Republicans under Trump last year raided the candy store, committing us all to borrow trillions of additional dollars to fund massive tax cuts for wealthy families and corporations. As usual, they promised that the tax cuts would pay for themselves and as usual, they didn’t. In February we racked up the largest monthly deficit in our history. Government borrowing has skyrocketed in the midst of an economic boom, promising to limit our options in the event of a downturn.
For decades Republicans have been lying in public and laughing in private about the rank stupidity of supply-side economics. Their strategy was a response to their long-term frustration over fiscal politics. Our political system won’t tolerate fiscal discipline. Since we can borrow from the future, politicians never have an incentive to keep their hands out of the kitty. Supply-side gave Republicans a cynical angle to turn a broken game to their own material benefit.
Supply-side was a remarkable political innovation. Turns out, voters like to get money from tax cuts even more than they like money sent back to their districts in pork. Republicans pitched tax cuts as free money, and their bonkers economic theory provided rhetorical cover for the scam. Did it work? Since Reagan, the national debt has always risen under Republican Presidents and declined under Democrats. In other words, yes, supply-side has been a success if you understand what problem it was meant to solve.
Did federal tax cuts generate enough economic growth to “pay for themselves” in rising tax receipts. As evidenced by our skyrocketing federal debt and every other mathematical measure, no. However, as rhetorical cover for a program to cripple the federal government it has been a remarkable success. Democrats aren’t supposed to be deficit hawks, but each Democratic Administration has inherited an economic and fiscal crisis which they are then preoccupied with resolving, leaving little time or most critically – money – for core Democratic priorities. Republican Administrations then walk in after the wreckage as has been removed and proceed to build the next disaster.
As our political failures add up in dollars, a new monster is stirring. Hard-left Democrats energized by the boldness of Republican scams are preparing to go one-better. Alexandria Ocasio-Cortez has been promoting “Modern Monetary Theory.” MMT is the Brawndo of theories, in which nothing matters because something and something else and “it’s got what plants crave.”
Our national debt is mathematical evidence of our declining interest in the public interest. No one cares about the debt, because it is shared. Americans no longer value anything we share with each other.
Government borrowing is good until it isn’t. It is a valuable, wise investment in our future, until it isn’t. So far we’ve piled up our peacetime national debt to wartime levels with few visible consequences. We’ve begun to foolishly imagine that no consequences will come. Rest assured, deficits don’t matter until one day they do.
Government borrowing is a wealth transfer from taxpayers to bond holders. At current rates, despite our massive borrowing, it remains an extremely small transfer. What the taxpayers gain from this exchange, in theory, is the opportunity to make investments that would otherwise not be possible. However, if the government is borrowing money just to pay its bills, then things get dicey.
The US is borrowing staggering sums of money, yet we continue to successfully sell this debt at interest rates below 3%, barely ahead of inflation. Why is the US able to borrow so much money so cheaply? First of all, it’s considered a very safe investment. Unlike almost every other nation, the US has never defaulted on its sovereign debt and has only rarely used inflationary tactics to cheapen that debt.
Second, everybody needs dollars to do business. If you’re buying commodities anywhere in the world, you probably need US dollars to pay for them. That produces demand for our currency which drives down the cost of our borrowing.
Third, and perhaps most important, our debt is payable in our own currency. In theory we could reduce it to pennies fairly quickly by stimulating inflation. In theory. In fact, the same forces that make the dollar ubiquitous in world trade would likely complicate an effort to inflate away our debt, or perhaps turn it into a global wrecking ball.
Finally, concentration of wealth in fewer and fewer hands has produced greater demand for low-yield, high-safety investments. In other words, demand for our bonds is driven in part by a form of capital inflation.
You don’t invest $10m into a venture capital fund for safety. You do it because you have a small fortune, and you’ll place a gamble to convert it into a large one. By contrast, if you inherited more money than you can comprehend, you probably aren’t interested in starting a business, buying a company, or wading into the shark-tank of high-yield, high risk capital investment. You just want the accountants to keep paying the pool boy. Your hired nerds could double your money in a bold investment, and you’d never know or care. But if, as a consequence of their risk taking, you had to spend several months flying commercial, you’d be furious. Hello, US treasury bonds.
Adding to this dynamic is a global looter economy, in which elites in places like Russia, the Gulf States and Latin America are piling up billions through scams, drug trafficking, or politically-backed looting of state industries. They’re not looking to invest their money in real businesses. Most of these people have no idea how a legitimate business works. They just need ways to launder more money than they can count into the legitimate economy in dollars, then drop it into something safe. After they’ve moved enough drug money or mafia rubles through their Trump brand condos, they take the rest and put into the most boring investment they can find. Increased wealth concentration and the increased safety of the rentier class has discouraged risk-taking, propping up the value of safe and unproductive investments like government debt.
Imagine if there was much less government debt available to buy, such that yields on truly safe investments like US currency were consistently around zero or even negative. And also imagine that steep marginal income taxes, inheritance taxes and wealth taxes were constantly biting into big pools of wealth, so that staying wealthy required some fraction of the level of talent and effort as earning it in the first place. In that scenario, people who held wealth would be looking for riskier, higher-yield investments to help them keep up.
Progressive taxation and careful law enforcement drive up the price of staying rich. Those higher prices force wealthy people into riskier and more productive investments, fueling innovation and real economic expansion. That would nice, but that’s not the world we live in.
It sounds crazy now, but this was a real fear of investment professionals in the late 1990’s. The US government had started to run budget surpluses, fueled by a tax hike reluctantly signed by Bush I and a booming economy. In other words, for a few years at the end of the 90’s, the amount of new Treasury bonds available for auction declined, with a looming threat that in the future, the tap could practically run dry. Rates for US treasuries began a spike in 1998, with yields on that new debt going negative in 1999. That condition was interrupted by the dot-com crash. Then, of course, the second Bush Administration fixed the glitch. They slashed taxes, causing a spike in US debt that turned the taps back on, making cheap US Treasury bonds once again abundant.
How much government debt is too much? The honest answer is nobody knows. The market will absorb our new debt until it won’t. What will happen if we ever reach this threshold? Again, nobody really knows. It is a difficult question to answer because it has no historical precedent and the complexity of the global economy is almost beyond our capacity for modeling. Even when the British ruled the globe, they did not enjoy the power of a single currency that the US possesses today.
This you can be sure of – there is a volume, or a set of global conditions, at which the market demand for our debt will decline and the price we have to pay in interest will spike. That happens occasionally in small bands based on the volume of debt available and global economic conditions. However, if we continue to test the markets, we will find a point at which we simply cannot clear our debts at prices we can afford to pay.
We experienced this rare occurrence last February. After the Trump tax cuts passed, the Treasury was forced to issue a much larger round of debt and their first auction attempt failed to clear their inventory. A “wall of treasury buying” helped resolve the issue as the US government quietly hoovered up its own bonds, but interest rates were pushed higher. Stocks responded with a long slump as borrowing prices rose, but a crisis was averted. What would this look like if it spiraled out of control? The most honest answer, again, is no one knows, but we’re setting ourselves up to explore that question as we try to sell more than $1tr in new Treasury debt this year into an already glutted market.
It is actually possible to run modest deficits indefinitely, as long as economic growth outpaces the growth of that debt. Almost anyone who has ever bought a house has put themselves deeper in debt than they have income to cover. That works out as long as the investment pays off in time. But what if you borrowed that money just to pay for vacations and cocaine? Well, the US is trying to find out.
A debt crisis in the US would be a currency crisis for the dollar. And a currency crisis for the dollar would be a cataclysmic global economic disaster on a scale impossible to predict. Right now, the world is at the mercy of American Idiots. Unless the EU, Japan and China are able to insulate the global economy from the power of the US Dollar, we’ll all bear the consequences together of a fiscal crisis born in the US. If we keep borrowing money we can never hope to service or repay, that crisis is as certain as the sunrise.
How would we reverse the growth of our debt? First we’d have to raise our tax rates, which are among the lowest in the developed world. If we still had the very low tax rates we enjoyed during the boom years of the 90’s, we’d still be running surpluses like we did then.
Over the longer term there are structural issues we need to address, related to an aging population and declining population growth. Tax increases could help, but it would be smart to also attack these problems at their source. We should be working hard to attract a lot more immigrants. We should also adopt a universal health care system, thus driving down our spectacular health care costs, a burden not carried by any other country.
None of this can happen in a broken political system in which everyone distrusts everyone else and each dollar invested in taxes is treated like theft. Our fiscal problems would be stupidly simple to fix in a healthy democracy. Our problem isn’t that we can’t afford our government, it’s that we don’t want to share anything with each other. For the richest country on the planet to face a fiscal crisis is absurd. Our debt is a measure of our political and moral failure.