Yes, I’ll pay for every one of the very few inches that were built, as ridiculous and ineffective as the project was. And I’ll pay for his tax cuts too. And the extra, unrequested, Arleigh Burke destroyer that was just tacked onto the 2023 budget, at $2B and change. And I’ll pay for Reagan’s Strategic Defense Initiative, W’s Iraq War, and the James Webb Space Telescope. I should, and you should too. Spending for all those things became part of our national debt, the accumulation of deficits over time, spent to pay for things we’ve bought, both good and bad.
To make up the difference between income and spending, we borrow money. People do, and countries do. Sometimes that is because expenses can be very “lumpy.” The cost of a house is very lumpy for the purchaser, so a mortgage is usually required. Countries take on lumpy debts during crises such as war, pandemics, and other financial emergencies. Debt can also accumulate because income chronically lags behind spending, even considering crises spending. That is the case for most counties in the world. Citizens want services and dislike taxes, and those preferences shape budget priorities.
We currently have a debt to GDP ratio of about 128%. That’s 12th in the world. Not great, but not horrible. The Great Recession and the Covid crises were recent contributors to the accumulated debt, but the story of debt accumulation is a long one. It didn’t start with Build Back Better.
To cover the deficits, our government sells bonds to investors at what are usually very low interest rates. The interest rate is low because the expectation of being paid back, principal and interest, is very high. Bond sales cover current deficits and the rollover of prior debt becoming due. We didn’t really ever pay off all those B-29s bought in WWII. We paid off the bonds as they matured, yes. But much of the money for the payoff was borrowed by issuing new debt. Is indefinitely rolling over debt a problem? Well, it can become one if debt continues to increase faster than GDP for long periods of time. Total debt is nothing more than the accumulation of deficits over time. Deficits that maintain a constant or decreasing debt to GDP ratio are generally considered sustainable, but those that constantly increase that ratio can become a real problem. We’re not there yet, and we have a demonstrated ability to service our debt that has kept investors buying our bonds. Well, we’ve demonstrated an ability to service it financially. Politically is another story.
So why are our ongoing deficits so high? The explanation is pretty simple. We do have a modest level of social welfare spending, but we lack a European-style comprehensive social safety net. Our rates of taxation are at the bottom end of the scale. And our military spending is closing in on 40% of the world's total. More that twice that of China and Russia, our two biggest potential rivals, combined. And twice our share of global GDP. Increased military spending is very popular. Taxes to actually pay for that spending are not so popular.
Demand for US debt has historically been high. Until 2011, during the last debt ceiling showdown, our AAA debt rating had been unchallenged. The brinksmanship at that time led to downgrades and a loss of confidence in investors. US treasury bond interest rates have traditionally been treated as the “risk-free rate” by investors.
Enter Kevin McCarthy, who has apparently sold his soul to a group of extremists who believe the debt ceiling is simply a tool to enact their own budget priorities. Priorities that can’t be otherwise enacted. They appear willing to force a default, destabilize markets and economies, and undermine our future borrowing ability in order to reduce domestic spending. Even though domestic spending is clearly not the problem. TFG supports this effort, even though he was a major contributor to the problem. Because of course he does.
To date, the Biden administration has responded appropriately, in my opinion. No negotiations. Because negotiations will get you nowhere and perpetuate a terrible tyranny of the minority. Once you open the door to discussion, it will be like dinner in the revolving restaurant at Mar-a-Lago. Every time you glance up, something uglier will come into view. (Nah, they don’t really have a revolving restaurant there.) Look at what Kevin had to give up just to get his pretend gavel and imagine the demands every time another short-term ceiling increase is granted.
It is possible, even likely, that no increase will be approved. Kevin’s assignment looks like a suicide mission and may well be. If they don’t budge with a clean increase, there are some options. They are all lousy, but better than having a perpetual debt ceiling hostage negotiation. They will all shake investor confidence, but maybe not as much as a perpetual debt ceiling fight. One key point in the Biden administration’s favor is that Congress has presented them with conflicting laws. The administration is obligated to both spend the appropriated budget and adhere to the ceiling, and they can’t do both. Personally, I like just blowing through the ceiling and citing it as the least unconstitutional route. And that could have the lovely side effect of making the ceiling moot, always and forever.
In the meantime, Democrats need to talk continuously about the reason we run deficits and the difference between the debt ceiling and the budget deficit. No, it’s not a credit card increase. Yes, we’ve already spent the money, we’re just deciding whether we’re going to pay the bill. Many people are confused, Republicans are helping fuel that confusion, and we need strong voices to keep the true nature of the issue in focus. And advertising...we need to see a lot of that, everywhere. We can’t just be reaching the folks that watch non-Fox stations and read DailyKos. Outreach is key, as always. Confusion is the enemy.
Cheers.