A Blog by Jonathan Low


Feb 24, 2020

The Reason Nobody Seems To Care About Trillion Dollar Deficits

A billion here, a billion there...So what's a trillion? JL

Larry Light reports in CIO Magazine:

The federal deficit will top $1 trillion annually this decade and reach $1.7 trillion in 2030. In January, 1% of those surveyed thought the federal deficit/debt was the biggest concern facing the nation. Why the collective shrug? To most people, no noticeable harm has resulted from this threat thus far, and any negative effects are far in the future, if they ever occur. Federal debt disasters are absent from modern American memory. To the citizenry, $1 trillion is “a meaningless number” they can’t comprehend.
A heating climate threatens catastrophe, with a biblical onslaught of floods and firestorms. But public authorities do little to stop the menace. That could describe today’s patchwork response to climate change. But it also depicts Washington’s approach to ever-mounting federal debt, a bomb that may well explode with devastating consequences.
Here’s some news that ordinarily you’d think would prompt worry and woe: The federal deficit will top $1 trillion annually this decade and reach $1.7 trillion in 2030, the Congressional Budget Office (CBO) estimated in a study last month. Plus, the CBO said, the government’s debt held by the public in 10 years will exceed $31 trillion, which is 98% of the estimated size of the US’s gross domestic product (GDP) then.
But Washington officialdom’s response to these ill tidings was muted, aside from isolated political jabs. And what about the reaction of the stock market, which serves as a proxy for the public, or at least that part of the populace that is economically astute? The market ignored the CBO projection and actually rose: The Standard & Poor’s 500 increased 1% the day of the nonpartisan agency’s announcement, Jan. 28.
The national debt expands because there’s insufficient tax revenue to pay for all the government’s many activities, hence Washington borrows the money to bridge the gap. And with outlays slated to burgeon to support the Social Security and Medicare payouts for the swelling legions of baby boomer retirees, demand for federal services is headed in only one direction. Sharply up.
So why the collective shrug? To most people, no noticeable harm has resulted from this threat thus far, and any negative effects are far in the future, if they ever occur. Sounds like a reasonable reaction. After all, federal debt disasters are absent from modern American memory.
The last time the federal debt surpassed 100% of GDP, US Bureau of Economic Analysis figures show, was 1946—right after World War II, the result of immense military expenditures. No economic dislocations ensued, however. In fact, the 119% debt figure in 1946 rapidly shrank as the domestic economy took off. The US benefited mightily from its sheltered status during the global conflict. Undamaged by the wartime destruction that had wrecked the rest of the developed world, American companies raked in profits, and federal tax revenues surged.
Trouble is, too few people nowadays care, or care enough to do something about what could hurt the country in the future. Despite powerful arguments that 21st century society is facing a ticking debt time bomb, the threat is an abstraction.
Possible ills to come: run-away inflation, a debased US currency, inability to sell Treasury bonds, and, ultimately, a weaker United States. “This would destroy incentive and ruin capitalism,” said Ken Van Leeuwen, founder of Van Leeuwen & Co., an investment advisory firm. Referring to Washington, he quipped, “If you need money, you go into the basement and print some.”
The obvious solutions of curbing spending and raising taxes are as popular as the flu. Years from now, though, these unappetizing measures may end up getting enacted out of dire necessity when some of the nasty scenarios start happening. 

What’s in the Way

Meanwhile, the entrenched obstacles to defusing the debt bomb remain:

Apathy. The debt bomb is a predicament that appears to register only briefly on people’s consciousnesses. In a poll last summer from the Peter G. Peterson Foundation, 83% of respondents said Washington wasn’t doing what’s needed to fix the debt situation.
Still, it turns out that nobody is really upset about this dilemma. In January, the Gallup Poll indicated that a mere 1% of those surveyed thought the federal deficit/debt was the biggest concern facing the nation. The worst quandary cited was poor government leadership (28%), followed by immigration (6%) and health care (6%).
An insightful, and downright sly, assessment of the zeitgeist regarding the ballooning federal debt and trillion-dollar deficits comes from Joe Queenan, the social commentator and humorist. “The American public,” he wrote last weekend in the Wall Street Journal, is “suffering from some form of Federal Deficit Attention Deficit” and fails to “get terribly riled up by the astonishing deficit staring us right in the face.”
To the citizenry, he continued, $1 trillion is “a meaningless number” they can’t comprehend. Further, Queenan added, economists are so predictably gloomy that their jeremiads can’t be believed, as these experts have “predicted 2 of the last 3,456 recessions.”

Partisan Divides. Time was that Republicans were the staunch defenders of the public purse, and Democrats sought to enlarge government spending, which often meant higher taxes for wealthier taxpayers. Yet that neat calculus has changed in the past few decades. What hasn’t changed is partisan gridlock.
“For my entire adult life, I’ve heard politicians on both sides of the aisle warning of an economic Armageddon from the growing federal debt,” said Rick Kahler, president of Kahler Financial. “Whether they are warning about or defending the debt depends on whether their party is in power.”
Absolutely right. For Democrats, the classic formula for political success was best expressed by Harry Hopkins, one of President Franklin D Roosevelt’s closest aides: “Tax and tax, spend and spend, elect and elect.” Republican lawmakers denounced this strategy as leading the nation into bankruptcy. Democrats were no less apoplectic when the Reagan White House ran up big deficits due to beefed up military spending. 

A more recent flash point: The advent of Obamacare. The new health care plan, signed into law in 2010, sparked a major Republican backlash, and the creation of the Tea Party, a loose conservative coalition that opposed President Barack Obama’s initiatives. Forced into a deal with the Republican-led House of Representatives, Obama reluctantly went along with budget restraints, known as sequestration.
But with the arrival of Donald Trump’s presidency, GOP budgetary ceilings went missing. The Trump tax reductions and a jump in federal spending mean that the government’s share of GDP ascends to 21.6% this year, the largest since 2012. That has prompted such detractors as Paul Krugman, a Princeton economist and New York Times columnist, to chide the Republicans for hypocrisy. “By the way,” he wrote, “whatever happened to the deficit scolds who were so prominent during the Obama years? They’re oddly quiet now.”
All party finger pointing aside, the cold fact remains that—except for four years during the Clinton era, when a tech boom fueled economic growth—red ink and mounting debt have been the malignant norms. Regardless of party, as Rich Sega, global chief investment strategist at Conning, observed, “Getting Washington guys to ramp up spending is not that hard.”

The Free Lunch

As the nation slogs its way toward the November election, the differing partisan fiscal bromides have one thing in common: No one need suffer. Or at least, to some of the Democratic presidential hopefuls, nobody who isn’t ungodly wealthy.
The philosophical touchstone to the left-most Democratic candidates, like Sen. Bernie Sanders, is Modern Monetary Theory. MMT, as it’s known, is the notion that huge federal deficits don’t matter much, if at all, since the US government prints its own money. The theory is a way of expanding government spending to pay for such goals as a Green New Deal and Medicare for all. With MMT, said Hossein Kazemi, senior adviser to CAIA Association, Washington spendthrifts “get intellectual cover.”
To help with the enormous boost in government spending his ambitious programs would entail, Sanders seeks to raise taxes on the wealthy. On the more moderate side of the Democratic field, where candidates are leery of big-ticket items like Medicare for all, they also call for more taxing of the well-off, although the hikes aren’t as dramatic as Sanders’. Former Vice President Joe Biden, for instance, would tighten capital gains rules. 
How such soak-the-rich proposals would work out in practice is a very large question. With their armies of clever lawyers and accountants, America’s wealthy have an historic ability to minimize taxes. They pay an average 23% of their income to the government, versus a third or more for the average person.
The same goes for US corporations. Example: Right before it went public in 2003, Google sold its own intellectual property, namely the search giant’s algorithms, to its subsidiary in Bermuda. Google, via its office on the self-governing British island, then licensed its technology to the company’s non-US affiliates and collected royalties. As Bermuda has no corporate income levy, the foreign-generated income is untaxed.
The GOP equivalent of a free lunch is embodied in the Laffer Curve, which economist Arthur Laffer in 1974 famously inscribed on a cocktail napkin at a Washington restaurant. Laffer sought to demonstrate to several Republican pols around the table, including future Vice President Dick Cheney, that lower taxes led to higher government revenues.
The Laffer Curve, which inspired the supply-side economics of the Reagan administration, has ignited heated debate through the years. Tax cuts under Republicans Ronald Reagan, George W. Bush, and Donald Trump have also coincided with large federal deficits—which critics use to deride the concept. Defenders say that other factors, such as wars and recessions, disrupted the revenue-enhancing elixir of tax reductions.
What the tax cuts did produce, of course, was an ever-growing pile of debt.

Debt and Taxes

“Don’t tax you, don’t tax me, tax that fellow behind the tree.” That line of doggerel, attributed to Russell Long, the late Louisiana senator, portrayed the ideal solution nicely: Tax anybody other than the vast middle class. They have the most votes, you see.
Taxes, along with death, alone are certain, as Benjamin Franklin declared. And eventually, higher taxes, plus benefit cutbacks, are the likely remedies that the US could employ to avoid the debt bomb going off. Could these changes, loaded as they are with political peril, ever be enacted?
Actually, they have been in the past, to a degree. While Reagan did lower taxes radically, moving the top rate to 28% from 70%, he also slashed a lot of tax breaks, such as passive losses on real estate partnerships. In 1990, President George H.W. Bush boosted the top rate to 31%, to counter the climbing deficit. And President Bill Clinton lifted the top rate again, to 36%, with a new category added for those earning more than $250,000 yearly. Finally, Obama reversed George W.’s cuts and focused on weightier taxes for the upper end of the income scale.
Notice that all these increases were tilted toward richer Americans. Social Security’s cost alone is projected to rise to 6% of GDP in 10 years, up from 4.9% now. The expected rise in entitlement outlays, which includes Medicare, would require 2.4% extra revenue by 2028, the CBO contends. That’s more than double the yearly expense of the Trump tax cuts. So taxes alone could not solve the predicament. Reining in the growth of entitlements would need to be part of the mix attacking the deficit bloat.
Could such a resolution come to pass? One thing is for sure: Aside from a few think tanks and economic savants, most people don’t care. At the moment.


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