The Two Sides Of The National Debt Coin

 "And if you want to get into the details, let’s just start with the IRS: 87,000 new IRS agents, all the billions of dollars.  [So,] $1.4 billion cut, leaving the balance, the balance to be used by the IRS immediately, starting at this moment, continuing at this moment, continuing on for the duration of this presidency; $4 trillion at least.   An unlimited debt ceiling increase.  Unlimited.  Unlimited debt ceiling &, oh, by the way, puts the incoming president, whether that’s Joe Biden or whether that’s a Republican, having to deal with it in a lame-duck session [after the 2024 elections].   Absolutely & completely unacceptable." - Congressman Scott Perry, Chairman of the House Freedom Caucus, speaking of his disgust with the Biden-McCarthy debt limit deal reached on June 3 that among other things confirms the addition from the Inflation Reduction Act of 87,000 new IRS agents & suspends the debt ceiling, with no limit, until after the November, 2024 presidential election.  

The actual bill itemizing the Biden-McCarthy deal, known as the Fiscal Responsibility Act of 2023 (H. R. 3746 Public Law 118-5), says the purpose of the bill is "To provide for a responsible increase to the debt ceiling," yet despite the bill's intended purpose the national debt increased $358.6 billion the first day after the bill became law.

There has been an uneasy truce between Kevin McCarthy & the House Freedom Caucus ever since six Freedom Caucus members voted present that allowed McCarthy to win the House Speakership 216 to 212 on the 15th vote after midnight on the 5th day of the 118th Congress - in exchange for McCarthy promising everything to the Freedom Caucus except the kitchen sink. 

 Although a no-confidence vote can be called by any member to oust McCarthy (one of his promises) the only casualty so far has been Georgia Congresswoman Marjorie Taylor Green who was voted out of the Freedom Caucus for being too helpful to McCarthy.

The first big point of the McCarthy-Freedom Caucus contention revolved around the U.S. Treasury estimating for months that the government would reach the current debt ceiling of $31.4 trillion on or around June 1 meaning that in order not to default the Treasury would need authorization from Congress to borrow more money to pay all the nation's debts on time or else parts of the government must be shut down.  

McCarthy's biggest promise to the Freedom Caucus in January was that any raising of the debt ceiling would be accompanied by substantial spending cuts.  Students of economics know that it is government spending & not the debt or deficits themselves that are the problem.

After Biden repeatedly refused to include any spending cuts in debt ceiling talks McCarthy did a masterful job of passing H.R. 2811 entitled Limit, Save, Grow Act of 2023 which forced Biden to the negotiating table.  The vote was 217 to 215 with 3 not voting.  Freedom Caucus members voting Nay were Biggs, Buck, Burchett, & Gaetz who all thought the spending cuts were not substantial enough.  The 3 not voting were Kelly (R, PA), Peters (D, CA), & Watson Coleman (D, NJ).

The following table shows the estimated savings resulting from H.R. 2811, the Limit, Save, Grow Act.  Click on table to enlarge.

First, H.R. 2811 suspends the debt ceiling through either March 31, 2024 or a $1.5 trillion increase from the then-current $31.4 trillion debt ceiling - whichever comes first.  In summary, the bill would save $4.8 trillion (i.e., reduce deficits & the national debt) through FY 2033 relative to the CBO baseline, with about $4.2 trillion of policy savings and $543 billion of interest savings. 

Most of these savings would come from reducing the FY 2023 Omnibus bill discretionary spending total of $1.65 trillion (the CBO baseline) to FY 2022 discretionary spending levels of $1.47 trillion in FY 2024 & then allow 1% per year growth through FY 2033.  Biggs & the other three Nay voters (& Kentucky Senator Rand Paul) wanted to use the discretionary spending levels in FY 2019 (before Covid funding), not the spending level of FY 2022, as the starting point for FT 2024.  A big difference.

H.R. 2811 would rescind unspent Covid relief funds ($30 B); repeal most of the Inflation Reduction Act's (IRA) energy & climate tax credit expansions ($540 B); rescind most of the IRAs increased IRS funding ($80 B); make changes to energy, regulatory, & permitting policies requiring Congress to approve any federal rule or regulation that the Office of Management & Budget determines would have an economic impact of $100 million or more (see REINS Act H.R. 277 - aptly named Regulations From The Executive In Need Of Scrutiny Act); impose or expand work requirements in several federal safety net programs for able-bodied adults without dependents between the ages of 18 or 19 to 55, requiring them to either work, engage in community service, or participate in a work training program for at least 80 hours per month ($120 B); & prevent implementation of both Biden's student loan forgiveness plan & Income-Driven Repayment (IDR) program - the Supreme Court struck down Biden's $430 student loan forgiveness plan but the IDR will require a party with standing to successfully bring suit to strike it down before it resumes in October.

The Freedom Caucus considered  H.R. 2811 to be the ceiling for how high they would go in government spending in negotiations with Biden to raise the debt limit, not the floor.  But the Biden-McCarthy deal (H.R. 3746 Fiscal Responsibility Act of 2023 - Public Law 118-5) significantly watered down H.R. 2811 - so much so that it received more Democrat votes than Republican votes.  See graphic below - McCarthy relied on Democrats to pass the bill he negotiated with Biden when 71 Republicans voted against it.

First the Biden-McCarthy deal has no debt ceiling @ all - just unbelievably a debt suspension until January 1, 2025 (after the presidential election) that will see the national debt increase another estimated $4 trillion.  After FY 2025, there are no budget caps, just non-enforceable appropriations targets.

A few highlights to give a flavor of why so many Freedom Caucus members were disgusted with the negotiation:  McCarthy agreed to leave in place Biden's student loan forgiveness plan (dangerously relying on the Supreme Court to strike it down later in the month - which it did).  With regard to H.R. 2811 removing $80 billion from IRS funding: McCarthy agreed with Biden to only remove $1.4 billion in FY 2023 (see Scott Perry comment @ the top of this post) & $21.9 billion mostly split in 2024 & 2025.  There were no changes to the climate & energy provisions planned $540 billion expenditures.  And most embarrassing, CBO determined that the work requirements for able bodied adults resulting in an expected $120 billion deficit reduction wouldn't save any money due to the Biden deal exempting veterans & the homeless, both of whom would benefit from the dignity & stability of work. 

Click here to see the House vote on the debt ceiling deal & here to see the Senate vote.

The only point that is worthwhile in the Biden-McCarthy deal is the inclusion of Kentucky Congressman Thomas Massie's requirement  that the government cut 1% of spending across the board if Congress doesn't pass all 12 appropriations bills for FY 2024 - which is the next point of contention for McCarthy's speakership.  In reality I would have to see our elected representatives take this step to believe it, but it is on the books thanks to Massie (Liberty Score "A" @ 96%).

Although McCarthy got through the Treasury's default-government-shutdown warning regarding the need to increase the debt ceiling he has boxed himself into a corner with the FY 2024 budget that starts on October 1, & its inclusion of the aforementioned 12 appropriations bills that fund the federal government each year.

McCarthy has now told the Freedom Caucus that he will demand more deficit reduction than his deal with Biden calls for which pleases the Freedom Caucus but has Biden saying he will veto any such measure because they have a deal in the Fiscal Responsibility Act.

Starting this week Congress is on its six week recess meaning there are only twelve legislative days in session before the current law funding the government expires which once again brings the possibility of a government shutdown in play.  One of McCarthy's promises was that the House would pass all 12 appropriation bills individually for FY 2024 instead of resorting to a continuing resolution or a catch-all omnibus spending bill that hides a lot of fat & real intentions of many members of Congress.  Congress's record in this regard is terrible - Between fiscal year 1977 & fiscal year 2012, Congress only passed all twelve regular appropriations bills on time in four years – fiscal years 1977, 1989, 1995, & 1997.   Every other fiscal year since 1977 has required at least one continuing resolution.  Source - Wikipedia.

The twelve pieces of legislation that require annual appropriation:

1.  Agriculture

2.  Commerce, Justice, & Science

3.  Defense

4.  Energy & Water

5.  Financial Services

6.  Homeland Security

7.  Interior & Environment

8.  Labor, Health & Human Services, & Education

9.  Legislative

10.  Military & Veterans

11.  State & Foreign Operations

12.  Transportation & Housing & Urban Development

The next two months will tell not only if our elected representatives have the nerve & stomach to resurrect the Limit, Save, Grow Act but if we the people being represented do.  See the graph below that shows the referenced Act provides @ least a starting point to control federal spending.

The problem with the Limit, Save, Grow Act is that it only pertains to half of the 30% of the federal budget classified as discretionary spending.  See graph below that shows the entire federal spending types.

Obviously, if the 63% of the budget that is labeled mandatory is considered off-limits to debt reduction the task is impossible & our financial misconduct will continue until collapse.  The mandatory programs continue year after year as if they were on autopilot following whatever formulas are called for with no, or very little, action from Congress.  BTW - the term mandatory is a misnomer because Congress could eliminate the programs it includes overnight if it so desired - there is nothing mandatory about them.

See graphic below for further breakdown of the components of federal spending.  The Limit, Save, Grow Act pertains only to the 16% of federal spending that makes up the non-defense discretionary component.  All the other components need to be addressed also.

The national debt went from $5.6 trillion to $10.0 trillion under GW Bush, $10.0 trillion to $19.5 trillion under BO, $19.5 trillion to $27.2 trillion under Trump in four years, & $27.2 trillion to over $32 trillion in just two & a half years under Biden.

Professor Friedman taught that money available for taxation is composed of direct taxes & deficit spending (borrowing) & that the portion of the national debt that is paid every year is the interest payments on that debt.  The great libertarian professor explained that government spending should be minimized in order to have the most robust economy possible because the larger the proportion of private sector resources that the government takes (spends) the less money is available for consumption, production, savings , & investment - the things that drive the economy & prosperity.  

The above point is illustrated by the famous Harvard study by Carmen Reinhart & Kenneth Rogoff in that they found that advanced economic countries with public debt above 90% of GDP typically had slower economic growth - median growth rates fell by 1% & average growth rates by considerably more.  This reduction in economic growth is largely an unseen cost compared to, for instance, a very visible direct cut in pay by your employer.

Now the debt & deficits can become much more serious than just a slowdown in economic growth - which is bad enough because increases in your standard of living depend on economic growth.  Without economic growth our futures are less robust.  This seriousness starts to turn into a crisis when the Treasury begins to have problems borrowing money to fund much of the programs that far too many Americans count on for living expenses.  Dr. John Cochrane put his finger on the significance of the national debt, writing in the WSJ on March 18, 2020: America's “unique ability to borrow, & to promise eventual repayment by taxation, is a treasured but finite resource.  When a crisis comes in which even the Treasury can’t borrow, we are in for a true catastrophe” - or what I call the first side of the national debt coin in which every American citizen is responsible for  funding whatever financial shortfalls result from the Treasury's borrowing troubles described by Dr. Cochrane, thereby wiping out wealth built over many generations especially when you consider the unfunded $100+ trillion liabilities of Social Security & Medicare & the liabilities of Fan & Fred, the housing giants whose liabilities are guaranteed by taxpayers.

Side one of the national debt coin should be thought of as a rupture or sudden burst.

This borrowing problem for America has not gone unnoticed by communist China, whose plans to supplant American leadership is known by all but the majority of the American citizenry, who are oblivious to such matters preferring to concentrate on identity politics, racism, & political correctness matters.  Already, Saudi Arabia, India, Russia, Brazil, Argentina, Bangladesh, Venezuela, & parts of Africa are in one stage or another of trade & transactions using the Chinese yuan instead of the dollar.  Bolivia, just last week, became the latest South American country to start partially using the yuan.  China has set up the petroyuan for oil trading in their challenge to overtake America.

So why did Alexander Hamilton refer to the public debt as a "national blessing"? - refer to first image @ the very top of this post.

Hamilton knew that debt can be used as a tool as deficits allow governments to change the timing of production as all American war efforts did to win wars starting with the Revolutionary War or as the government did under President Reagan running large deficits to increase national productive capacity while also cutting taxes - this provided a double incentive for economic growth in the U.S. economy as GDP increased faster than debt, which was paid down by Bill Clinton with the help of Newt Gingrich.  

Hamilton emphasized the repayment of debt starting when he accepted the responsibility, as Treasury Secretary, to pay off all of the state's debts @ full value from the war.  See graph below (click on it to enlarge) to follow debt reduction after each war & the expansion under Reagan.  Notice only once in our history that the national debt was zero (not just as a percent of GDP but in absolute dollar terms) - January 8, 1835 following the plan set in motion by James Monroe, our best president, & then followed through by two men who had worked for President Monroe - John Quincy Adams & Andrew Jackson.  Not only is this the only time in American history that our debt was extinguished, it remains the only time in world history that a major country was without interest paying debt.  A gargantuan achievement that can’t be imagined today.

After 2005 none of the four presidents elected in the 21st century have presided over an economy that has produced one year of 3% real annual economic growth (except 2021 when growth comparisons were made to a pandemic ultra low year level).   The national debt has increased 475% in the last 22.5 years from what it was for our prior entire history.  The labor force participation rate (lfpr) for men in their prime working years of 25 to 54 has dropped 2.5 percentage points since January 2001.  The government pays people to stay home & the Cato Institute has identified 126 federal entitlement & welfare programs.  The lfpr for people 16 to 24 has dropped by 1.2 percentage points since February 2020.  People have retired early who were not financially prepared to retire - the lfpr rate for people 55 & over has dropped by 2 percentage points since February 2020.  There are two times as many job openings as there are unemployed people & employers still cannot find enough qualified workers.  There are schools in Atlanta & Baltimore where 97% & 85%, respectively, of students cannot read.  Welfare programs do not require beneficiaries to work, in fact people can lose benefits if they become employed.  There is no one working in half of the bottom quintile households as of 2014.

The above conditions are what I call the second side of the national debt coin in which economic growth is stymied because of welfare programs funded by deficit spending.  People not working detracts from the GDP & is a burden on productive citizens.  This is more of a slow burn than the other side of the coin described above as a rupture, but in the end it leads to the same place of ruin.

GW Bush, BO, Trump, & Biden increased the national debt, all under sub 3% real economic growth years, as indicated above, meaning they did not use debt as Hamilton intended nor did any of them have any intention of ever paying it back despite the growing threat from China.  Instead of increasing production to benefit the nation, they used debt to fund redistributionist policies.

We are bleeding to death.