Further magical thinking

this one hurts for generations

We are also applying magical thinking to the budget if we intend to reduce the federal debt. Come on, folks. Please explain how the federal debt can do anything other than explode under the present plan to cut taxes while trimming the federal budget modestly, as different needs arise?

Let me state unequivocally I don’t like paying taxes any more than anyone else but I prioritize ensuring national fiscal health far more. I also know we don’t seem to be improving on that, vows from countless office-seekers not withstanding.

Most federal spending is mandatory in several categories: debt repayment, military and federal salaries, Medicare, Medicaid, Social Security, and many other relatively small programs. So far, our fiscal year 2025 spending as of the end of last month was

U.S. Government Spending, FYTD [fiscal year to date—cw] 2025

Top 10 Spending by Category and Agency

CategoryAgency

Percentage of expenditures

22 % Social Security

14 % Net Interest [on debt]

13 % Health

13 % Medicare

13 % National Defense

11 % Income Security

5 % Veterans Benefits and Services

3 % Education, Training, Employment, and Social Services

2 % Transportation

1 % Natural Resources and Environment

3 % Other

Since we have yet to finish fiscal 2025, let me use USAFacts.org data from the fiscal 2024 budget to discuss mandatory versus discretionary spending.

The high-visibility, painful DOGE efforts are not garnering substantial savings relative to overall spending. Federal employment peaked in May 1990 under Republican George H.W. Bush but has been declining overThey constitute a relatively small portion of federal spending, some of the "cuts" are being overturned on a needs basis (we need people to oversee some nuclear weapons assurance programs, it turns out, as well as air traffic controllers). Despite condemnations to the contrary, we have never given much foreign aid as a percentage of the budget.

This is just a historic reminder that the number of federal employees has remained stable for the past four decades. Presidents come and go, but the size of the federal bureaucracy is about the same because Americans demand the same programs overall, as USAfacts.org shows with Bureau of Labor Statistics data.

Department of Government Efficiency (DOGE) has saved some money over its four-month effort, but that number is debatable. It targeted programs and employees, only to reveal what anyone should have understood from the beginning: every line item in the federal budget has a supporter. Using a scalpel on the size of government and its programs, the goal of Project 2025 is exceptionally problematic (with or without the judicial branch entertaining perfectly legal appeals to the actions).

Only 26% of the budget is discretionary, while the huge Medicaid, Medicare, and Social Security programs are mandatory spending. Should Congress and any administration truly take those on for "reform" (one person's reform is another's loss, so it's a relative concept), we could see budget decreases. Still, these programs have substantial public support because Americans rely on them.

Let me repeat that: Americans count on these programs, politics aside. We each like what we find most important while eschewing the other person's "pork" or "pet projects". The truth is, as I wrote last year, states where Republicans dominate politics have higher percentages of citizens on government programs than do those with Democratic majorities.

As a Missouri hawk in any other category, Senator Josh Hawley exemplified this by becoming vocal about protecting Medicaid from the chopping block, saying that Americans in middle—and lower-income positions increasingly rely on these government programs for survival. To cut Medicaid, for example, would probably drive up health care costs by forcing more people to use emergency room services, resulting in additional fees.

These proposals will not change the debt but worsen it by facilitating a massive, permanent (as much as anything ever is in Washington) tax cut. We are not addressing the problems we truly confront because it is too painful politically. For many Americans, subjecting fellow citizens to the effects is also an obscenity, but that is a different column.

We take in far less than we spend, hence a budget deficit. Yet, we have lived for almost fifty years believing that somehow unleashing the magic of the marketplace, once we eliminated government regulation, would right things. Eliminating regulation has not, nor is there any indication it can in the future, eaten into the debt as substantially as promised because the interest repayments we owe inexorably creep higher, despite magical thinking we can outrun it by cutting taxes or deploying some other fanciful method. The harsh reality is that debt repayment overwhelms us, yet we keep pretending something else is occurring.

The undesirable condition of a budget deficit does not address the debt, which is part of the problem. It exacerbates it, but the $36 trillion debt is money we have already borrowed, thus we owe. Moody's downgraded our credit rating, which only exacerbates this because those ratings affect the borrowing rates at which banks lend us money. I must disagree with the Treasury Secretary who dismissed the bond rating over the weekend: yes, it matters. If our creditworthiness declines, we will borrow at a higher interest rate, which is essential.

Let's discuss federal debt using a different method. Accountants use the term balance sheet for a specific reason, with the meat of the phrase in that balance concept. If revenues don't meet expenditures, the two sides of the budget equation—revenues and expenditures—become unbalanced. That is a clear number because revenues provide evidence of assets we can spend as government expenditures. Without assets, the government cannot spend money. That is the law.

We borrow to make up the gap between what we have accrued through taxes (federal or corporate) on the revenue side of the equation. When we don't take in sufficient revenue to satisfy the spending, we borrow money by selling interest-bearing bonds to make the difference. We are good at this borrowing part, preferably at low interest levels, because we expect to pay back slowly. But we must still pay it back or become as unreliable as Argentina.

With the kind of numbers we are familiar with for most of us, with mere household budgets. We have always run a deficit, meaning we spent more than we took in taxes (personal or corporate at whatever level of government) as a government. The resulting deficit, which almost invariably results every year because the government's role is to meet the needs of its people, accumulates annually, illustrating the money we borrowed through issuing bonds that other nations, investors, and even the public, back in the day of "war bonds," buy. Those bonds guarantee our government will pay back the purchaser, along with the interest established when the bond sale occurs and when the purchaser seeks to redeem the bond. This part is pretty straightforward, helped by the fact that our federal government has never once defaulted on paying back the purchasers or lenders at any point since the Republic began. We have an excellent record under massive stress because we have recently politicized the process of borrowing money to continue funding that deficit.

The Moody's downgrade of our creditworthiness on Friday indicated we are not trusted quite as fully as we were. Two immediate reasons leap to mind. First, the amount we are accumulating in owed debt is now vast: almost 37 trillion Yankee dollars. This is money we already spent, folks, not money we are talking about spending. Our aggregate national debt to gross domestic product (the summation of all the goods and services this country accrues in a year) is now 122%. English: We owe one and a half times as much debt as we accumulate yearly in national product or assets. Lest you wonder, this puts us in the category with Spain, Italy, Mozambique, and France. Regardless of political persuasion, this should make anyone wonder if we genuinely care.

Second, over the past eight years, some deficit hawks, often associated with the Republicans, have tried to hold hostage the arcane debt ceiling because if we default, people will begin to take the budget seriously. (They usually seek to cut social spending as if their constituents would not notice, but that is a different chimera.) They want to hold our creditworthiness rating hostage by not increasing the debt ceiling (interest on those bonds I mentioned, for example) to indicate hostility to the debt while blithely ignoring that the current proposed legislation will explode that debt by about 10%.

Republicans profess to worry about the debt, but a handful are less aware that preventing regular increases in our borrowing authorization would lead to a default since the law prohibits spending beyond the legally approved debt ceiling, regardless of the reason. When that debt ceiling authorization question arises later this year, Congress would be approving borrowing for money already spent rather than new spending. By not approving that amount, the U.S. Treasury would default on its obligations, an unprecedented move. We don't know how badly we would suffer from a default, but it would likely undermine iron-clad trust in our word, an invaluable strength for two and a half centuries.

So, you're wondering where the magical thinking is in today's column. For political and mathematical reasons, it is fundamentally impossible to see how we can address the national debt without raising revenue to match the increases in spending and massive tax cuts by both political parties. It's not in the cards, people. The math does not lie, despite politicians' inclinations to do so.

We are not taking in anywhere near enough revenue, from any aggregation of sources, to pay back the debt already accumulated. New programs, such as the proposal for a domestic "golden dome" missile defense system at $175 billion (an unreasonably low projected cost), continue accumulating spending obligations for desirable, if not essential, programs. The government's entire purpose, counter to assertions to the contrary, is to serve us, the people, with a panoply of programs, but each requires funding of some sort.

President Trump asserted yesterday that the country gained more than a trillion dollars during his trip to the Middle East last week, but that is neither money in the bank (agreements may or may not come to fruition) nor revenues available to Congress to use to pay off anything. Perhaps Mr. Trump does not understand this, but his advisors assuredly do. Democrats favor their priorities, adding to the deficit if approved. Most policy proposals, regardless of originating party, entail borrowing more.

We need more revenue in conjunction with sustained cuts to do this, but we are neither on a trajectory towards that, nor is there any reason to think either party would seriously do that. I realize that last phrase will infuriate those who see Republicans as fiscal conservatives or Democrats as perpetual spenders. The magical thinking is that either party is offering serious programs to achieve any improvement in the debt we owe.

In short, we are disastrously living on borrowed money. As long as the dollar remains the global currency, we can continue telling ourselves this will all be ok. But please note that major financial players who live and die from this stuff, like Jamie Dimon of JP Morgan and others, are raising flags. Yesterday, Dimon warned of recessionary trends. Why does that matter? In a recession, defined as an economic slowdown, we will see a decrease in employment and overall growth. What he did not have to add is that it would decrease government revenues while our required expenditures would remain constant. We have weathered countless recessions over the decades, but our societal stress level is considerably higher today. More people rely on government services than in the past, as we are seeing proposed trimming of those services in favor of extending a massive tax cut for the wealthy. At what point do lenders decide our irresponsible behavior in so many ways is no longer tolerable?

Magical thinking may be comfortable, but is it sustainable? I strongly doubt it.

I welcome your thoughts, corrections, rebuttals, and comments. Perhaps I have this all wrong. I hope we can expand our dialogue on the question.

I appreciate your time. I especially thank those who are paid subscribers.

The Blue Angels are scheduled to perform their annual show in advance of Friday’s graduation but the forecast is bleak since we are finally getting the long-absent rains. They did practice yesterday, however.

Be well and be safe. FIN

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