Congress' Debt Deal Took No Courage, Solved Few Problems
Congress recently averted a federal debt-repayment crisis that could have wrecked our economy, and that’s good. Before we don party hats, however, let’s look at how paltry and uncourageous their actions really were.
Our lawmakers and president took the easy way out, making no tough decisions to slow the soaring deficit when they agreed to increase federal spending and raise the government’s borrowing limits as part of a two-year budget deal.
As usual, some of Congress’s self-proclaimed deficit hawks tut-tutted about government red ink. But few people took them seriously because, truthfully, they aren’t serious.
The White House says the annual deficit (the difference between what the government spends and takes in) will reach $1 trillion this year. That will be added to the current $16.2 trillion public debt (the cumulative total of all annual deficits). And on it goes.
Why does this matter? Well, interest payments alone on the federal debt are projected to reach $390 billion this year. That’s almost one quarter of all the income taxes the government collected last year, and more than 60% of the Defense Department’s entire budget.
Those are big numbers. But our economy is humming along nicely, so the deficit hawks (the real ones, not the chicken hawks) were wrong, right? Maybe not. They may just be early.
As economists note, a nation’s financial stability depends largely on its public debt as a share of the total economy, or GDP. When the debt-to-GDP ratio gets too high, the government is headed for trouble.
America’s publicly held debt is now higher as a share of our economy than at almost any time since World War II. And the International Monetary Fund says the United States is the only advanced economy projected to increase its debt-to-GDP over the next five years.
This may not matter much if the economy—which now enjoys high employment, decent growth and a strong stock market—continues to prosper. But this won’t last forever. Another U.S. slump is inevitable, sooner or later, and that’s when we may regret the cavalier way we’ve dealt with deficits, taxes and spending.
The problem is that Washington has used some of our most powerful economy-boosting tools – low interest rates, tax cuts and stimulative government spending – when the economy was already robust. It’s like eating your emergency food supply when everyone’s already full, leaving nothing for the next bad harvest.
Take President Trump’s 2017 tax cuts of $2.3 trillion over 10 years, which were enacted with no offsetting spending cuts. The worn-out claim that “tax cuts pay for themselves” by juicing the economy was quickly and predictably disproven. The tax cuts did provide some boost to growth but at a high price. An analysis by Politico, to pick one, estimates that from 2018 to 2027 those tax cuts will reduce federal coffers by a net of $1 trillion or more.
Historically, a strong economy has offered an opening for leaders to trim federal spending, because fewer people need government assistance. But the final months of Bill Clinton’s presidency and the first few months of George W. Bush’s were the last time policymakers allowed a healthy economy to produce a budget surplus and start paying down the debt.
So, no, Congress and Mr. President, you don’t get a pat on the back for merely averting a “debt crisis.”
Lawmakers (enabled by a complacent public) have shown they’ll do nothing serious about our troubling debt trend unless they are forced to by a crisis. That’s why it’s time for Congress to pass and the president to sign a new Fiscal Responsibility Act.
This proposal would entail the implementation of a public debt/GDP limit that could only be violated with a formal Declaration of War or a supermajority vote of both houses of Congress and the signature of the president. This new public debt/GDP limit would replace the current debt ceiling limit – which serves no purpose other than regularly threatening the creditworthiness of the U.S. Treasury, and should be repealed. America’s current public debt/GDP ratio is about 83%. The Fiscal Responsibility Act could prevent that ratio from exceeding 100%.
This proposal does not tell Congress how to get our fiscal house in order, and it does not require members to go on the record now to support specific budget cuts and revenue increases. It does, however, require Congress and the president to better align spending and revenues over an appropriate period of time. Absent a mechanism like the Fiscal Responsibility Act, the most likely course of action is for our federal debt to continue growing exponentially.
Instead of making financial hay while the sun shines, Washington has been eating it. The rains will come, and it won’t be pretty.