2010-2018 the 400 wealthiest Americans paid an average tax rate of about 8.2%.

ProPublica managed (probably illegally) to get their hands on 15 years of recent tax data on wealthy Americans. The relevant article can be read here.  The data shows many of the wealthiest among us paid no tax at all, while others paid in the range of 0.1%-3.4% federal tax.  You and I, of course, not wealthy enough to hire expensive tax lawyers to find all the loopholes for us, pay more in the range of 18% or so.

Bloomberg Business Week this week has a story Most Americans Today Believe the Stock Market is Rigged, and They’re Right, which reports that research shows that insider trading is widespread, something many of us have assumed already.

The Economist this week has an article New taxes will hit America’s rich. Old loopholes will protect them.  President Biden has been asserting that his proposed expensive new programs will be fully paid for by higher taxes on the rich and corporations, but of course neither the rich nor major corporation pay anything like the tax rates they are now supposedly to pay, so what are the odds they will pay much more tax in the future?

The Institute on Taxation and Economic Policy published a recent article entitled 55 Corporations Paid $0 in Federal Taxes on 2020 profits. The point is, of course, that they paid no tax LEGALLY, using loopholes provided them by a compliant Congress. Another 2017 report by them documented that over the eight-year period from 2008 to 2015, 258 profitable Fortune 500 companies paid an average effective federal income tax rate of 21.2%—while the federal tax rate was 35% for all those years.

National Public Radio had an article last year entitled How the CARES Act Became A Tax-Break Bonanza for the Rich, Explained. Most bills that get through Congress apparently get lots of little “goodies” stuffed into the 1000+ pages for this or that corporation or special interest group.

The Forbes article Top 1% of U.S. Households Hold 15 Times More Wealth That Bottom 50% Combined makes the point that inequality in America has reached about the same degree as in the 1870s Gilded Age of the Robber Barons.

The Economic Policy Institute has a report CEO pay has skyrocketed 1,322% since 1978, which points out thje growing disparity in pay between senior management and the average corporate worker.

Of course, as Sarah points out in her recent book On Corruption in America, and What is at Stake, the corruption isn’t limited just to the extremely wealthy at the top – it is a whole integrated business model in which all the facilitators – politicians, lawyers, brokers, bankers, accountants, government officials, managers, ete, etc - get their percentage for helping. The U.S. model of corruption is in general far more genteel than just bills stuffed in paper bags. We do it with plush jobs on corporate boards for retired generals, or generous campaign contributions for helpful politicians, or fat fees for helpful law firms, or lucrative positions with lobbying firms or think tanks for useful “fixers”.

There are of course a certain number of the wealthy evading taxes illegally, with Swiss bank accounts, offshore shell companies, undeclared income and the like. There are always thieves among us. But what is more worrying is that there are apparently so many LEGAL ways for them to avoid taxes. That suggests the whole system is corrupt.

All this suggests the corruption is pretty widespread and pretty serious.  Why aren’t more people up in arms about it?