Government Borrowing

There are times when a government spends beyond its means that are fully justified. Fighting a war is at the top of the list – but that kind of expenditure mandates concomitant austerity. WWII was the architype for that kind of appropriation. It was accompanied by the sale of war bonds as well as higher taxes, collection of needed metals and the rationing of critical materials (including metal, some foodstuffs and fuel). Economists refer to this process of wartime allocations and accompanying austerity as “guns or butter.” Without this two-fold process, what economists admonish as an unsustainable “guns and butter,” chronic growth-sapping deficits rise without concomitant offsets in underlying values and assets.

We started our unhealthy “guns and butter” practice of all borrowing to fight a war with no austerity – even lowering taxes for the rich under the thoroughly discredited “trickled-down/supply side economic theory – during the Vietnam War, continuing right into the recent wars in the Middle East and Afghanistan. Our deficit exploded, sapping continued government spending with the massive interest charges the US has to pay on its borrowings.

There are other instances where borrowing beyond your budgetary limits is justified. One, where the money is literally invested in assets that increase productivity or provide innovation-directed research, carries an inherent return on investment that should more than offset these costs with carried interest. Infrastructure expansion, repair and upgrades. Scientific and medical research that stimulates new industries and jobs. Education that provides for a much more productive workforce and reduced reliance on government welfare programs. Even investing in healthcare provides dividends. Healthier people in the workforce. Eliminating wasteful medical bankruptcies. Job creation in healthcare sector. Eliminating the cost of caring for those who have fallen between the crakes, a very expensive alternative.

Not to mention the competitive advantage in nations with national health insurance. We lost tons of carmaking jobs to Canada in the mid-1960s and years following after their implementation of universal healthcare. While US/Canadian wage rates were comparable, Canada’s subsidized health care saved US carmakers $1500/$2000 per vehicle. Today, “Automotive manufacturing is one of Canada’s largest industrial sectors, accounting for 10% of manufacturing GDP and 23% of manufacturing trade.” Wikipedia.

The last justifiable arena where government borrowings of this type include stimulus, generally in response to natural disasters or massive economic disruption. Fixing natural disasters reinstates prior productivity. Large expenditures of economic stimulus can reduce pressures from depressions or severe recessions, or fissures in the manufacturing (think: major carmakers), agriculture (think: dustbowl) and financial core (think: the depression of the 1930s and the recent great recession after 2007). Make-work (TVS, CCC, etc.) after the 1929 fall generated the massive electrical power generating capacity needed to win WWII and kick the post-war manufacturing sector into overdrive.

The 2017 corporate tax cut, however, fit none of the above paradigms. When too many years of guns and butter meld with policymakers who refuse to give up the notion that “give money to the rich and it will trickle down to everyone else” works (it never did), you get massive tax cuts that provide statistics that make it all look good but a reality that reflects huge increases at the top of the economic ladder – hence bringing the average performance levels up – but impose a crushing burden on the rest, amplifying income inequality the likes of which has never been seen in the United States over its entire history. Lots of jobs, but people are having to work harder to stay afloat with less buying power… or accepting sub-par jobs or part-time gig employment well below their expectations. All this as costs for food, housing, education and healthcare continued to rise much faster than wage rates for most Americans.

And federal budget deficits have exploded: “The U.S. government’s budget deficit ballooned to nearly $1 trillion in 2019, the Treasury Department announced Friday [1/24], as the United States’ fiscal imbalance widened for a fourth consecutive year despite a sustained run of economic growth. The deficit grew $205 billion, or 26 percent, in the past year.

“The country’s worsening fiscal picture runs in sharp contrast to President Trump’s campaign promise to eliminate the federal debt within eight years. The deficit is up nearly 50 percent in the Trump era. Since taking office, Trump has endorsed big spending increases and steered most Republicans to abandon the deficit obsession they held during the Obama administration.” Washington Post, October 25^th. In 2018, we spent 1.6% of our entire GDP on federal deficit interest alone… without reducing that deficit a penny. The entire federal budget for that year was $4.1 trillion. It’s heading to $4.6 trillion this fiscal year.

“The U.S. government’s [one-year] budget deficit is projected to reach $1.02 trillion in 2020, according to a report released Tuesday [1/28] by the nonpartisan Congressional Budget Office, as the federal government continues to spend much more than it collects in tax revenue.  “A combination of the 2017 tax cuts and a surge in new spending has pushed the deficit wider. This year would mark the first time since 2012 that the deficit breached $1 trillion, a threshold that has alarmed some budget experts because deficits typically contract — not expand — during periods of sustained economic growth… With rising annual deficits, the total debt held by the government is also projected to grow dramatically, from about $18 trillion in 2020 to $31 trillion in 2030, according to the CBO’s projections. The U.S. government must pay interest on this debt to keep borrowing money.” Washington Post, January 28^th. And you thought Republicans hated deficits?! They do, so they are about to try and cut programs that do not benefit the rich to make up for their reckless fiscal policies.

In its Trillion-dollar deficits, again editorial (January 29^th), the Los Angeles Times Editorial Board explains the deficit crush that we face by reason of failed Congressional policies, efforts that have flown in the face of the most basic economic rules: The nonpartisan Congressional Budget Office issued yet another warning Tuesday that the federal government is heading down a dangerous fiscal path, racking up debt at an alarming rate. The CBO projects that deficits will average $1.3 trillion a year over the coming decade, with the economy settling into steady but sluggish growth. That’s the most disturbing thing about the report: the expectation that giant deficits will be allowed to continue even when there’s no recession driving up spending on federal safety net programs and causing tax revenue to plummet.

It’s not inherently bad for the federal government to borrow money; extra spending by the government can help stimulate the economy during a downturn. But sustained and heavy deficit spending can have the opposite effect, raising borrowing costs and slowing GDP growth. The CBO projects that the fastest growing part of the federal budget will be interest payments on the rising debt — spending that delivers no tangible benefit for taxpayers while leaving less money for programs that do.

Rising healthcare costs and an aging population are contributing to the federal budget mess. But the problem has been exacerbated by the large and irresponsible tax cuts Republicans pushed through in 2017. The cuts were sold as a way to trigger a sustained surge in economic growth; instead, GDP bumped up only briefly, held back in part by the tariffs President Trump slapped on a broad array of imports.

We’ve seen this movie before. Some supposed fiscal conservatives will demand more tax cuts to try to jump-start faster growth (in fact, Trump and House Republicans floated just such an idea before the 2018 election and again last year). Others will blame the problem on federal spending and demand cuts — not to the military and security programs that Trump has vastly expanded, not to the vast tax giveaways and subsidies, but to the safety net programs the administration is already trying to restrain.

Slashing programs such as Medicaid and food stamps to help pay for the GOP tax cuts would be redistributing wealth in the worst way — from the impoverished to the well-to-do. The right answer starts with lawmakers rolling back the tax-cut and spending excesses of the Trump administration. They can then work on a longer-term plan to bring spending and revenue back into line.

Such policies continue to reward the rich, and the economic markers that reflect this rise in incomes for the wealthiest are reflected in stock market values and the GDP, while the basic unemployment rate excludes workers who have given up (as in the coal and rust belts) and does not reflect the overall per capita income loss for working Americans do to lower pay and higher costs of living. Politicians who want to take credit for “growth” and “economic health” can pick and choose which number they can use to “justify their success.” A slight drilling down into the numbers says otherwise. For the rich, the best of times. For the rest, not remotely.

            I’m Peter Dekom, and we have gotten so good at lying to each other with manipulated statistics that finding truth appears to be relegated to the very “experts” so many Americans now hold in complete disdain.