Returning Sanity to the National Debt

President Joe Biden (D) met last week with Speaker of the House Kevin McCarthy (R) and other members of the House and Senate leadership regarding increasing the federal debt ceiling. Mr. McCarthy had already passed a bill authorizing that increase and tying it to a series of budget cuts. Mr. Biden rejected it out of hand because he did not want any budget cuts. The budget cuts are necessary because Congress and presidents of the United States, including President Barack Obama (D), President Donald Trump (R) and Mr. Biden have grossly authorized spending far in excess of current revenues – deficit spending. The deficit has grown since the beginning of Mr. Obama’s time from $10.0 Trillion to $19..6 Trillion by the end of his administration. It grew from $19.6 Trillion $27.7 Trillion during Mr. Trump’s term and from there to the current level of $31.4 Trillion in just the first two years of Mr. Biden’s term. The deficit spending has required the Treasury Department to issue bonds to pay for the deficit spending. Lacking a legit demand for treasury bonds by the public has caused the Federal Reserves System to purchase the bonds by printing additional money without any corresponding increase in the Gross Domestic Product (GDP) – in other words money created out of whole cloth. The massive influx of the newly created money has caused the money supply to exceed the demand and thus inflation.

There is nothing inherently wrong with having a national debt. It is the purpose for which the debt is incurred that is problematic. Most people when they buy a home incur a debt in excess of their current income. That is because incurring debt for a capital investment, done within reason, is a normal and quite frankly healthy undertaking for both individuals and the overall economy – it helps the economy grow. However, if you borrow an amount that is in excess of your ability to pay it will be catastrophic. That is what happened in the 2008-10 Bush/Obama economic recession – people were encouraged by the federal government to borrow money for homes without the ability to pay the installment payments on the mortgages. The fact that they would be unable to pay was obscured by what were called “subprime mortgages” which did not require proof of income or of other unencumbered assets – only government officials could dream up something that stupid. The rule of thumb for home purchases as been historically a twenty percent equity down payment and proof on current income sufficient to make the mortgage payments.

But what is really stupid is when you are borrowing to pay current recurring expenses. And that is what much of the deficit spending by Mr. Obama and Mr. Biden was doing. It occurred during Mr. Trump’s tenure also but was often caused re-purposing grants for capital expenditures into payments for recurring expenses. Here is an example. The funds authorized to reopen schools was spent in large part to give raises to teachers union members rather than upgrading HVAC systems, technology advancements and hardware – the teachers unions were among Mr. Biden’s major campaign supporters. Here is the difference. Assume that a school’s annual expenditures are $2,000,000 of which eighty percent represents salaries, healthcare and retirement benefits and other recurring expenditures (utilities, transportation, etc.). Most schools use what is known as Current Service Level budgeting – take the previous years recurring expenditures and increase them by inflation, increases in the population and/or the number of service recipients and other such factors. For purposes of this example we will use only inflation so that those unfortunate souls confined to a teachers union led education in the Portland public schools have a chance at understanding this example. To let’s assume a five percent inflation. That would mean that the new years budget would be $2,100,000. ($2,000,000 base plus five percent inflation – $100,000 – equals $2,100,000.) Now let us assume that that the school has been awarded $100,000 in federal “stimulus” funds and chose to use all of it for increases in salaries, healthcare and retirement benefits . In such case the base would be $2,000,000 plus $100,000 or $2,100,000 to which you would now apply the five percent inflation for a budget of $$2,205,000. The result is that the $100,000 as a one time stimulus grant is not trapped in the baseline budget and will be included in calculating future budgets ad infinitum. And since there won’t be annual “one-time” stimulus local taxpayers will be forced to pick up the increased costs.

The effect is that it wasn’t just a one-time bonus for the teachers unions it was/is a continuing bonus – a reward to the unions for being one of Mr. Biden’s principle campaign supporters.

Repeat that effect for the vast number of public employees who benefited from the stimulus programs and you can see that the Mr. Biden’s $1.9 Trillion stimulus became a forever burden on government expenditures and growth in deficit spending. However, if you return to the federal budget for fiscal year 2022 as demanded by Mr. McCarthy the entire effect of the $1.9 Trillion deficit will be erased – more importantly it will emphasize that the stimulus was a one-time event and not a continuing burden on the economy.

Now for further purposes of illustration, reducing current expenditures by $1.9 Trillion means that you would reduce expenditures for the next fiscal year (again assuming five percent inflation) by $1.995 Trillion and $2,095 Trillion the following year and on and on infinitum. The point here is that it is not difficult to return to fiscal sanity and you can do so by simply eliminating the recurring effects of one-time stimulus payments.

But don’t count on it because the Democrats realize that a percentage of every tax dollar that goes to a public employee winds up in the hands of the public employee unions and that the public employee unions will continue to be the principle financial arm of the Democrat Party.

Who knew that it would be this simple.