Can We Exercise Some Common Sense?
Common Sense on our Debt
If Janet Yellen, Secretary of the Treasury, is correct, the United States could default on its sovereign debt on June 1, 2023. That would be the first time in our history, and by all accounts of economists and others who know what they are talking about, that would be bad. But I am not an economist, I am a somewhat simple person, so I want to write about this in terms that I can understand.
First, let's acknowledge that borrowing to pay expenditures has been a feature of the United States and its political system since the Founding. The warring colonies borrowed to prosecute the Revolutionary War. And in fact, the people who wrote the Constitution and were there at the creation, the people we call "the Founders," knew this was a problem. While Jefferson and Madison on one side of an argument, disagreed with Hamilton on the other, Hamilton won the argument. The Funding Act of 1790, which Hamilton pushed for, allowed the United States to take on the debt of all the former colonies, now states, who borrowed heavily during the war. Fast forward to the Civil War, and in its aftermath, we find that the 14th Amendment, in plain language, said that this:
"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."
This is interesting for several reasons. First, of course, the only debt being recognized is that incurred in the North, not the South. And even though many in both North and South had lobbied for many years prior to the Civil War for so-called "compensated emancipation" (paying the slaveholders off to free slaves), this amendment made clear that the time for that was now past. But for the current debate, the most important part is that the "validity of public debt authorized by law" cannot be questioned. Why is that important? It is important because the House GOP plan that Speaker Kevin McCarthy offers as his basis for negotiation with President Biden has, as its major platform plank, the effective repeal of the Inflation Reduction Act of 2022 and other acts of Congress.
But it would not matter which party advocated or somehow passed previous laws that had the effect of increasing debt. They were all "authorized by law," and those debts must be paid. There are two important discussions: one has to do with paying the debt, and the other has to do with creating budgets that do not create more debt. But the discussions are two separate discussions. There is some emotional appeal in linking them, and in fact there is some linkage. But if Congress is going to do that, then all previously-authorized appropriations should be subject to review, not just some spending. The House GOP plan addresses "some" spending. Primarily, the plan attempts to reverse some of the major provisions of the Biden Inflation Reduction Act of 2022. The GOP plan proposes removing enhanced funding to the Internal Revenue Service, which is interesting, because the Biden Administration says the intent of that is to improve revenues.
And that brings us to the common sense part of all of this. Many claim we have a spending problem. Perhaps. But that spending problem is across all government activities including so-called mandatory spending. That spending problem includes national defense spending. That spending problem includes spending on infrastructure, which many Republicans back. They backed it so much that they defied some in their own party to vote for the Bipartisan Infrastructure Act of 2021. But all the spending in that act also contributes to the so-called spending problem. The common sense part of this discussion is that we somehow must match expenditures and outlays, and Congress, over decades, has shown itself unwilling to do this. This is not a new problem.
I should be clear here. I am not calling for a balanced budget every year. I think that a nation like the United States borrowing is not necessarily bad. And in fact, as I started out in this essay, I think there are a lot of good reasons to borrow. What I am criticizing is the partisan talking point that says only some spending is bad and only some borrowing is bad. The dollars are indifferent to how they are spent. If people believe that deficits are bad and borrowing is bad, then they should prove it through budget behavior. But the same folks who claim the current administration spends like drunken sailors on a weekend pass are okay with all kinds of spending in other areas.
So, if we are going to apply common sense, let's start with the difference between deficits and debt. I know this is basic, but important. The line graph below shows federal outlays versus receipts from 1981 through 2022. Outlays are not the same as budgeted expenditures and receipts are not the same as budgeted revenue. However, outlays and receipts do a good job of approximating the outcomes of budget decisions Congress has made over time. They also include both kinds of spending: mandatory and discretionary. For simplicity, this characterizes both as a percentage of Gross Domestic Product (GDP), shown on the left axis.
If one goes back to ancient history (2010), one would find that the famous "Simpson-Bowles Commission" (you can find it here https://www.ssa.gov/history/reports/ObamaFiscal/TheMomentofTruth12_1_2010.pdf ) liked the appeal of the 20% of GDP mark. The goal, said this commission, was to find ways to make both expenditures and revenues hover around that 20% mark. However, expenditures have typically been a few points above 20% and revenues a few points lower than 20%.
What becomes immediately obvious is that outlays consistently outpace receipts. Indeed, if one goes back and looks at budget documents for these years, you will find that Congress budgeted more dollars in expenditures than in revenues. The four years this did not happen were the only four since 1970. The way we "balance" then is to borrow with Treasury instruments. So U.S. debt becomes "owned by the public." The public includes lots of people, institutions, other nations. But it is debt incurred to pay off deficits. But not only discretionary deficits. The mandatory spending parts like Medicare, Social Security, Military retirement, other legal obligations that Congress at some time in the distant past approved, are also part of the debt. So, here is that that debt looks like as a percent of GDP over the same period. This is from the Federal Reserve Bank of St Louis. And yes, our national debt is more than 100% of our GDP, but the trend line could have been obvious to anyone serving in Congress during the past 30 or 40 years.
For context, I add this chart from the U.S. Treasury. This is a screen shot, but you get the idea. Debt did not start becoming what some would consider unmanageable until the postwar period, and especially since the 1960s. So, again, to implicate only one political party is simply disingenuous.
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