• Tag Archives deficit

  • Why the United States Lost Its AAA Credit Rating

    Posted on by Azrael Comment

    For the second time in its history, the United States saw its AAA rating on long-term debt downgraded by a credit rating firm.

    Fitch Ratings said the downgrade of the U.S., which is now rated AA+, “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”

    In the wake of the downgrade, the first since S&P downgraded the U.S. in 2011 amid a similar debt-ceiling showdown, Democratic politicians and White House officials immediately attacked both Republicans and Fitch.

    “The downgrade by Fitch shows that House Republicans’ reckless brinksmanship and flirting with default has negative consequences for the country,” said Senate Majority Leader Chuck Schumer (D-NY).

    Meanwhile, Treasury Secretary Janet Yellen slammed Fitch, calling the decision “flawed” and “entirely unwarranted.” She was echoed by press secretary Karine Jean-Pierre.

    “It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” Jean-Pierre said. (CNN inexplicably blamed the downgrade on Jan. 6, even though Fitch in its report made no mention of the event, which happened 2 1/2 years ago.)

    Perhaps such a reaction should not surprise us. Pointing fingers and blaming others is what politicians do best. Yet pointing fingers will not change a troubling reality: The federal government is facing a fiscal reckoning.

    Most people probably don’t even know that in June, the national debt hit $32 trillion. If you find this strange because it feels like only yesterday that the national debt was $20 trillion, you can be forgiven. It practically was.

    It was in 2017 that the national debt hit $20 trillion. You read that correctly: The U.S. government racked up an astonishing $12 trillion in six years. Sadly this spending frenzy will have serious consequences for the future of our children and grandchildren.

    The federal government is now shelling out an unprecedented amount of money to pay interest on its debt — $476 billion in 2022, an increase of 35% from the previous year.

    The nonpartisan Peter G. Peterson Foundation says Americans are likely to spend $9 trillion in interest on the debt over the next decade, making it perhaps the single largest federal expenditure in the coming years and crowding out other programs.

    Lawmakers in Washington seem oblivious to the threat. Despite record revenues, federal spending continues to outpace tax receipts at a growing rate. In May 2022, the Congressional Budget Office estimated the federal government would rack up $15.7 trillion in new debt over the next decade; this year, the CBO adjusted the figure to $19 trillion, largely because of legislative changes.

    This isn’t to say the debt-ceiling drama did not play a role in Fitch’s downgrade; it clearly did. What partisans are neglecting to tell you is that the standoff stemmed from the other causes Fitch alluded to in its downgrade — ”the expected fiscal deterioration” of the federal government and the “growing general government debt burden.”

    These are serious threats, and instead of pointing fingers at Fitch and Republicans, the White House and Schumer should be addressing them. Instead, Democrats are calling for student debt “cancellation,” Medicare for All, and a fatter Pentagon.

    There’s a troubling disconnect with reality here. It’s not unlike those who insist the historic inflation that began in 2021 stemmed from “corporate greed,” not trillions of dollars the Federal Reserve printed to flood the economy with money.

    The Biden administration is of course not solely to blame for this debt. But it’s time for leaders to get honest about this fiscal recklessness, which history shows is more difficult to correct than it might seem because of the perverse incentives and corruption it spawns.

    America’s Founding Fathers warned about such dangers. James Madison called public debt “a public curse, and in a Republican Government a greater curse than any other.” Benjamin Franklin called it a threat to liberty.

    To keep independence, “we must not let our rulers load us with perpetual debt,” warned Thomas Jefferson.

    People, especially leaders in Washington, have failed to heed these warnings. Sadly, it will be the generations of tomorrow who will pay if we fail to learn from our mistakes.

    This article originally appeared in The Washington Examiner.


    Jon Miltimore

    Jonathan Miltimore is the Editor at Large of FEE.org at the Foundation for Economic Education.

    This article was originally published on FEE.org. Read the original article.


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  • Congress’s 4,155-Page Omnibus Bill Is a Symbol of American Decadence

    Posted on by Azrael Comment

    On December 20th a handful of Republican senators shuffled before an audience of reporters prepared to issue fiery polemics on the year-end omnibus bill which sat, heavy and ponderous in all its eight-ream absurdity on a wheeled cart before the five-senator assemblage.

    “DANGER: $1.7 trillion of hazardous debt” read one of the mock-hazard signs decking the cart. Kentucky Senator Rand Paul declared the bill an “abomination,” while Utah Senator Mike Lee skewered the unseemly pressures to freeze it into law by proclaiming the process “legislative barbarism.”

    Every year it happens with textbook repetition: Washington politicians procrastinate in releasing a colossal expense prospectus for the following year which unfailingly runs thousands of pages, requests billions of dollars, and is granted mere hours of scrutiny before being thrust to a congressional vote. The process is riddled with partisan intimidations and shrewd slandering. Democratic politicians trot out folksy pleas about supporting struggling Americans, to which, naturally, passing the bill is postured to achieve. Most Republicans cave to its smothering inevitability; a minority bitterly protest.

    The omnibus bill earns its name from its practice of absorbing a collection of smaller bills into one vote. You might be tempted to call this government efficiency, but think again. In reality, it’s the gateway of legislative sloppiness and profligacy. And you might be tempted to believe Washington’s Christmas tradition is paternal benevolence for the common man but this too is a smokescreen. If our political overlords actually cared for our future in the manner of responsible stewards they would not bankrupt the nation. They would not smuggle dozens of silly congressional pet projects into our legislative initiatives. They would not make a mockery of the political process by demanding decisions on bills scarcely proffered hours of review. They would not egregiously spend money we did not have. They would not thoughtlessly shovel funds to any hungry bureaucratic mouth in the country. They would not insult American taxpayers by destroying our currency, snowballing our debt, and wrapping it all in a veneer of charity and Progress. Grim and apocalyptic though this indictment may be, it is nevertheless the bitter truth.

    As Americans, we have become numb to the money-gobbling maneuvers of the bureaucratic machine. We hardly flinch at billion-dollar price tags, not because we do not cognitively register such a number as large but because we feel detached from its significance. We do not feel connected to its consequences. We don’t even feel particularly sure about what the spending figures should be, so bewildered by the dizzying complexity of contemporary American politics are we. We put our fingers to the glass and watch but we cannot seem to stretch our fingers out and really touch the harrowing reality of a $1.7 trillion bill or a $31 trillion in national debt. Such numbers fail to disquiet our consciences. Why?

    Here are a few potential reasons.

    1. Nobody talks about fiscal conservatism anymore. Republicans love to rhapsodize about this fixture of their intellectual tradition but few are those who actually extend this principle from token rhetoric to the necessary scolding and refashioning efforts of current regimes. No matter whether they claim democratic or republican status, administrations do a sordid job of expenditure restraint. This equivalence between the parties is sobering indeed, indicating that the majority of republicans do not know how to defend small-government and balanced budgets with any authentic confidence. You might hear “fiscal conservatism” sprinkled throughout the campaign trail for its old-fashioned appeal and knack for attracting votes, but it is no longer practiced by those in Washington. Longtime champion of fiscal restraint Sen. Rand Paul has made entreaties for years that are drowned out by the opportunism and apathy swarming the Capitol.
    2. Nobody is sure why fiscal conservatism even matters: Government money has been lamentably scrubbed of morality. It bears no qualms about tempering its quantity or maintaining its quality due to an ethical contract with the people. Money has no scruples attached to it anymore. The modern conscience conceives of it as a hollow instrument; a neutral tool to get from A to B. But what is money really made of? Where does it get its value? In what ways can it be a wonderful thing and in what ways can it equally be a dangerous thing? Few care to mull these questions.
    3. Nobody quite feels the consequences of reckless spending yet: Because we raise debt ceilings with impunity and have thrown that old burden of balancing budgets out the window, we stay disconnected from the ramifications of fiscal hedonism. It is hard enough for politicians to make difficult choices that affect life beyond their term limits, because where’s the motivation in that? And so, money becomes this distant, untouchable relic that no one wants to poke at.

    And so, not only have we lost a certain emotional reaction to government spending (i.e. an instinctual discernment of when it hits a threshold of moral questionability) but we have also lost an intellectual grasp of it (i.e. an understanding of why extravagance cannot persist in perpetuity.) All of this adds up to a mass desensitization that leaves us dangerously acclimated to an environment that pretends money is a plaything and not actually the beating heart a civilization.

    Here are some of the ways in which this unlucky acclimatization has occurred:

    1. Money added is rarely scaled back: In government, addition is the path of least resistance. Subtraction has poor incentives, can be politically painful, and sounds mean and parsimonious to us Americans who see government as our rightful pursestrings and sympathetic caretaker.
    2. Added bureaucracy is rarely reviewed or pruned: More money inevitably feeds more bureaucratic cubicles. Bureaucracy is a curious animal: one that has a considerable appetite for more money and workers and administrative projects, but one that also has a deadening effect and leaves decay in its wake. In this way, bureaucracy has always bizarrely appeared to me as a life/death personification. If one thing is for sure, it will seek to justify its existence and once breathed form by taxpayer dollars, will lunge for more funds to legitimize its continuance.
    3. Law becomes more complex and disorienting: As sentences rain from keyboards and paper churns from the printer and more thousand-page legal monstrosities are produced, we end up building on a (new-ish) toxic American tradition of unintelligible, byzantine law. The less lucid and graspable the law is to the public, the less accountable government becomes—and the more fuzzy the political vision of the masses grows. After all, do we even know what laws were passed in the year-end omnibus bill? More worryingly still, do our politicians even know? Is this state of affairs normal? Would we call it a natural progression? I would warn against this particular temptation: the temptation to believe that increasing complexity is a sign of sophisticated progress, of governmental fine-tuning. It is not. It tangles with its serpentine requests and chokes with its punishing demands. And it throws a veneer of precision and compassion (owing to its seeming charity) over it all. As a general rule of thumb, when edicts becomes more profuse and complex and fail to remain concise and coherent to the public, they are unequivocally not serving the masses. (They are probably serving the elites.)

    What does one see when they gaze upon a 4,155-page bill? A symbol of American decadence. A pile of legal jargon so exhaustive its efforts look undeniably frantic. This utter excess inspires notions of blind mania. What are we doing and why? Is there any principle behind governmental motion? Are there any scraps of real thought or prudence? Or is the impetus merely zombie-like bureaucratic appetite? No matter how comprehensive and caring we would like our present government to appear, the rot cannot be fully concealed. An eight-ream bill is no sign of legislative nobility. It is an insult to the common people. It makes for a ridiculous picture of thoughtless excess. It just looks stupid at first glance. This intuitive, gut-level reaction is important. It’s the embarrassing truth of our attempts at managerial sophistry laid bare. It’s worth mentioning that empire decline is marked by an apathetic watering-down of principle, by money deterioration, and by administrative overextension. Check, check, check.

    The larger government grows, the more money it absorbs; sure. But the less functional it becomes too. It ossifies, and its vibrant principles start to decay under the dead weight.

    Once a certain threshold in size is reached (and who’s to say exactly where that is) organization lapses into oppression. Vibrancy lapses into atrophy. And decent functionality lapses into chaotic disarray. The lesson?

    Overreach and you snuff out life. Congress’ proud 4,155-page creation is a post-empire emblem if there ever was one. Do not be fooled by the legislation’s size: it represents a floundering American system, not a vibrant one.


    Lauren Reiff

    Lauren is a writer of economics, psychology, and lots in between. To read more of her work, follow her on Medium.

    This article was originally published on FEE.org. Read the original article.


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  • The Unseen Cost of Government Largesse

    Posted on by Azrael Comment

    The US government recently hit its $31.5 trillion debt limit after years of careening baseline spending on entitlements combined with emergency COVID-19 spending in the last few years to produce record-busting deficits. The new Republican majority in the House of Representatives, elected largely on economic concerns like inflation and runaway spending, now faces an obstinate Senate and White House. A showdown appears likely as does the ritual brow-beating of all those who object to simply raising the debt limit “without conditions,” as President Biden demands.

    To those who will inevitably cry, “Don’t use the debt ceiling as a negotiating tool!” over the coming weeks and months, it should be pointed out that it is the only tool that has been even remotely effective at taming Congress’s appetite for spending. In the same way that an intervention is only possible when a drug addict is in crisis, debt limit negotiations are the only context in which Uncle Sam has accepted even modest constraints on government spending in recent decades.

    Conservatives and libertarians rightly decry the rapidly-expanding national debt as an embarrassment, a threat to the nation, a root cause of inflation (as the Federal Reserve must expand its balance sheet to purchase the Treasuries that finance these huge deficits, as happened most clearly in the pandemic’s peak), and a promise of higher future taxes. While all these are accurate observations, one effect of massive government spending and deficits is often overlooked in the standard conservative critique: the forgone private investment of capital and therefore forgone economic growth, often termed the “crowding out effect.”

    The basic idea is that there exists a total sum of money, or financial capital, that individual and institutional investors are willing to loan out or invest. Most economists call this the “loanable funds market.” The supply of loans, as with any supply curve, slopes upward and to the right. In other words, as the interest rate (the price of a loan) rises, more people will be eager to supply loans. In contrast, the demand for loanable funds slopes, like a normal demand curve, downward and to the right. That is, as the interest rate goes down, more people are interested in borrowing money. Just think of any normal supply-demand graph, but with the good in question being a loan rather than a physical good or a service, and the vertical axis labeled “interest rate” rather than “price,” as in other markets.

    The demand for loanable funds is a function of how much capital investment businesses need (which is itself a function of how profitable those capital investments are), what quantity of money consumers need for purchases like homes and new vehicles, and how much money the government needs to borrow. In a game where the total supply of loanable funds per year is set, say at $5 trillion, every $1 trillion the government runs up in deficits is $1 trillion less available for private investment in the innovations that improve quality of life, bring us new medicines, and create new jobs.

    Increased government deficits shift the demand for loanable funds to the right. As any student of elementary economics knows, this increases the price, or in this case, the nominal interest rate. Many private sector projects that make sense at 4 percent interest are no longer acted upon if the government runs such a large deficit that the interest rate must increase to 7 percent for investors to shell out the cash necessary to finance that deficit. Increasing the supply of loanable funds through monetary expansion, as happened in the COVID pandemic with breathtaking speed, can temporarily hide this effect. However, this spurs inflation that reduces real returns and hampers economic growth (the stock market’s dismal returns since runaway inflation started in late 2021 is one example of this result).

    In contrast to the Keynesian “money multiplier” theory, which insists that government spending stimulates the economy by circulating money via transfer payments that otherwise would have remained in savings and uncirculated, savings in nearly all developed countries are not locked away gathering moths and rust, but invested. Of every dollar put in the bank, more than 90 percent is invested in loans for commercial enterprises, in home loans, and in bonds, and this doesn’t account for the fact that a larger and larger share of surplus savings in the United States are not in the traditional banking system, but in brokerage accounts, 401(k)s, and elsewhere.

    Government spending does not multiply the economic power of money, it diminishes it. If the opposite were true, Cuba, North Korea, and Venezuela would be among the wealthiest nations on the planet, since nearly all economic activity is facilitated through government spending in those nations. That they are not, but that nations with relatively free markets such as the United States, Singapore, the United Kingdom, and Japan punch above their weight economically suggests that private investment in the innovations and technologies of tomorrow everywhere and always beats government transfer payments in facilitating economic growth.

    Every dollar the government must borrow is a dollar not available for private businesses or individuals to borrow, and that reduces future economic growth and job creation. With America’s debt now hovering near 125 percent of GDP (before netting for debt held by government entities) and deficits topping $1 trillion yearly as far as the eye can see, we can no longer ignore this drag on the American economy.


    Nathan J. Richendollar

    Nathan Richendollar is a summa cum laude economics and politics graduate of Washington and Lee University in Lexington, VA. He lives in Southwest Missouri and works in the financial sector. 

    This article was originally published on FEE.org. Read the original article.


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