September 5, 2023
Dear Friends and Family,
In this segment we are seeking wisdom on the perils of overspending. As an illustration let me provide my viewpoint on what has happened in the past four years.
We experienced 12.81% cumulative inflation from 2021 to August 10, 2023, per both the Official Data Foundation and Google. Why? The economists tell us inflation occurs when there is too much money chasing too few goods. What happened to cause that?
The Trump administration pumped significant money into the system via the CARES Act ($2.2 trillion) and Payroll Protection Program ($953 billion) in 2020 because of the pandemic. The Biden administration followed that by pumping more money into the system with the American Rescue Plan ($1.9 trillion) in 2021 followed by the Inflation Reduction Act in 2022 (a bill of $891 billion of which had little to do with inflation reduction as it allocated $783 billion to clean energy and climate change and three years of Affordable Care Act – Obamacare – subsidies). The result was a lot of money pumped into the system -- $6 trillion which is roughly equivalent to a yearly budget.
Simultaneously we were coming out of the lockdowns of the pandemic where the production of goods in the U.S. and elsewhere were severely constrained plus imports experienced supply chain bottlenecks. These conditions were exacerbated by policy decisions which reduced the availability of oil and gas as well as driving up its price, affecting national transportation creating more supply chain problems. Further, availability of labor was slow to recover from the pandemic as reported in the labor participation rates (63% before the pandemic dropping to 60% in 2020, and very slowly creeping back to 62.6% in April 2023). Some of the slowness in recovery was undoubtedly due to money people received from the huge stimulus packages of 2020 and 2021.
Clearly too much money was spent chasing too few goods and inflation ensued.
To combat the resultant inflation, money had to be taken out of the system. The classic way to do that is to reduce the amount of borrowing via the reduction of loans throughout the country. To accomplish that the Federal Reserve increased the Federal Funds Rate 5.25% to date via eight increases since March 2022.
Increasing the Federal Funds Rate resulted in increased interest rates on loans throughout the financial system – mortgages, automobiles, credit cards, and various government loans (Treasury bonds and notes, TIPs, etc.) For instance, the yield rate on the 10-year treasury increased from an average of 1.45% in 2021 to 4.34% today, a 2.89% increase. That doesn’t sound like much, but 2.89% of $33 trillion is $957 billion/year in increased interest rate changes that has to be paid from tax revenues taking money away from other needed expenditures by the federal government. That increase alone would be roughly 15% of the 2022 budget of $6.27 trillion.
You will note in the excerpts, this resulted in the Fitch Bond Rating Agency to downgrade the credit rating of the U.S. government – the second downgrade in history, the first being in 2011.
The question is how do we pay for the extra nearly $1 trillion in costs when we have been running budget deficits since 2001. This 22-year history of continual deficits has increased our national debt from $5.6 trillion to $33 trillion or a 589% increase. There are only four ways to pay for the increase: increase growth hence more tax revenues, decrease spending, increase the tax rate (which would decrease growth) or increase the debt level (which increases annual debt interest payments). The most desirable is growth rate, but we have been unsuccessful in increasing growth to cover our deficits for 22 years and now we have a 15% cost increase.
We are getting close to the point where the country will be forced to institute austerity programs on entitlements such as Social Security, Medicare, and Medicaid. Our political representatives have avoided austerity programs, “kicking the can down the road” via debt increases, and most likely will do so again.
Happy Learning,
Harley
Dear Friends and Family,
In this segment we are seeking wisdom on the perils of overspending. As an illustration let me provide my viewpoint on what has happened in the past four years.
We experienced 12.81% cumulative inflation from 2021 to August 10, 2023, per both the Official Data Foundation and Google. Why? The economists tell us inflation occurs when there is too much money chasing too few goods. What happened to cause that?
The Trump administration pumped significant money into the system via the CARES Act ($2.2 trillion) and Payroll Protection Program ($953 billion) in 2020 because of the pandemic. The Biden administration followed that by pumping more money into the system with the American Rescue Plan ($1.9 trillion) in 2021 followed by the Inflation Reduction Act in 2022 (a bill of $891 billion of which had little to do with inflation reduction as it allocated $783 billion to clean energy and climate change and three years of Affordable Care Act – Obamacare – subsidies). The result was a lot of money pumped into the system -- $6 trillion which is roughly equivalent to a yearly budget.
Simultaneously we were coming out of the lockdowns of the pandemic where the production of goods in the U.S. and elsewhere were severely constrained plus imports experienced supply chain bottlenecks. These conditions were exacerbated by policy decisions which reduced the availability of oil and gas as well as driving up its price, affecting national transportation creating more supply chain problems. Further, availability of labor was slow to recover from the pandemic as reported in the labor participation rates (63% before the pandemic dropping to 60% in 2020, and very slowly creeping back to 62.6% in April 2023). Some of the slowness in recovery was undoubtedly due to money people received from the huge stimulus packages of 2020 and 2021.
Clearly too much money was spent chasing too few goods and inflation ensued.
To combat the resultant inflation, money had to be taken out of the system. The classic way to do that is to reduce the amount of borrowing via the reduction of loans throughout the country. To accomplish that the Federal Reserve increased the Federal Funds Rate 5.25% to date via eight increases since March 2022.
Increasing the Federal Funds Rate resulted in increased interest rates on loans throughout the financial system – mortgages, automobiles, credit cards, and various government loans (Treasury bonds and notes, TIPs, etc.) For instance, the yield rate on the 10-year treasury increased from an average of 1.45% in 2021 to 4.34% today, a 2.89% increase. That doesn’t sound like much, but 2.89% of $33 trillion is $957 billion/year in increased interest rate changes that has to be paid from tax revenues taking money away from other needed expenditures by the federal government. That increase alone would be roughly 15% of the 2022 budget of $6.27 trillion.
You will note in the excerpts, this resulted in the Fitch Bond Rating Agency to downgrade the credit rating of the U.S. government – the second downgrade in history, the first being in 2011.
The question is how do we pay for the extra nearly $1 trillion in costs when we have been running budget deficits since 2001. This 22-year history of continual deficits has increased our national debt from $5.6 trillion to $33 trillion or a 589% increase. There are only four ways to pay for the increase: increase growth hence more tax revenues, decrease spending, increase the tax rate (which would decrease growth) or increase the debt level (which increases annual debt interest payments). The most desirable is growth rate, but we have been unsuccessful in increasing growth to cover our deficits for 22 years and now we have a 15% cost increase.
We are getting close to the point where the country will be forced to institute austerity programs on entitlements such as Social Security, Medicare, and Medicaid. Our political representatives have avoided austerity programs, “kicking the can down the road” via debt increases, and most likely will do so again.
Happy Learning,
Harley
SEEKING WISDOM FOR AMERICA – SEGMENT 9
ROMAN DECLINE #4: OVERSPENDING & TRADE – EXCERPTS
SPENDING
WHAT HAS CAUSED THE NATIONAL DEBT TO RISE SO SIGNIFICANTLY IN RECENT DECADES? Tumultuous events over the past 20 years have led Congress to spend astronomical sums of money and worry about the debt later down the road. These include the post 9/11 wars in Afghanistan and Iraq, the financial crisis of 2007-2008, the most recently, fallout from the worldwide COVID-19 pandemic. These unfortunate events cause waves of spending at levels not seen since World War II on the basis of what could justifiably be seen as grave national emergencies, from a roughly $6 trillion national debt in 2001 to nearly $28 trillion in 2021 – a staggering 366% increase. [Note: Currently we are approaching a $33 trillion national debt].
In order to deal effectively with the worst economic downturn since the 1930s, Obama racked up nearly as much debt in eight years than in the entire 232-year history of the country before he took office. He entered with $10.6 trillion in total debt and left with the country owing $19.9 trillion. That’s an average tab of $1.16 trillion a year. Most recently, the emergence of COVID-19 kicked off a global pandemic, which has necessitated hefty stimulus packages to mitigate the economic fallout associated with the crisis. In fiscal year 2020, the Congressional Budget Office (CBO) reported that the U.S. added some $3.3 trillion to the national debt, which makes it the largest one-year budget shortfall since 1945, largely due to declining revenues for the government and huge stimulus packages being signed into law. Most notably, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program, both of which were supported by the Trump administration and members of both parties in Congress. In early 2021 lawmakers granted approval to an additional $900 billion stimulus package – dubbed the American Rescue Plan, signed into law by President Biden.
This propelled the national debt, as a share of the country’s GDP, to levels not seen since World War II. Democrats seem keen on boosting this stimulus spending to help the country ride out COVID’s widespread negative impacts on the American economy, even if it drives the national debt higher. The U.S. Congress spends more money than any other body or group on the planet. Congress is poised to allocate approximately $6 trillion in fiscal 2022. That means that for 2022, Congress is projected to spend a million dollars every 5 seconds and borrow a million dollars about every 17 seconds.
WHERE IS THE MONEY SPENT? There are certain specific budgetary areas where the vast majority of public dollars are allocated. Chief among these are – in order of the size of expenditures – (1) the major federal entitlement programs (Social Security, Medicare, and Medicaid), (2) the defense establishment (including the military and intelligence community), and last but certainly not least (3) servicing our national debt (i.e., interest payments on the debt). The data released for fiscal year 2020 shows that Congress spent roughly 56% of the budget on various entitlements and “safety net” programs, 16% on military and security, and 8% to finance its debts. The remaining 20% went toward other federal programs and operations, including benefits for federal government workers and veterans. [Note: a 3% increase in interest rates equates to an additional 990 billion dollars in interest payments on the debt per year – this would be a 15.8% increase to the $6.27 trillion budget of fiscal year 2022]
Source: America’s National Debt by Thomas Arndt (2022)
DESIRED INCREASES IN SPENDING – CLIMATE CHANGE: At a May 3, 2023, hearing of the Senate Appropriations Committee, Louisiana Sen. John Kennedy took Deputy Secretary of Energy David Turk to the woodshed for his refusal to directly answer some pointed, relevant questions about the enormous cost of the Biden energy and climate policies. Kennedy repeatedly asks Mr. Turk a pair of key questions, the first of which had to do with the Department of Energy’s estimate of the total price tag to the American taxpayers needed to achieve the Biden goal of U.S. carbon neutrality by 2050. It was a question that Kennedy posed multiple times, and which Turk refused to answer. Finally, having had enough of the obfuscation, Sen. Kennedy noted some of the “experts” to which Turk had referred earlier in his testimony had estimated an all-in cost of $50 trillion. Nodding his head and making no attempt to dispute the number, Turk replied, “it’s gonna cost trillions of dollars, there is no doubt about it.”
Kennedy: “Let me ask you, again. If we spend $50 trillion to become carbon neutral by 2050 in the United States of America, how much is that going to reduce world temperatures?”
Turk: “This is a global problem, so we need to reduce our emissions and we need to do everything to, uh…”
Kennedy: “You don’t know, do you? You don’t know, do you?”
Finally, his point avoidance and obfuscations having apparently been exhausted, Turk resorted to saying, “in my heart of hearts, there is no way the world gets its act together on climate change unless the U.S. leads.” And there we have it. Americans are being asked to accept the force-feeding of an incredibly radical set of policies with a price tag that is unprecedented in global history to achieve a “carbon neutrality” goal whose benefits are so nebulous, negligible and wholly reliant on the cooperative actions of other countries beyond U.S. control that they cannot be measured in any reliable way. Instead, we are being told by senior political appointees forcing those policies into being that we should simply trust them because they think it is the right thing to do in their “heart of hearts.” This is madness. For some context, the $50 trillion is an amount that exceeds the gross domestic product of the U.S., China, India, Germany, and Japan, combined. It is a number that drastically exceeds total U.S. national debt.
Source: MSN article titled Debunked Biden’s Climate Agenda in Epic Fashion by David Blackmon (May 24, 2023).
An inconvenient truth for the traditional Green movement: nuclear power is the world’s most abundant and scalable carbon-free energy source. Although renewable energy sources, particularly solar and wind, have become drastically cheaper, and their share of the world’s energy has more than tripled in the past five years, that share is still paltry 1.5% and there are limits on how high it can go. To satisfy the world’s needs with renewables by 2050 would require tiling windmills and solar panels over an area the size of the United States (including Alaska), plus Mexico, Central America, and the inhabited portion of Canada.
Nuclear energy, in contrast, represents the ultimate in density, because, in a nuclear reaction you get an immense amount of energy from a small bit of mass. Mining of uranium for nuclear energy leaves a far smaller environmental scar than mining coal, oil, or gas, and the power plants themselves take up about one five-hundredth of the land needed by wind or solar. Nuclear energy is available around the clock, and it can be plugged into power grids that provide concentrated energy where it is needed. It has a lower carbon footprint than solar, hydro, and biomass, and it’s safer than them, too.
Nordhaus and Shellenberger summarize the calculations of an increasing number of climate scientists. “There is no credible path to reducing global emissions without an enormous expansion of nuclear power. It is the only low carbon technology we have today with the demonstrated capability to generate large quantities of centrally generated power. For countries to reduce their emission enough to meet the 2-degree target, estimates that the U.S. will have to get between 30 and 60 percent of its electricity from nuclear power by 2050. Unfortunately, the use of nuclear power has been shrinking just when it should be growing. In the United States, eleven nuclear reactors have recently been closed or are threatened with closure, which would cancel the entire carbon savings from the expanded use of solar and wind.
Source: Enlightenment Now by Steven Pinker (2019)
CONGRESSIONAL BUDGET OFFICE (CBO) PROJECTION: Many of the CBO’s recent forecasts have raised red flags of concern in the minds of people across the political spectrum. In 2020, for example, the CBO produced a long- term budget outlook, which projected that under the current trends, the debt could easily reach 200% of GDP by the year 2050. To make matters worse, Congress’s deficit spending tends to outstrip even the most pessimistic CBO estimates put on public record over the past few decades, such that the forecasts on medium – to long-term debt may be considerably understated. If this forecast proves true, it could impose a heavy burden on the economy in the form of inflation and higher interest payments and make it more difficult for Congress to sufficiently fund its most vital priorities and programs.
PUBLIC POLICY ISSUE: MODERN MONETARY THEORY: For many politicians, it is easier to accept deficit spending (spending that increases the national debt) where everyone gets what they want, as opposed to standing up and fighting against the other party over how to allocate whatever money trickles into the Treasury each year. To some observers, this dynamic is a sign of bipartisan action that benefits the country with an influx of federal money and a political system of gears that continues turning. To others, it amounts to a sort of unholy alliance between the parties that sets the country up for financial ruin in the form of unstoppable growth in the federal budget and mountainous levels of debt.
Why is there such a sharp clash of ideology when it comes to financial issues managed by Congress? The clash speaks to a difference of approach in how people perceive their money, how it is valued and how it can be used (or perhaps abused) as a tool for social engineering. National debt has the interesting character of being seen as a problem only if one considers it to be so. At least this is consistent with the predominant approach to Modern Monetary Theory (MMT). According to this school of thought in economics, governments are utterly unlike individual households in the “state cannot run out of money, it can always meet its own obligations in so far as they are denominated in its own currency [Note: meaning the dollar must be the reserve currency for the world] and it does not, therefore, face a “budget constraint” as this is conventionally understood.
Standing in stark contrast to MMT (accepted as doctrine by most liberals in Washington, D.C.), there is a distinctly more conservative approach. In their view, the government is, in fact, on the hook for the money it owes, and no amount of financial juggling or recalculation will make it disappear. There is little doubt that conservatives want to spend less money; they fear the prospect of growing inflation, and they are more worried about the stability of the financial system. Moreover, conservative politicians and financial gurus are more likely to warn of massive, looming economic crashes over the horizon if America fails to become more fiscally responsible.
Source: America’s National Debt by Thomas Arndt
FITCH DOWNGRADES U.S. CREDIT RATING (8/1/2023): Fitch lowered the U.S. long-term rating to AA+ from its top mark of AAA. “The repeated debt-limit political standoffs and last-minute resolution have eroded confidence in fiscal management,” Fitch said in a statement. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.” The firm noted that the U.S. had made only “limited progress” in tackling the challenges related to the rising costs of programs such as Social Security and Medicare, whose costs are expected to soar as the U.S. population ages. Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the U.S. credit rating amid a debt-limit standoff – the first time the United States was removed from a list of risk-free borrowers.
Source: The New York Times (8/1/2023).
Fitch cited both U.S. political dysfunction and the rising debt limit standoffs and last-minute resolutions.” Fitch pointed to a “high and growing” debt burden over the next several decades – an outlook buttressed by other bleak predictions about the U.S. government’s fiscal trajectory. In June, the nonpartisan Congressional Budget Office (CBO) projected that U.S. debt would reach 181% of the nation’s total economic output by 2053. Rising interest rates, increased as the Federal Reserve has tried to fight inflation, will also make payments on future debt much more expensive.
Source: The Washington Post (8/2/2023).
WHAT IS A REASONABLE SPENDING LIMIT? Milton Friedman created a proverb for the ages when he reportedly said, “To spend is to tax.” That five-word truth, however, has created one of the biggest misunderstandings we have today regarding spending and taxes. “To spend is a tax” means that spending today must sooner or later be funded by taxes. Friedman was correct, no way around it. But there’s more to it.
“Keep your eye on one thing and one thing only; how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what the government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that you can stop worrying about the debt.”
Our national income is almost exactly the same thing as GDP (gross domestic product), so Friedman was saying that we can’t judge whether the federal government is spending “too much” until we compare spending to the size of the economy. John Taylor, the famous economist at Stanford quantified it.
“A commonsense and quite reasonable budget plan would be to insist simply that federal spending be brought down from 24 percent to 19 ½ percent of GDP and then hold there.”
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
Federal Net Outlays as Percent of Gross Domestic Product rose to 25% in 2009 following the 2008 Banking Crisis then slowly declined to 20% from about 2013 to 2019. Then hit about 31% in 2020 and has subsided to 25% where it is today.
Source: Federal Reserve Bank of St. Louis
[Commentary: The government spending level has not hit the target of 19 ½% since 2007, so we have been significantly overspent since then – for about 16 years]
INTEREST RATES AND COSTS ON THE NATIONAL DEBT: In July 2023 the Federal Reserve announced a 0.25 percentage point increase in the target for the federal funds rate. The increase in that rate, which is the interest rate at which commercial banks lend to one another, is meant to help tame rising inflation; however, the increase also has implications for the federal government’s borrowing costs and therefore the nation’s fiscal picture. The Fed’s move will set the target range for the federal funds rate to between 5.25 and 5.50 percent – a 16-year high.
The CBO projected that annual net interest costs would total $640 billion in 2023 and double over the upcoming decade, soaring from $739 billion in 2024 to $1.4 trillion in 2033 and summing to $10.5 trillion over that period. However, if inflation is higher than CBO’s projections and if the Fed raises interest rates by larger amounts than the agency projected such costs may rise even faster than anticipated. The growth in interest costs presents a significant challenge in the long term as well. According to CBO’s projections, interest payments would total around $74 trillion over the next 30 years and would take up nearly 40% of all federal revenues by 2053. Interest costs would also become the largest “program” over the next few decades – surpassing defense spending in 2029, Medicare in 2044, and Social Security in 2050. Ballooning interest costs threaten to crowd out important public investments that can fuel economic growth in the future.
Source: Peter G. Peterson Foundation: Higher Interest Rates Will Raise Interest Costs on National Debt
[Commentary: Because of the Biden’s overspending with the American Rescue Plan and Inflation Reduction Act (which had nothing to do with inflation) plus the reduction in oil and gas drilling resulting in the country’s loss of energy independence, inflation ensued to the highest rate in 40 years. To calm the inflation the Fed had to raise interest rates which has resulted in further overspending due to increased interest costs, the result of which will probably further increase the debt resulting in more interest costs. That is the sequence leading to the CBO’s projections. It indicates a huge potential downward spiral in the offing for our economy. Net, the inflation was a double whammy. First, increased prices for the American consumer plus higher mortgage and other loan and credit cards rates. Second, higher interest payments on our debt forcing reductions in government spending on other issues].
TRADE
THE LOSS OF MANUFACTURING THUS CREATING TRADE DEFICITS: The decision the elites of this country made about 20 years ago to let Communist China into the World Trade Organization (WTO) exposed millions of workers to cut-rate Chinese labor and cheap products. At the time, the people who made the decisions about American economic policy believed that our primary task as a country was to integrate every society on earth into the global market. We believed that even the worst, most repressive regimes in the world – including Communist China – would magically become liberal democracies if we allowed them to get a little rich off the free market.
Now more than ever, the decision of our elites to allow Communist China into the WTO is acknowledged to be a critical mistake. The results are in—they’ve been for years, in fact – and they’re not good. Five years after China became a full member of the WTO, our trade deficit with them had nearly tripled. Before China joined the WTO, the United States was the largest trading partner of 152 countries in the world. Today, we are the largest trading partner of only 57, and China is the largest trading partner of 128.
Today, many Americans – particularly those who live in areas that have been hollowed out by the loss of manufacturing jobs – believe the American Dream is no longer in reach. The dream my immigrant parents and millions like them achieved here in this country. Not a dream of becoming rich or owning a lot of things, but a dream of having a stable and dignified job that allowed you to get married, start a family, own a home in a safe neighborhood, retire with dignity, and leave your children better off than yourself.
Since the founding of our nation, economic independence and a robust manufacturing sector have allowed this country to thrive. The great statesmen of our past have always understood this. More importantly, they have understood the danger of depending on other nations for our prosperity.
As the euphoria of the 1990s set in, different kinds of politicians and business leaders began making decisions about the future of the U.S., they began to forget about the millions of people who relied on the steady incomes that our robust manufacturing sector provided.
At first the changes were relatively minor. A few companies moved key operations overseas, allowing them to take advantage of the cheap labor available in countries like India and China. This practice, known as outsourcing, had become increasingly common in the late 1980s, and accelerated in the 1990s. Soon, with the passage of legislation like the North American Free Trade Agreement (NAFTA), companies realized they could also take advantage of a practice known as “offshoring,” whereby they closed down entire factories in the U.S. and moved them to places like Mexico. All of this set the stage for allowing Communist China to join the WTO.
The trend was clear. With every month that passed, the trade deficit between the United States and China was growing. More American jobs were being lost to cheap Chinese labor. And this was before China entered the WTO. Once they did, according to many experts, the agreement would “lock” that bad relationship into place, “setting the stage for rapidly rising trade deficits in the future that would severely depress employment in manufacturing, the sector most directly affected by trade.”
Without dignified work, society decays. Suicides and drug overdoses soar. Values erode. There is no more important project than rebuilding our nation’s workforce, and that begins with rethinking our century-old approach to organized labor.
Source: Decades of Decadence by Marco Rubio (2023).
The unabbreviated version of the above can be found in the pdf document below.
ROMAN DECLINE #4: OVERSPENDING & TRADE – EXCERPTS
SPENDING
WHAT HAS CAUSED THE NATIONAL DEBT TO RISE SO SIGNIFICANTLY IN RECENT DECADES? Tumultuous events over the past 20 years have led Congress to spend astronomical sums of money and worry about the debt later down the road. These include the post 9/11 wars in Afghanistan and Iraq, the financial crisis of 2007-2008, the most recently, fallout from the worldwide COVID-19 pandemic. These unfortunate events cause waves of spending at levels not seen since World War II on the basis of what could justifiably be seen as grave national emergencies, from a roughly $6 trillion national debt in 2001 to nearly $28 trillion in 2021 – a staggering 366% increase. [Note: Currently we are approaching a $33 trillion national debt].
In order to deal effectively with the worst economic downturn since the 1930s, Obama racked up nearly as much debt in eight years than in the entire 232-year history of the country before he took office. He entered with $10.6 trillion in total debt and left with the country owing $19.9 trillion. That’s an average tab of $1.16 trillion a year. Most recently, the emergence of COVID-19 kicked off a global pandemic, which has necessitated hefty stimulus packages to mitigate the economic fallout associated with the crisis. In fiscal year 2020, the Congressional Budget Office (CBO) reported that the U.S. added some $3.3 trillion to the national debt, which makes it the largest one-year budget shortfall since 1945, largely due to declining revenues for the government and huge stimulus packages being signed into law. Most notably, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program, both of which were supported by the Trump administration and members of both parties in Congress. In early 2021 lawmakers granted approval to an additional $900 billion stimulus package – dubbed the American Rescue Plan, signed into law by President Biden.
This propelled the national debt, as a share of the country’s GDP, to levels not seen since World War II. Democrats seem keen on boosting this stimulus spending to help the country ride out COVID’s widespread negative impacts on the American economy, even if it drives the national debt higher. The U.S. Congress spends more money than any other body or group on the planet. Congress is poised to allocate approximately $6 trillion in fiscal 2022. That means that for 2022, Congress is projected to spend a million dollars every 5 seconds and borrow a million dollars about every 17 seconds.
WHERE IS THE MONEY SPENT? There are certain specific budgetary areas where the vast majority of public dollars are allocated. Chief among these are – in order of the size of expenditures – (1) the major federal entitlement programs (Social Security, Medicare, and Medicaid), (2) the defense establishment (including the military and intelligence community), and last but certainly not least (3) servicing our national debt (i.e., interest payments on the debt). The data released for fiscal year 2020 shows that Congress spent roughly 56% of the budget on various entitlements and “safety net” programs, 16% on military and security, and 8% to finance its debts. The remaining 20% went toward other federal programs and operations, including benefits for federal government workers and veterans. [Note: a 3% increase in interest rates equates to an additional 990 billion dollars in interest payments on the debt per year – this would be a 15.8% increase to the $6.27 trillion budget of fiscal year 2022]
Source: America’s National Debt by Thomas Arndt (2022)
DESIRED INCREASES IN SPENDING – CLIMATE CHANGE: At a May 3, 2023, hearing of the Senate Appropriations Committee, Louisiana Sen. John Kennedy took Deputy Secretary of Energy David Turk to the woodshed for his refusal to directly answer some pointed, relevant questions about the enormous cost of the Biden energy and climate policies. Kennedy repeatedly asks Mr. Turk a pair of key questions, the first of which had to do with the Department of Energy’s estimate of the total price tag to the American taxpayers needed to achieve the Biden goal of U.S. carbon neutrality by 2050. It was a question that Kennedy posed multiple times, and which Turk refused to answer. Finally, having had enough of the obfuscation, Sen. Kennedy noted some of the “experts” to which Turk had referred earlier in his testimony had estimated an all-in cost of $50 trillion. Nodding his head and making no attempt to dispute the number, Turk replied, “it’s gonna cost trillions of dollars, there is no doubt about it.”
Kennedy: “Let me ask you, again. If we spend $50 trillion to become carbon neutral by 2050 in the United States of America, how much is that going to reduce world temperatures?”
Turk: “This is a global problem, so we need to reduce our emissions and we need to do everything to, uh…”
Kennedy: “You don’t know, do you? You don’t know, do you?”
Finally, his point avoidance and obfuscations having apparently been exhausted, Turk resorted to saying, “in my heart of hearts, there is no way the world gets its act together on climate change unless the U.S. leads.” And there we have it. Americans are being asked to accept the force-feeding of an incredibly radical set of policies with a price tag that is unprecedented in global history to achieve a “carbon neutrality” goal whose benefits are so nebulous, negligible and wholly reliant on the cooperative actions of other countries beyond U.S. control that they cannot be measured in any reliable way. Instead, we are being told by senior political appointees forcing those policies into being that we should simply trust them because they think it is the right thing to do in their “heart of hearts.” This is madness. For some context, the $50 trillion is an amount that exceeds the gross domestic product of the U.S., China, India, Germany, and Japan, combined. It is a number that drastically exceeds total U.S. national debt.
Source: MSN article titled Debunked Biden’s Climate Agenda in Epic Fashion by David Blackmon (May 24, 2023).
An inconvenient truth for the traditional Green movement: nuclear power is the world’s most abundant and scalable carbon-free energy source. Although renewable energy sources, particularly solar and wind, have become drastically cheaper, and their share of the world’s energy has more than tripled in the past five years, that share is still paltry 1.5% and there are limits on how high it can go. To satisfy the world’s needs with renewables by 2050 would require tiling windmills and solar panels over an area the size of the United States (including Alaska), plus Mexico, Central America, and the inhabited portion of Canada.
Nuclear energy, in contrast, represents the ultimate in density, because, in a nuclear reaction you get an immense amount of energy from a small bit of mass. Mining of uranium for nuclear energy leaves a far smaller environmental scar than mining coal, oil, or gas, and the power plants themselves take up about one five-hundredth of the land needed by wind or solar. Nuclear energy is available around the clock, and it can be plugged into power grids that provide concentrated energy where it is needed. It has a lower carbon footprint than solar, hydro, and biomass, and it’s safer than them, too.
Nordhaus and Shellenberger summarize the calculations of an increasing number of climate scientists. “There is no credible path to reducing global emissions without an enormous expansion of nuclear power. It is the only low carbon technology we have today with the demonstrated capability to generate large quantities of centrally generated power. For countries to reduce their emission enough to meet the 2-degree target, estimates that the U.S. will have to get between 30 and 60 percent of its electricity from nuclear power by 2050. Unfortunately, the use of nuclear power has been shrinking just when it should be growing. In the United States, eleven nuclear reactors have recently been closed or are threatened with closure, which would cancel the entire carbon savings from the expanded use of solar and wind.
Source: Enlightenment Now by Steven Pinker (2019)
CONGRESSIONAL BUDGET OFFICE (CBO) PROJECTION: Many of the CBO’s recent forecasts have raised red flags of concern in the minds of people across the political spectrum. In 2020, for example, the CBO produced a long- term budget outlook, which projected that under the current trends, the debt could easily reach 200% of GDP by the year 2050. To make matters worse, Congress’s deficit spending tends to outstrip even the most pessimistic CBO estimates put on public record over the past few decades, such that the forecasts on medium – to long-term debt may be considerably understated. If this forecast proves true, it could impose a heavy burden on the economy in the form of inflation and higher interest payments and make it more difficult for Congress to sufficiently fund its most vital priorities and programs.
PUBLIC POLICY ISSUE: MODERN MONETARY THEORY: For many politicians, it is easier to accept deficit spending (spending that increases the national debt) where everyone gets what they want, as opposed to standing up and fighting against the other party over how to allocate whatever money trickles into the Treasury each year. To some observers, this dynamic is a sign of bipartisan action that benefits the country with an influx of federal money and a political system of gears that continues turning. To others, it amounts to a sort of unholy alliance between the parties that sets the country up for financial ruin in the form of unstoppable growth in the federal budget and mountainous levels of debt.
Why is there such a sharp clash of ideology when it comes to financial issues managed by Congress? The clash speaks to a difference of approach in how people perceive their money, how it is valued and how it can be used (or perhaps abused) as a tool for social engineering. National debt has the interesting character of being seen as a problem only if one considers it to be so. At least this is consistent with the predominant approach to Modern Monetary Theory (MMT). According to this school of thought in economics, governments are utterly unlike individual households in the “state cannot run out of money, it can always meet its own obligations in so far as they are denominated in its own currency [Note: meaning the dollar must be the reserve currency for the world] and it does not, therefore, face a “budget constraint” as this is conventionally understood.
Standing in stark contrast to MMT (accepted as doctrine by most liberals in Washington, D.C.), there is a distinctly more conservative approach. In their view, the government is, in fact, on the hook for the money it owes, and no amount of financial juggling or recalculation will make it disappear. There is little doubt that conservatives want to spend less money; they fear the prospect of growing inflation, and they are more worried about the stability of the financial system. Moreover, conservative politicians and financial gurus are more likely to warn of massive, looming economic crashes over the horizon if America fails to become more fiscally responsible.
Source: America’s National Debt by Thomas Arndt
FITCH DOWNGRADES U.S. CREDIT RATING (8/1/2023): Fitch lowered the U.S. long-term rating to AA+ from its top mark of AAA. “The repeated debt-limit political standoffs and last-minute resolution have eroded confidence in fiscal management,” Fitch said in a statement. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.” The firm noted that the U.S. had made only “limited progress” in tackling the challenges related to the rising costs of programs such as Social Security and Medicare, whose costs are expected to soar as the U.S. population ages. Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the U.S. credit rating amid a debt-limit standoff – the first time the United States was removed from a list of risk-free borrowers.
Source: The New York Times (8/1/2023).
Fitch cited both U.S. political dysfunction and the rising debt limit standoffs and last-minute resolutions.” Fitch pointed to a “high and growing” debt burden over the next several decades – an outlook buttressed by other bleak predictions about the U.S. government’s fiscal trajectory. In June, the nonpartisan Congressional Budget Office (CBO) projected that U.S. debt would reach 181% of the nation’s total economic output by 2053. Rising interest rates, increased as the Federal Reserve has tried to fight inflation, will also make payments on future debt much more expensive.
Source: The Washington Post (8/2/2023).
WHAT IS A REASONABLE SPENDING LIMIT? Milton Friedman created a proverb for the ages when he reportedly said, “To spend is to tax.” That five-word truth, however, has created one of the biggest misunderstandings we have today regarding spending and taxes. “To spend is a tax” means that spending today must sooner or later be funded by taxes. Friedman was correct, no way around it. But there’s more to it.
“Keep your eye on one thing and one thing only; how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what the government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that you can stop worrying about the debt.”
Our national income is almost exactly the same thing as GDP (gross domestic product), so Friedman was saying that we can’t judge whether the federal government is spending “too much” until we compare spending to the size of the economy. John Taylor, the famous economist at Stanford quantified it.
“A commonsense and quite reasonable budget plan would be to insist simply that federal spending be brought down from 24 percent to 19 ½ percent of GDP and then hold there.”
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
Federal Net Outlays as Percent of Gross Domestic Product rose to 25% in 2009 following the 2008 Banking Crisis then slowly declined to 20% from about 2013 to 2019. Then hit about 31% in 2020 and has subsided to 25% where it is today.
Source: Federal Reserve Bank of St. Louis
[Commentary: The government spending level has not hit the target of 19 ½% since 2007, so we have been significantly overspent since then – for about 16 years]
INTEREST RATES AND COSTS ON THE NATIONAL DEBT: In July 2023 the Federal Reserve announced a 0.25 percentage point increase in the target for the federal funds rate. The increase in that rate, which is the interest rate at which commercial banks lend to one another, is meant to help tame rising inflation; however, the increase also has implications for the federal government’s borrowing costs and therefore the nation’s fiscal picture. The Fed’s move will set the target range for the federal funds rate to between 5.25 and 5.50 percent – a 16-year high.
The CBO projected that annual net interest costs would total $640 billion in 2023 and double over the upcoming decade, soaring from $739 billion in 2024 to $1.4 trillion in 2033 and summing to $10.5 trillion over that period. However, if inflation is higher than CBO’s projections and if the Fed raises interest rates by larger amounts than the agency projected such costs may rise even faster than anticipated. The growth in interest costs presents a significant challenge in the long term as well. According to CBO’s projections, interest payments would total around $74 trillion over the next 30 years and would take up nearly 40% of all federal revenues by 2053. Interest costs would also become the largest “program” over the next few decades – surpassing defense spending in 2029, Medicare in 2044, and Social Security in 2050. Ballooning interest costs threaten to crowd out important public investments that can fuel economic growth in the future.
Source: Peter G. Peterson Foundation: Higher Interest Rates Will Raise Interest Costs on National Debt
[Commentary: Because of the Biden’s overspending with the American Rescue Plan and Inflation Reduction Act (which had nothing to do with inflation) plus the reduction in oil and gas drilling resulting in the country’s loss of energy independence, inflation ensued to the highest rate in 40 years. To calm the inflation the Fed had to raise interest rates which has resulted in further overspending due to increased interest costs, the result of which will probably further increase the debt resulting in more interest costs. That is the sequence leading to the CBO’s projections. It indicates a huge potential downward spiral in the offing for our economy. Net, the inflation was a double whammy. First, increased prices for the American consumer plus higher mortgage and other loan and credit cards rates. Second, higher interest payments on our debt forcing reductions in government spending on other issues].
TRADE
THE LOSS OF MANUFACTURING THUS CREATING TRADE DEFICITS: The decision the elites of this country made about 20 years ago to let Communist China into the World Trade Organization (WTO) exposed millions of workers to cut-rate Chinese labor and cheap products. At the time, the people who made the decisions about American economic policy believed that our primary task as a country was to integrate every society on earth into the global market. We believed that even the worst, most repressive regimes in the world – including Communist China – would magically become liberal democracies if we allowed them to get a little rich off the free market.
Now more than ever, the decision of our elites to allow Communist China into the WTO is acknowledged to be a critical mistake. The results are in—they’ve been for years, in fact – and they’re not good. Five years after China became a full member of the WTO, our trade deficit with them had nearly tripled. Before China joined the WTO, the United States was the largest trading partner of 152 countries in the world. Today, we are the largest trading partner of only 57, and China is the largest trading partner of 128.
Today, many Americans – particularly those who live in areas that have been hollowed out by the loss of manufacturing jobs – believe the American Dream is no longer in reach. The dream my immigrant parents and millions like them achieved here in this country. Not a dream of becoming rich or owning a lot of things, but a dream of having a stable and dignified job that allowed you to get married, start a family, own a home in a safe neighborhood, retire with dignity, and leave your children better off than yourself.
Since the founding of our nation, economic independence and a robust manufacturing sector have allowed this country to thrive. The great statesmen of our past have always understood this. More importantly, they have understood the danger of depending on other nations for our prosperity.
As the euphoria of the 1990s set in, different kinds of politicians and business leaders began making decisions about the future of the U.S., they began to forget about the millions of people who relied on the steady incomes that our robust manufacturing sector provided.
At first the changes were relatively minor. A few companies moved key operations overseas, allowing them to take advantage of the cheap labor available in countries like India and China. This practice, known as outsourcing, had become increasingly common in the late 1980s, and accelerated in the 1990s. Soon, with the passage of legislation like the North American Free Trade Agreement (NAFTA), companies realized they could also take advantage of a practice known as “offshoring,” whereby they closed down entire factories in the U.S. and moved them to places like Mexico. All of this set the stage for allowing Communist China to join the WTO.
The trend was clear. With every month that passed, the trade deficit between the United States and China was growing. More American jobs were being lost to cheap Chinese labor. And this was before China entered the WTO. Once they did, according to many experts, the agreement would “lock” that bad relationship into place, “setting the stage for rapidly rising trade deficits in the future that would severely depress employment in manufacturing, the sector most directly affected by trade.”
Without dignified work, society decays. Suicides and drug overdoses soar. Values erode. There is no more important project than rebuilding our nation’s workforce, and that begins with rethinking our century-old approach to organized labor.
Source: Decades of Decadence by Marco Rubio (2023).
The unabbreviated version of the above can be found in the pdf document below.
| america_9l_overspending_--_segment_9.pdf |