Yesterday the Trump administration released its second annual budget proposal. It contained a number of eyebrow-raising provisions designed to significantly weaken the social safety net, headlined by a plan to morph half of what is recieved by SNAP recipients into cheap, delivered food baskets. Presidential budget proposals in general are regarded by Congress with the kind of amused condescension usually reserved for children, and it is difficult to say how many of the most absurd ideas have a chance of becoming policy - though some of them, in some form, certainly will.
There is a deeper structural problem with the direction of recent budgets that I would like to point out, because I think the risk it poses to the economy at large has been not just underestimated but ignored entirely in the political discussion. I am speaking about the national debt and deficit. The total national debt is currently at about 105% of our Gross Domestic Product, which is to say that the total dollar value of our debt is slightly larger than the value of what our economy produced last year.
The 100% mark has a powerful hold on the minds of investors in government debt. Because what an economy produces in a year determines the rate at which it can repay outstanding debt, purchasers of government debt will be reluctant to continue buying if the government in question is putting out so much debt that their ability to repay is called into question. While 100% is not by any means a crisis threshold, it is widely considered a point where questions of repayment start to become more relevant.
While deficits* were large under the Obama administration, the debt was prevented from coming a critical issue by two circumstances. The first was that the Federal Reserve, in a desperate attempt to keep lending from stopping entirely after the crash of 2007-8, kept interest rates very near zero. While the government was adding significant new debt, the fact that it carried essentially no interest meant that it would be relatively easy to service for the foreseeable future.
The second was that spending caps in place from President Obama's conflicts with the Congress kept the government's expenditures from increasing while a recovering economy slowly began to increase the tax income it could collect. As a result, the deficit fell by roughly half from the third year of the Obama administration to its last.
On the premise that new debt is still relatively easy to service, the Republican Party collectively shrugged when economic analyses universally declared that its tax cut law would increase annual deficits back above the one trillion mark - previously only reached in the worst years of the recession - on a regular basis.
Yet the beginning of the crash was fully ten years ago and the Fed now acknowledges the need to raise interest rates back to more historically normal levels, to prevent lending from getting out of control. That means that the enormous continued increases in debt will no longer have the cover of low interest rates to keep them from getting out of hand.
Furthermore, the economy has been expanding now for nearly ten years since rock bottom in 2009. It would be foolish to assume that this expansion will continue indefinitely, or even for another five years. Recessions, even relatively mild ones, put pressure on government budgets for the reasons already discussed. Lower tax receipts and higher necessary spending on unemployment benefits and safety net programs tend together to increase government deficits in hard times.
When - not if, when - there is another recession for whatever reason, if government debt continues on its long term trajectory there will begin to be serious questions about the ability or willingness of the US government to commit to paying it all. At that point, the largest economy in the world could plausibly find itself in a precarious position similar to those faced in recent times by Greece, Italy, and Spain.
Whatever one makes of the policy those countries took out of the crises, there is no way out of that situation that does not involve substantial economic pain inflicted on the populace. If the government tries to repudiate the debt, interest rate spikes and an inability to find new creditors could quickly paralyze government operations for sheer lack of funds. If the Fed were tempted for economic or political reasons to simply increase the money supply to cover the cost of the debt, it would risk a sizable inflation that would raise the cost of basic necessities and erode savings.
Finally, if like the countries mentioned the government were to try to use the leverage it has over its creditors (the sheer size of its debt) to bargain them down, a solution would still involve an economically painful combination of higher tax rates and expenditure cuts. My experience of the political system in this country does not make me hopeful that those cuts would spare the worst off among us. Regardless, the wanton mismanagement of the government budget will eventually have profound consequences for the country at large if it is not addressed very soon.
In the last twenty years we have repeatedly squeezed money from the regulatory infrastructure and the social safety net to finance growing military expenditures and wholly unnecessary tax cuts. We have also failed to address the systemic issues in our medical system that drive the excessively growing costs of Medicare and Medicaid. Without an aggressive reevaluation the direction of the federal budget it will have social and economic effects that, once set into motion, will be difficult to control.
*For those who may not be aware, the deficit is the yearly increase in new government debt, or equivalently the amount by which government expenditures outstrip its income
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