The Trillion Dollar Question

– It’s readers’ turn to decide how to reduce the deficit

GEORGE NOGA

Jan 28, 2024

Over the years, I have presented many different and (hopefully) compelling ways to put the US spending crisis into proper perspective. Now it is your turn. Following is the government spending for the fiscal year ended September 30, 2023. These are real numbers – actual dollars out the door – not projections or estimates.

Health care programs¹ . . . . . . . . . . . . . . $1.6 trillion
Social Security . . . . . . . . . . . . . . . . . . . . . $1.5 trillion
Discretionary non-defense . . . . . . . . . . $1.0 trillion
Defense . . . . . . . . . . . . . . . . . . . . . . . . . . $0.8 trillion
Interest on the national debt . . . . . . . . $0.7 trillion
Other mandatory spending² . . . . . . . . $0.5 trillion
Total federal government spending . . $6.1 trillion

Other relevant numbers are GDP $26.2 trillion, government debt $33.7 trillion and the debt to GDP ratio 129%. Let’s stipulate the goal is to freeze the debt ratio at its present level of 129%. This is the dead minimum necessary to prevent a death spiral.

If GDP grows this FY by 3% to $27.0 trillion, the maximum debt must be no more than $34.8 trillion (34.8/27.0=129%). This means the total debt cannot increase by more than $1.1 trillion (33.7+1.1=34.8). Since the annual deficit is running at $1.7 trillion, that means $0.6 trillion of spending must be cut (1.7-1.1=0.6). We aren’t finished.

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Interest on the debt will increase this year by $0.2 trillion due to higher rates and more borrowing. Social Security and health care expenses are ballooning due to adverse demographics. To cut to the chase, immediate spending cuts of one trillion dollars ($1,000,000,000,000.00) are needed simply to freeze the ratio at 129%. Moreover, this does not solve our debt problem, it merely keeps it from getting worse.

It’s Your Turn; Where Would You Cut $1 Trillion?

So, where would you cut $1 trillion? You can’t cut interest on the debt; that would result in default. Do you cut defense spending given the dangerous geopolitical situation? Do you cut pensions and the VA? If you don’t cut Social Security or Medicare (political suicide), that leaves only discretionary non defense spending (cost of running the government) which coincidentally was $1 trillion last fiscal year.

So, it is up to you. Where do you cut one trillion dollars immediately? The old canard of cutting waste, fraud and abuse won’t fly – it is endemic and impossible to cut due to the nature of government. Raising taxes is a possibility and plausibly could be one (small) part of the solution. However, higher taxes stifle economic growth, which reduces tax collections, which increases the deficit, which leads to more tax hikes and results in a vicious circle. The problem is not low taxes, it is out of control spending.

If We Don’t Cut Voluntarily, Markets Will Do It For Us

If we do not make the spending cuts needed to freeze the debt ratio, the markets will do it for us by blowing up the market for US Treasury securities, i.e. buyers no longer would be willing to finance America’s deficit because they believe (correctly) that they would not be repaid in full.³ There are only three possibilities.

The Fed prints money (most likely scenario) which leads to hyperinflation
Draconian tax increases (carbon, VAT) which make the US economy a basket case
The US defaults on its debt

Foreign holdings of US debt have plunged by 35% from ten years ago, In November, there were not enough buyers and Treasury was unable to sell all the debt it wanted. Who will be the last person on Earth to buy US government bonds?

One way or another, the spending cuts are inevitable and America will be forever changed. Imagine the political and societal chaos that would result from drastic cuts to Social Security, Medicare and all other government programs. America will suffer a lost generation and become a European style no-growth welfare state where people lead lives of quiet desperation.

If something cannot go on forever, it won’t!

1. Includes Medicare, Medicaid, CHIP (Children’s Health) and ACA (Obamacare)

2. Includes government pensions, VA and veterans benefits

3. This already has begun. Some buyers are refusing to buy 30-year bonds and have forced the Treasury to shorten the duration of the bonds it issues.

© 2024 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

Recent developments have sealed America’s fate; it is only a matter of time until some event (perhaps minor) triggers a crisis – forever changing the United States.

Gotterdammerung for America

By: George Noga – February 25, 2018

Gotterdammerung is the final opera in Richard Wagner’s Ring Cycle. It means twilight of the gods and is marked by a catastrophic and violent societal collapse. It was the final performance of the Berlin Philharmonic on April 12, 1945. It is an apt choice for the above headline because, for the first time ever, I believe America has crossed the point of no return on its way to gotterdammerung. The climax of the crisis is years away but we have crossed the Rubicon and jacta alea est – the die is cast.

I was not this apocalyptic when I wrote the February 11 and 18 posts. The February 11 post identified the three root causes of the fiscal crisis as health care, Social Security (pensions) and interest on the debt. Because of recent developments, these root causes plus defense now will suck up the entire federal budget (and then some) by 2020 – much earlier than I believed scant weeks ago.

The February 18 post showed the public debt/GDP ratio surpassing 90% within 5 years. No nation has escaped from a ratio that high without societal upheaval and a lost generation. Subsequent to that post, things have gotten worse. Congress’ budget deal increased spending $150 billion/year and permanently raised the baseline for all future spending. Add another $200 billion for infrastructure plus billions more for higher interest on the debt and there are trillion dollar (and bigger) deficits forever. The US now will reach the critical 90% ratio much earlier than I believed on February 11th.

We were lucky until recently. The 2013 budget sequester restrained spending; we are in the ninth year of an economic expansion; and interest rates have been at historic lows. These factors delayed our fiscal death march to Gomorrah. Meanwhile, the demographic time bomb keeps ticking as health care and pensions spiral out of control. Now, the sequester is busted, interest rates are exploding and a recession is due soon.

There is no way out of this fiscal rathole. Slashing spending requires cuts of 25% and must include health care and pensions – sowing the clouds of civil unrest. Raising taxes also requires a 25% increase and kills economic growth leading to stagnation and lives of quiet desperation. Other possibilities such as runaway inflation and repudiation of the debt also would rent the country’s fabric. All possible solutions are nihilistic.

Most politicians, however venal, are not stupid. They fully understand everything in this post. They do not attempt to halt America’s entropy because they know voters will not support drastic action unless there is an existential crisis. Speaker Ryan wanted to tackle entitlements but he would be demagogued to death merely for trying. Nothing will happen until it is far too late and then it will be only quarter-measures.

Charles Murray, one of the titans of our time, recently said: “the American experiment in self-government is essentially over“. Hamilton said it well: “The only path to a subversion of our country is by flattering the prejudices of the people and exciting their passions, jealousies and apprehensions, to throw affairs into confusion and bring about civil discord.” That describes America today, dithering over identity politics and playing to peoples’ fears and prejudices, while ignoring existential threats.

With profound regret, I now must concur with Charles Murray. I fear our beloved republic of 230 years has passed the point of no return; I hope and pray I’m wrong.

Next in 3 days: Special Posting on the Parkland school shooting