Mitch Daniels suggests

honest conversation on the debt

Early this morning, I ran to our glorious Bakers & Co. where I ran into our neighbors as they finished the newspaper and their breakfast savories. Jim mentioned an op-ed in the Washington Post advocating that the summer of 2025 emphasize not the next election cycle or climate change but the increasingly pressing questions of how we deal with our burgeoning federal debt. I promised to look at it when I got home.

I often stay away from monetary, fiscal or financial topics for fear I won’t adequately explain them. Jim’s suggestion I cover this topic, however, reminds me of how both underappreciated and yet pivotal it is for people in this country. Every single one of us reading this column has lived during a period of unchallenged supremacy for the U.S. Dollar as the world’s premier currency. For the record, as of this afternoon, The U.S. Debt Clock says in real time that every citizen owes $104,895 while each taxpayer owes $269,269. You realize we owe this by law, don’t you?

It’s hard to find a traditional Republican these days for whom a primary concern is government spending. As we all know because this seemingly endless campaign bleeds over immediately into the next one, most voters of either party seem to care only about the personalities and the insults rather than federal debt. That actually was not always the case, with the question of fiscal restraint a major defining point between the two major parties. Mitch Daniels, once President of Indiana University, Indiana Governor, and the head of the Office of Management and Budget under Bush 43, still takes debt seriously, penned today’s suggestion for next summer.

Sure, Richard Nixon took us off the Gold Standard in August 1971, meaning he would not longer guarantee the U.S. Government had the reserves to pay $35 in exchange for every Troy ounce of gold. That was a huge deal. Nixon made the move with no forewarning and could have absolutely destroyed our national credibility but had no options at the time. The dual costs of the Southeast Asia conflict and the Great Society spending his predecessor began in the 1960s (Medicaid, Medicare, and other social safety net issues building on FDR’s work during the Great Depression precluded us from meeting the obligation the peg for gold required. As a result, on 15 August 1971, he simply allowed the Dollar to float against gold.

Why did the world go on as if this merely a minor burp rather than a major belch or an attack of stomach cancer, if not national death? Because the Soviet system was closed into the Warsaw Pact while we were the supreme economic power. No one doubted we would be a rock solid, reliable nation about paying debts we were accruing——punto final. We needed some flexibility to pay our bills but everyone knew we would pay them while trying to bring down inflation that was spiraling.

Nixon’s decision was fifty three years ago. In that period, we have managed to ignore voices reminding us that the debt (the aggregate amount we have borrowed to pay our national bills) was a major concern to the Founders and ultimately is a responsibility for each and every single citizen since our system relies on our taxes. The Constitution says we must pay off the debt.

Both parties—Democrats and Republicans—have ignored the debt as it continues mounting. Time was that Republicans had a modicum of moral and economic pride in pointing out that social spending was contributing rapidly to debt because we were dispensing more, for genuine need in many cases, revenue than we were collecting. Democrats appeared to consider that imbalance a necessary evil, as the British economist John Maynard Keynes had discussed following the First World War. Debt for Democrats was not desirable but far less important than social stability. This distinction in priorities was a major difference between our two political parties for decades.

The attacks on George H.W. Bush by Grover Norquist of Americans for Tax Reform for “flip flopping” on taxes in 1990 were the turning point. Bush, famously promising in his 1988 campaign “Read My Lips: No New Taxes”, reneged on that posture two years later when he raised taxes. The backlash was instantaneous, sustained, and furious by those who sought to lower taxes while trimming the size of government. Bush lost his re-election bid in 1992, though for complex reasons beyond taxes. Since his defeat for reelection in 1992, however, candidates at all levels in the United States run from any possible semblance of raising taxes despite the spiraling need to borrow money which someone will pay in the future. Re-election is much more important than fiscal and tax responsibilities, in short.

When Ronald Reagan took the White House in 1980, the debt to gross domestic product ration was 34.67% meaning that debt was a third what we produced as a nation annually; today the amount we owe to creditors is 123.45%. Reagan contributed to that increase as did everyone following him.

Republicans continued protesting they cared about repaying the debt until Trump’s four years added $8.18 trillion to our national debt. The FPOTUS allegedly said he did not care about curbing spending because he would not be in power when the payback became essential. He not only did not increase taxes but cut them for highest earners. I have no idea whether or not he really said he would not be around but our contemporary emphasis on immediacy rather than the future would lead one to think he probably did. Much of Trump’s spending also went to pandemic relief, again a safety net move.

Democrats indeed increased the debt with the expansion of social safety net expenditures. The Obama growth in federal obligation requiring repayment was $8.34 trillion over eight years. Biden’s additional $6+ trillion is substantial, even if it has been for infrastructure and other internal needs.

Why are the numbers so shockingly high in more recent administrations? Taking taxes off the table for fear of riling groups such as Americans for Tax Reform, as if most Americans were not benefitting from the social safety net in one category or another, is the primary reason. Taxes are absolute anathema in contemporary America. Taxes rather than abortion, guns, or immigration are the most volatile subject in politics today. The result is that we now have a federal debt at $34.6 trillion and counting.

The fact the nation produces goods and services (known as the gross domestic product) roughly the same as the debt makes the argument we can cut taxes to grow out of the debt ridiculous. We are not even keeping up because of interest which increasingly eats into the federal budget obligations because we must pay it by law.

Congress, most recently the Republicans in the House of Representatives, claim they will make massive, appropriate cuts to align the federal budget expenditures with revenue amounts but that is a demonstrably irrelevant (and false) claim. Certain categories, such as Medicare, Social Security, and Medicaid are mandatory spending over which Congress has no control year by year; these specific programs constitute roughly 67% of federal spending. The entire structure of the programs would require alteration, a massive task for a government sputtering to open daily.

The only discretionary funding—again about 33% of spending—including food stamps, defense, federal pay, foreign aid, housing, veterans’ benefits, environmental protection, and all other issues, do not amount to nearly enough annually—much less in the aggregate—to solve the problem. Every time you hear a politician talking about balancing the budget by cutting these programs (and how many ever seriously talk about cutting defense these day?), run the other way as the individual either is expressing budgetary ignorance (seemingly common) or deliberate falsehoods. Budgetary illiteracy is hardly the purview of Johanna and John Q. Public; remember who gets elected these days.

Even cutting mandatory programs has all sorts of consequences, not the least of which is a mirror image of voter fury to those who never forgave George H.W. Bush for breaking his promise. Millions of Republican voters, not merely Dems, rely on the various programs of the safety net to get by, often so accustomed to receiving the benefits that they do remember these are tax-payer provided benefits. Why do old geezers like me vote so regularly? To preserve their benefits as a major goal.

So what Mitch Daniel is calling for is a pretty audacious conversation. He believes the summer Chautauqua Institution or Aspen Institute (or any other august, open gathering) conclaves need discuss our burgeoning debt to uncover some common ground for solutions. If we are serious, that conversation will include the blithed taxes we are currently eschewing.

Why does this matter? Let me admit that many economists do not think the debt is nearly as dangerous as Daniels or others do. These analysts and practitioners remind us that the U.S. Dollar, in which the debt is denominated, is the reserve currency for the world. People want to hold dollars so the Federal Reserve Bank can control how much of our currency circulates, thus theoretically controlling our ability to borrow as a nation.

The problem, as Daniels hints, is that if the U.S. Dollar were not that desired currency, we would have far less credibility. It’s that belief in our reliability, our willingness to pay our debts (already in doubt, based on Republicans’ threatening repeatedly over the last few years to raise the debt ceiling to allow us to borrow to pay what we have already spent), and our overall seriousness as the global economic power we have been for a century that is being reconsidered. Should the renminbi, the PRC’s currency, become a serious competitor to which some countries fled for reliability, our indomitable position would teeter. Interest rates would skyrocket, adding to the debt which would become even harder. No other currency currently appears likely to supplant the Dollar but others still aspire to that, frustrated by the power this status gives us.

These global machinations also align with doubts about our public debt market. Will people keep buying U.S. debt long term? Daniels is arguing we need address that question rather than assume we know the answer.

Mitch Daniels appears genuinely committed to far more constricted mandatory spending through altering our commitments to beneficiaries. That is certainly an approach, although one that even many Republicans dependent on government spending would resent if the past tells us much about the future. Many people want to maintain spending but find some fairy dusty or a magic wand to fix how we pay for all of ti.

To solve the soaring debt crisis, we need spending cuts and substantial tax increases; the numbers just don’t add up otherwise. No one likes paying taxes but, as noted, it’s hard to find politically feasible cuts so the revenue side becomes unavoidable. This is part of the political and economic illiteracy plaguing us. Republicans whine and threaten about their Democratic colleagues “raising your taxes” as if those tax increases were without reason: they pay for what we are getting, people. Taxes are not some abstract monster seizing the world, much like Reagan’s portrayal of “gov’munt” as if it weren’t populated by regular citizens who live around this country, including in your neighborhood most likely.

I applaud Daniels for raising the questions and hope we begin addressing them; the time is past for letting this fester. But I also hope we have a serious conversation on all options rather than a partisan attack on the opposition because it’s en vogue. Partisanship won’t matter when international bankers and other nations no longer trust us with world-wide implications. Sadly, our current behavior in so many ways is hastening that day. Let’s at least start addressing the debt so we can look our grandchildren in the eyes about its implications when it weighs them down.

Debts have caused wars in the past, as Europe knows only too well. Short of global nuclear war, debt’s not going away any other way. Inactions are an action causing consequences.

I welcome your thoughts, retorts, questions, and corrections on this or any column. Please feel free to circulate if you find this of value. Thank you, dear subscribers, for your financial commitment to this newsletter.

Have a prosperous week. Is it too late for you to register to vote in November? Please do if you haven’t yet. Billions around the world don’t have the privilege. It’s a civic act of such power.

Be well and be safe. FIN

US Debt Clock, retrieved at https://www.usdebtclock.org/

Mitch Daniels, “Next Summer’s plan: Prepare for the death of the dollar”, WashingtonPost.com, 22 September 2024: A29.