How the national debt will play out
Pretending there is no problem means that a sudden crisis is likely
At the national level, we also need to be cultivating the seeds of a Millei moment. Javier Millei took the helm in Argentina under similar conditions of fiscal disarray, and is using that to slash the bureaucracy – including, significantly, state-controlled media – with considerable success. This country could use something similar. That means someone should look at what Millei has done and how Millei has made it work, and establish similar targets for the United States government.
Although Milei is my choice for President (unfortunately, he is not eligible), I do not think that even he could solve the problem. We are at the point where slashing the bureaucracy is not enough. Social Security, Medicare, and interest on the debt will soon account for more than 100 percent of tax revenue.
Tyler Cowen points to Joseph Rauh, who writes,
if I use CBO projections to calculate the interest-to-revenue ratio, it reaches 22.9% by 2034.
That is, for every $5 the Federal government will collect in taxes, more than $1 will go to pay interest on the debt. Imagine if 1/5th of your income were going to pay the interest on your credit cards.
Mandatory outlays, mostly entitlement spending, are 90 percent of revenues. So mandatory outlays plus interest will be more than 100 percent of revenue. The Milei chainsaw won’t bring outlays in line with revenues.
Rauh goes on,
instead of ending the next 10 years exactly where we’re starting, at less than 3.4% as the CBO forecasts, what if the average interest rate the federal government paid on its debt crept up to just 4.4%?
…interest payments will consume 29.7% of revenues
At any moment, there are two possible states of the world concerning a nation’s government debt. In the high-confidence state, investors are sure that the government will put its finances in order, and the interest rate is low. In the low-confidence state, investors do not have confidence, the interest rate is high, and this produces an immediate crisis. Either state is self-reinforcing, and the move from the high-confidence state to the crisis state can be sudden.
It is possible that the bond market will remain in the high-confidence state for many more years. It has so far. But at some point, there could be a sudden shift to the crisis state. Although such a debt crisis has been building up slowly and was anticipated for a long time, the actual event will take place rapidly, over the course of a few days.
Could the government just print money and inflate away the debt? Not easily, because inflation will not solve the government’s spending problem. Interest rates usually rise with inflation. Government employees usually demand higher salaries to compensate for inflation. Social Security outlays automatically rise with inflation.
The primary choices in a crisis would be a partial default on the debt and/or a partial default on obligations to pay Social Security and Medicare. And taxes would have to go up sharply.
This crisis will produce intense political conflict. Old people will not like having their benefits reduced. Bond holders will not like having their savings stolen. Taxpayers will not like having their taxes raised. Things will get really ugly.
Reynolds envisions a Constitutional convention in the wake of such a crisis. But I doubt that the political fabric will be strong enough to handle such a convention.
What we need to prevent this from happening again is some sort of Constitutional amendment requiring a balanced Budget. But we missed that opportunity decades ago.
Have a nice day.
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"Government employees usually demand higher salaries to compensate for inflation."
An interesting thing to observe in recent years is the rapidly declining, um, "employee advocacy" role of the leadership of the government employee unions, who are supposed to be agents and representatives of employee interests, but increasingly behave as if insulated and disconnected from those interests. This from unions formerly purported to be 'powerful' and 'feared'.
Instead, like many other left-leaning institutions, the leaderships of those organizations are no longer staffed with folks who came in after long careers in the ranks, but of professional (even 'hereditary' - not joking) white collar administrator / manager types, living fat, soft, comfortable sinecure-like jobs on extremely reliable dues revenue streams, which they hand mostly to Democrats for personal favor exchanges that are increasingly disconnected from employee interests in a kind of weird analogy to "public choice" incentive problems. This new class of people tend hold their positions for the long term and are extensions of and completely integrated into (and often pass through the revolving doors of) the the greater Democratic Party Machine, with which no """negotiation""" is genuinely an "at arms-length" interaction. Importantly, they can be relied upon to not cause trouble for The Party even when strong majorities of union members are very upset with the imposition of new woke quota policies, or even in the worst cases pretty easily leaned on with small carrots and sticks should they raise a fuss which threatens to cause trouble for the wrong people at the wrong time.
What this has meant in practice is that Democratic administrations have been able to low-ball statistics about inflation and cost of living and squeeze a tiny bit of budgetary relief by setting federal civilian employee raises a bit below inflation and so decline slightly in real terms. Like the woke policies, you can bet this causes a lot of passionate angst and grousing among the ranks - especially since there is another wave of people about to head into retirements set by recent nominal pay levels, and yet, the leadership is ... notably sanguine and insouciant about the whole matter.
What's more mysterious is why a Democratic administration that doesn't otherwise seem to have any qualms about policies that blow up the short or long-term budget orders or magnitude more severely than shaving a few real-terms percent off federal salaries would even bother worrying about this stuff. My guess is that the non-left media is able to make a lot of hay out of the message that, "While you were struggling, federal workers got a nice fat pay raise ... " and that bites politically just enough for Democrat Party leadership to want to avoid if they don't think they'll pay any price for it. And since they now have the support and contribution-streams of the gov union leadership completely locked-up, who will vote Democrat and donate to Democrats until the bitter end, then the party can just take all that for granted and know it won't pay any price.
It’s worse than you think. Historically, the government has financed a portion of the debt equivalent to 15-20% of debt outstanding with short term notes. As old debts have rolled over in recent years, the percent of new debt issued with short duration is now >40%. So not only is the debt growing much larger, it needs to be refinanced much sooner. This is basically payday lending at the sovereign level. When it ends, it can end really quickly.