The US Deficit

This week we talk about Rubinomics, government spending, and US federal debt. We also discuss the Government-Household analogy, the House of Representatives, and the looming government shutdown. Recommended Book: Quantum Supremacy by Michio Kaku Transcript Early in November 2023, the credit firm Moody's lowered its outlook on the US government's credit rating from "stable" to "negative," pointing at a huge decline in debt affordability—the government's ability to borrow money cheaply, basically—and an ever-increasing, already gargantuan deficit as its primary justifications for that change. And those issues are on top of another standoff in the House of Representatives over funding the government, which, if something isn't done, will come to a head on November 17. A previous agreement struck by the previous House Speaker, Kevin McCarthy, expires on that day, and if a new collection of 12 funding bills, which are what allows the government to pay for things, are not passed by then, the government could be shut down, possibly further diminishing the government's rating, on top of the many other consequences of not providing funding for things like national defense, energy and water development, and the Justice Department. This new reduction in outlook by Moody's follows a recent downgrade by Fitch back in August, when that ratings firm dropped the US government's rating from AAA to AA+, largely because of all the down-to-the-wire negotiations about funding the government that have roiled Congress over the past few years, and what that kind of tumult does to a government's ability to say for 100% certain that they'll pay their debts and never default; the US has never defaulted on its debt, but the possibility becomes more realistic-seeming each time these politicians fail to provide funding for essential government functions, including, debt-paying. Fitch also, like Moody's, cited the general diminishment in fiscal circumstances across the government, though, referring to a collection of variables that have been weighing down the state's capacity to acquire cheap debt. Ratings are one such variable, as each decrease in a nation's credit rating makes debt more expensive, folks and other states buying bonds and treasuries and the like demanding more interest for the same amount of loaned money—which is what those sorts of financial instruments are, at the end of the day. But beyond reputation, there are also factors like high interest rates, hiked by the Fed in order to tamp-down on inflation, and the accumulated interest payments that must be paid on previous debt taken out by the government to pay its bills. So in addition to the government suddenly having to pay more interest on all its new debt, it also has to pay more and more interest on its existing debt, and that latter figure is compounding to the point that a lot of folks who are otherwise generally unconcerned about such things, are starting to take what could turn out to be practical notice. What I'd like to talk about today is Rubinomics, government spending, and why the US federal debt is becoming a political talking point once more. — In the context of federal spending, fiscal responsibility refers to the balancing of a state's budget so that its spending is almost always close to, or below its revenue. So if a government brings in a trillion dollars in revenue, from taxes, for example, and spends a trillion dollars to keep agencies running, infrastructure maintained, and its military up to date, that's a balanced budget. If that same government were to spend a trillion and a half dollars without increasing tax revenues, though, it would have a deficit of half-a-trillion dollars. And if it were to spend less than it pulls in, if it were to reduce the social safety net programs it provides or spend less on its military, and thus only spent a half-trillion of the trillion it earns in taxes, that would represent a surplus of a half-trillion dollars. This is similar, at its most basic, at least, to how an individual might manage their money. Spend more than you make and you'll tend to go into debt, spend less than you make and you can sock money away or invest it, and spend exactly what you make, and your bills will all be paid without accruing debt. This comparison, though intuitive in a way, at least for the purposes of defining the outline of how this works, is also quite flawed—and economists have given it a name, potentially to make criticizing it that much easier: they call it the Government-Household analogy. And this analogy is often-touted by politicians, usually when they want to criticize their opponents for their spending by making it seem like they're less capable and responsible than the average heads of a household; why should we good, hardworking citizens be required to assiduously manage our personal economies, but these freewheeling politicians can't seem to balance a budget of billions or trillions of dollars? The analogy falls apart, though, when you look at the specifics of a household versus a government. Governments, after all, can literally print money if they so choose. They also tend to get far favorable terms on debt, can increase their budgets by raising taxes, and, oddly, if you think of a government as a household, different facets of a government can owe other facets money, so part of the debt owed might be owed to itself. While this analogy is often convincing to voters, then, it's not terribly useful as a model for economists and folks working to actually manage budgets of the scale and with the peculiarities of a government's budget. All that said, there are pros and cons to every possible approach to government debt, as running a deficit, spending more than is pulled in via taxes, means that a state can invest in more programs and infrastructure, and just like a company taking on debt to invest in more manufacturing capacity or warehouses or restaurant locations, that can mean setting things up for growth in the future: a healthy, happy, secure, well-educated populous will tend to do better than the opposite, so spending money on programs that improve and amplify those sorts of things can lead to more revenue sometime later. On the other hand, just like any other debt, federal debt tends to be paid back with interest, and that means the government taking on such debt will not just be on the hook to pay back the initial, principle amount they borrowed, but more than that—and possibly, especially if debt accrues for a long while, or accrues during periods of high interest rates, for them specifically, or more globally, they could be on the hook for a lot more than that. The last time the US government had a balanced budget was in 2001, and it's enjoyed the same for five years total in the past five decades—four of which were the years leading up to and including 2001, the fifth being 1969. This is such a rare state of affairs, in part, because the general economic consensus, amongst economists in the US, at least, is that federal debt isn't a big deal, that it tends to lead to more benefits than downsides, and that it is therefore prudent to not balance the budget, most of the time, because doing so leads to austerity—severe cuts in vital programs and other investments—and that hobbles the nation and its capacity for growth over the long-haul. Balancing the budget just to balance the budget, then, isn't really such a good thing, according to this prevailing theory; it's a compelling rallying cry for some folks occupying some spots on the ideological spectrum, traditionally those on the conservative side of things more than the left, but not spending also comes with consequences, and those consequences tend to outweigh the downsides of accruing some amount of debt, year to year. This mainstream sensibility about debt, though, was subbed-out during that 1998-2001 period, during the Bill Clinton administration, when the Treasury Secretary, Robert Rubin, implemented a policy that became know… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit letsknowthings.substack.com/subscribe