“No money shall be drawn from the Treasury but in consequence of appropriations made by law”                                        U.S. Constitution, Article 1, Clause 9, Section 7

The U.S. national debt now stands at $31.4 trillion, after enormous increases during the pandemic. The new Republican House of Representatives insists on significant spending cuts in return for agreeing to raise the debt limit.

The President’s budget proposal will be unveiled on March 9, a month later than normal.  Then the House and Senate Budget Committees mark up the President’s budget, pass their own individual budgets, and then come to an overall agreement through joint conference. (https://budget.house.gov/budgets/)

Finally, the House and Senate Appropriations Committees take over in May and pass individual spending bills for each of the various federal agencies.  Below are listed the Appropriations Subcommittees which do this work in the House of Representatives.   Finally, the separate House and Senate Appropriations Committees meet in conference to agree on overall spending levels for the federal agencies.

• Agriculture, Rural Development, Food, and Drug Administration
• Commerce, Justice, Science, and Related Agencies
• Defense
• Energy and Water Development, and Related Agencies
• Financial Services and General Government
• Homeland Security
• Interior, Environment, and Related Agencies
• Labor, Health and Human Services, Education
• Legislative Branch
• Military Construction, Veterans Affairs, and Related
• State, Foreign Operations, and Related Programs
• Transportation, Housing and Urban Development, and Related

Senator Joe Manchin (D, WV) is urging that Democrats work with Republicans on both short-term spending cuts for this year as well as a long-term plan to get entitlement spending under control.  This augers well for achieving real bipartisan cooperation.

Conclusion.  The U.S. has a very serious problem of huge spending deficits year after year.  The new Republican House has taken the lead n insisting that Congress return to traditional “regular order” in processing spending requests from each of the various federal agencies.  For now, it looks like our national leaders will be able to work together, across party lines, to begin a process to get the annual budgeting and appropriations processes under sustainable control.  A sound fiscal future depends on their success in doing so.

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Our biggest national problems at the present time are inflation and debt.  The annual rate of Inflation now appears to be stalled in the mid-6% range (6.5% in December and 6.4% in January) and our national debt is sitting at $31.4 trillion.  The Federal Reserve is determined to bring inflation back down to the 2% range.  Already short-term interest rates have been boosted by 4.25% and are likely to have to go up much further.  The problem is that the economy is not responding like it was expected to.  Consider:

• The economy has been very strong in the past year.  The $5 trillion in Covid fiscal stimulus has a long tail. Years of low-interest rates have transformed debt dynamics for the overwhelming majority of U.S. households, leaving them largely shielded from the current high-interest rates.
• The changing debt profile has allowed consumers, still cash rich from the flood of fiscal stimulus unleashed in the wake of the pandemic, to keep up their high levels of spending on services, especially as Americans have shifted away from the goods they had been buying during Covid shutdowns.
• With over 10 million unfilled jobs in the economy, a hiring surge of 517,000 new employees in January 2023, and a very low 3.4% unemployment rate, wages are increasing rapidly.  An undersupply of housing, in combination with fresh federal investment in infrastructure, has kept the construction industry in business.
• Some Covid spending programs, such as expanded nutrition aid, are only now winding down, while federal spending on green infrastructure initiatives, is just beginning to flow out.
• This positive economic data has fueled hopes of a “no landing” scenario – rather than a hard or soft landing – in which the economy continues to expand. But a more realistic outlook is less benign: interest rates are likely to stay higher for longer to tamp down stubborn price growth, probably forcing at least a mild downturn along the way.
• A no-landing scenario, in other words, is simply a delayed landing because the central bank will keep policy tight until inflation falls. And whether it will be a contractionary crash or a smooth glide back to 2% inflation remains to be seen.  Thus, even unprecedented economic strength so far isn’t enough to ensure that the Fed can avoid a painful outcome.

Conclusion.  The Federal Reserve is committed to reducing our current high rate of inflation back down to the normal 2% range.  But the Fed can’t fix inflation by itself.  It needs fiscal restraint from Congress and the President.  And it’s not getting it from the Biden Administration.  This is making the Fed’s job much harder and more likely to have painful side effects for the overall economy.

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Last week I pointed out that President Biden is being fiscally irresponsible by downplaying our massive national debt, high rate of inflation and rapidly increasing interest payments on the debt (because of rising interest rates).  All of this, and more, has now been carefully documented by the Congressional Budget Office.

Consider:

• The pandemic is over but federal spending in 2022 still rose to 24.8% of GDP from an average of 21% of GDP from 1973-2022. It is predicted by the CBO to continue to be 24.9% of GDP, ten years from now in 2033.

  

• Although revenues were up to 19.6% of GDP last year, this still amounts to a deficit of 5.2% of GDP. Again, the CBO predicts an even higher deficit of 6.9% of GDP in 2033.
• The inflation rate fell from 6.5% in December 2022 to 6.4% in January 2023, in other words, just barely. This means that the Federal Reserve will have to keep raising interest rates aggressively for much longer to get inflation back down to the desired level of 2%.
• The higher the rate of inflation and the higher that interest rates must go to bring it down, the more likely the chance of a hard “recessionary” landing.
• The Treasury has to roll over 30% of our $31 trillion of debt, more than $9 trillion, in the next 12 months at interest rates now approaching 5%. This, of course, makes the debt that much worse.

  

• Amid the fiscal mess now being made worse by the Biden Administration, the Republican House wants the federal government to adopt a plan to reduce federal spending!  What could make more sense?
• “The bottom line is that the President and the Democrats have built a much larger federal government that is taking nearly a quarter of all national income, up from about a fifth over the last fifty years.”

Conclusion.  In our dangerous fiscal climate of massive debt, high inflation, and rising interest rates, the Biden Administration has dramatically increased federal spending.  This is highly irresponsible and speeds up the inevitable day of fiscal reckoning which can’t be postponed forever.  It should be opposed as strenuously as possible.

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The topic of the hour is inflation and debt and President Biden has now doubled down on a likely bad bet. The Federal Reserve is determined, as it should be, to bring inflation back down to the 2% level from its current level of 6.5% in December 2022.  How long will this take and will it require a hard landing – a painful recession – to accomplish?  Consider:

• The most recent Labor Department report for January 2023 shows a surge in new employment of 517,000 and a fifty-year low of 3.4% in unemployment. Such strong economic data will likely require more aggressive action by the Fed.
• The $1.9 trillion American Rescue Plan, passed right after Biden became President in January 2021, is what tripped off inflation in the first place and what led to the $2.7 trillion deficit in FY 2021.

  

• In his 2023 State of the Union speech, Biden claimed that he reduced the deficit by $1.7 trillion in FY 2022 but it was still a whopping $1.4 trillion.
• The deficit in the first four months of FY 2023 increased from $259 billion in the same period last year to $522 billion this year. And President Biden claims to be fiscally responsible!
• The House Republicans want to establish a serious plan for deficit reduction in return for agreeing to raise the current debt limit which is $31.4 trillion. For example, they want to return to “regular order” whereby standing committees in each chamber determine budget levels for each government agency.  President Biden insists on a “clean” debt ceiling increase with no strings attached.  Which side is more fiscally responsible?

  

• It is apparent, from the attached chart on federal government finances, that spending got most out of whack beginning in 2009 from the financial crisis and then again beginning in 2020 from the pandemic. Of course, it is understood that crises require a government response.  But now that inflation has been tripped off, fiscal restraint is badly needed to help the Fed get it back down.

Conclusion.  The U.S. is currently faced with two fiscal crises, inflation and massive debt, at the same time.   By apparently refusing to work with the Republican House toward serious deficit reduction, President Biden is risking making debt and inflation much worse and more prolonged.  The success of his Presidency is riding in the balance.  If he is wrong, and the economy dips into a major recession, the American people are going to suffer a lot more pain than they have already and he will rightly be blamed for this.

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In my last post I praised House Speaker McCarthy and the Freedom Caucus for insisting on spending cuts before agreeing to raise our current debt limit of $31.4 trillion.  But how to accomplish this in a responsible way that keeps public opinion on your side?

Here is one possible approach:

• Continue to emphasize your intention of returning to “regular order” whereby spending bills for each federal agency are developed by standing committees in a bipartisan manner with an overall spending limit established by the budget committee. Since this will take several months to accomplish, either offer to raise the debt limit by $1 trillion or so in the meantime (enough to get through the current fiscal year which ends on September 30, 2023) or perhaps suspend the debt ceiling until then.  Returning to regular order is a clearly sensible reform which has the potential to eliminate much wasted and unnecessary spending.
• The Covid health emergency should be legislatively ended as soon as possible  and all unspent funds from the $6 trillion of pandemic stimulus be declared void. This would save $255 billion in 2023-24 alone.
• Although entitlements such as Social Security, Medicare and Medicaid make up 2/3 of long-term debt projections, the House has decided not to propose entitlement reforms during the current negotiations. This is a smart strategy. There are many good ideas, in particular, for the difficult job of reforming healthcare, and lowering its cost, but these will take longer and broader discussion to implement.

Conclusion.  The House is off to a good start in insisting on spending cuts in return for raising the debt limit.  The general public understands that we have a very serious debt problem.  By continuing to act in a responsible manner, and keeping public opinion on its side, the House is in a good position to win this important political battle.

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Right now the new GOP House of Representatives is on the side of the angels!  Our national debt stands at over $31 trillion and is growing rapidly.  The deficit for Fiscal 2022 was $1.4 trillion.  Under President Biden in the last two years alone, the debt has increased by $3.7 trillion. This is the height of fiscal irresponsibility and the GOP House wants to stop it.  Absolutely excellent as far as it goes!  Just don’t forget that the $31.4 trillion debt limit will have to be raised before default occurs.

Please, Freedom Caucus, don’t squander this unique opportunity you now have to address the debt problem.  It is critical for you to keep the overwhelmingly favorable public opinion you now have on your side.  There are certain actions that will work and others that won’t.  For example:

• What won’t work.  Do not insist on balancing the budget over a ten-year period with just spending cuts.  Even including all spending categories (such as defense, entitlements, etc.) a 26% overall spending cut over ten years would be necessary.  Exempting defense and entitlements would require much steeper cuts in all other programs and this will be unacceptable to most Americans.

  

• What will work. The best idea that the new GOP House has is to return to “regular order,” under which spending bills for the various federal government agencies are developed in a bipartisan fashion at the committee level, with overall spending limits determined by the budget committee.  This gives the various committees, each controlled by a Republican majority, an opportunity to carefully review the operations of each federal agency and whack off the unnecessary, bloated spending that has accumulated over the years.

  

• Here’s another idea. The House needs to establish and maintain credibility with the public that it understands the necessity of raising the debt limit in the next few months.  How about passing a bill to raise the debt limit by $1 trillion (or enough to get through the current fiscal year ending on September 30, 2023)?  This would allow time for the House standing committees to prepare spending bills for FY 2023/24 and send them to the Senate before the end of the current fiscal year.  It would reinforce the needed credibility for the House Republicans, including reasonable overall spending limits.  This is what is so badly needed to start reducing annual deficits and put the U.S. on a credible path to solving the debt problem.

Conclusion.  More power to the new Republican House of Representatives!  With a debt limit staring us in the face, and the full attention of the voting public, you have a unique opportunity to address our horrendous national debt problem.   Don’t blow it.  There are very responsible and useful steps you can take to move the process forward (as described above).  Most Americans want you to succeed in getting this done!

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As readers of this blog know, I am optimistic about the future of the U.S.  We have an amazingly resilient democratic form of government as well as great economic and military strength.  Believe it or not, I am also optimistic about the likely performance of the new Congress over the next two years.  There are two main things I want them to do:

• Support Ukraine. Helping Ukraine defend itself against the Russian invasion is by far our biggest foreign policy challenge at the present time.  Defending democracy and freedom around the world, against autocracy and repression, is not only the right thing to do, but it’s also in our own best interest because it enhances our national security.  Judging by the Omnibus Spending Bill (including $45 billion in new spending for Ukraine) approved by the last Congress, the Biden Administration and the Senate strongly support continuing to support Ukraine.

  

• Cut overall spending. One of the outcomes of the supposedly “chaotic” process of electing a Speaker for the new House of Representatives, will be the return to “regular order” in the House whereby standing committees will approve bills on individual topics.  This means that spending budgets for all bills will get the attention and oversight that they deserve.  This bodes well for the spending restraint that is so badly lacking and sorely needed in Congress.

  

• Raising the debt limit. The current debt limit is $31.4 trillion which will be reached by midyear 2023.  Congress will need to raise the debt limit before this amount is hit.  There is overwhelming public support for Congress to reduce the debt in a bipartisan manner.  Hopefully, this means that the Ukraine supporters in the Senate and the deficit hawks in the House will be able to negotiate a compromise plan to raise the debt limit in return for strict spending controls as well as continued support for Ukraine.

Conclusion.  The stakes are high for the new Congress.  Biden Democrats support Ukraine.  Republican deficit hawks control the House.  The current debt limit will be reached by midyear.  I am optimistic that a sensible compromise can be achieved and I’m willing to go out on a limb to predict it!  We’ll soon see what happens.

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My last few posts on this website have discussed the great strengths of our democracy.  Fundamentally, it is the decentralized, republican structure of our government as a collection of states, each with many powers and responsibilities as conferred by the Tenth Amendment to the Constitution.

It is the combination of this decentralized, democratic form of government along with our dynamic free-enterprise economy which has made us so strong.   Consider:

• Regular and fair elections are the bedrock of democracy. Elections are conducted at the state and local level by state and local election officials.  Votes are counted at the county level and there are 3143 counties in the U.S.  County election workers are friends and neighbors which makes fraud very unlikely, and widespread fraud virtually impossible, because it could only happen on a multiple county basis.
• Divisive and controversial issues are ultimately resolved at the ballot box. For example, Donald Trump was elected President in 2016 even though he has an abrasive and narcissistic personality.  His election denialism about losing in 2020 is now leading to his political downfall.  Trump-endorsed election denialists mostly lost in the 2022 midterm elections which otherwise should have been a good year for Republicans.  Trump has now become a huge liability for the Republican Party and is unlikely to be nominated again for president is 2024.
• Social progress in the U.S. First, intermarriage between minorities and Caucasians is gradually reducing political polarization by expanding the number of citizens participating in mainstream culture.  Secondly, the African/American middle class is also steadily growing.  Both of these trends strengthen democracy by bringing more minorities into the mainstream.  Furthermore, the merits of good old-fashioned hard work are strongly supported by most Americans.
• The economic and military strength of the U.S. The U.S. has geographical advantages such as friendly neighbors, north and south, and ocean protection, east and west.  But it is mostly our hardworking, industrious, and patriotic citizens that have made us the in the world both economically and militarily.  In addition, the U.S. has many freedom-loving friends and allies, primarily other democracies.  In fact, the economic strength of the free world greatly outweighs the economic strength of the non-free autocracies.
• Autocracy is more fragile than democracy. Of course, the U.S. has major problems to solve such as inflation, huge national debt, poverty, homelessness, overly expensive healthcare, etc.  But our main adversaries, China, Russia and Iran, all autocracies, have much bigger problems than we have.  Our country could splinter apart if we were to ever stop making social progress, which is unlikely.  But autocracy is inherently more fragile than democracy because it denies the universal desire for freedom and independence that democracy represents.

Conclusion.  Americans are very fortunate. We live in the strongest, most prosperous, and one of the freest countries in the world.  We are not immune to making mistakes.  But our decentralized, republican form of government, as well as our great economic and military strength, provides a huge safety net that protects us from many calamities that might otherwise occur.  This is why I am so optimistic about our future!

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“A Republic, if You Can Keep It”
Benjamin Franklin, Independence Hall, Philadelphia, 1787

My last several posts on It Does Not Add Up have discussed the foundations of American democracy which I think are very strong. First of all, it is our decentralized, republican form of government (i.e. we are a collection of states, each with many rights of their own), which is the most fundamental guarantor of our basic liberties.  Furthermore, the threat of polarization of the electorate will gradually diminish as minority groups, especially through intermarriage, become more and more integrated with mainstream culture.

So, while the long-term prospects for the survival and spread of U.S. democracy are very favorable, there certainly are roadblocks to be overcome in the near future.  Consider:

• The Ukraine situation. In a brilliant essay in Foreign Affairs, “A Free World, If You Can keep It”, Robert Kagan makes it very clear what the stakes are with our help for Ukraine in repelling the brutal Russian invasion.  Yes, we are defending a country that wants to be free and independent like we are.  But even more than this, we are defending the free world against barbarian autocracy.  If Russia succeeds in subduing Ukraine, who will it attack next?  The Ukrainian people will ultimately decide how much pain and suffering they can tolerate without succumbing to the Russian onslaught.  But we should for sure continue to support them as long as they are able and willing to resist.
• Inflation and Debt. Our national debt is now $31 trillion and rapidly increasing.  Our annual rate of inflation now stands at the high level of 7.1%.  Federal Reserve Chair, Jerome Powell, has made it clear that the Fed will raise short-term interest rates (now at 4%) as high as necessary to bring inflation back down to 2%.  But this will almost surely cause a recession, most likely next year.  Furthermore, the Fed can’t fix inflation by itself.  It needs fiscal restraint from Congress.  If our debt continues to rise in an out-of-control manner, we are inevitably headed for a new financial crisis, that will occur when the U.S. Treasury is unable to find buyers for its bonds even at ever higher interest rates.  The eventual result will be depression and/or hyperinflation.
  We badly need major fiscal restraint from Congress.  Will the new Republican House majority be able to provide it?  Let’s hope so!

  

• The immigration crisis at the southern border. There are now roughly 2 million illegal immigrants crossing our southern border every year.  We have a huge labor shortage, but immigrants need legal status in order to be employed.  Our badly broken immigration system cannot realistically be fixed until our border is closed to illegal entry.  It is up to the Biden administration to figure out how to get this done.

Conclusion.  U.S. democracy is fundamentally very strong.  People all over the world yearn to be free and we are a beacon of hope and freedom for all.  We have a responsibility not only to help other countries achieve freedom and independence but to keep our own house in good order.  We can continue to meet this high challenge but we need to focus on solving our most pressing problems to get this done.

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Last week I argued that the fundamental strength of American democracy is its decentralized nature.  Voting procedures are regulated at the state level and elections are conducted at the county level.  This ensures that the people in charge of running elections, at the state and local level, are close to the people.  This naturally creates more trust among the voters.

Political polarization is often considered to be a major threat to democracy.  Consider the following.

• The sociologist, Charles Murray, says that the biggest threat to our democratic system is the polarization created by identity politics. The rhetoric coming from black opinion leaders and their white supporters, about systemic racism and white supremacy, is causing a strong backlash among middle-class and working-class whites.  This is the main cause of our current polarization, says Mr. Murray.
• But another sociologist, Richard Alba, responds that many non-whites are assimilating into the American mainstream just as white ethnic groups did before them. More than 10% of U.S.-born babies have one parent who is nonwhite or Hispanic and one parent who is white and non-Hispanic.  This is a sign of growing integration into the mainstream by members of minority groups.  By the 2050s, one third of babies with white ancestry will also have Hispanic or nonwhite ancestry. The idea of who belongs to a racial majority or minority will become scrambled.  In this way, racial assimilation will increase and polarization will begin to fade.
• Last week I discussed how Donald Trump’s 2020 election denialism is now alienating increasing numbers of voters. It is quite interesting that a recent WSJ poll shows that Republican voters now favor Florida Governor Ron DeSantis over Donald Trump as the 2024 Republican presidential candidate.  It is very early for the 2024 election, of course, but already Donald Trump does not have a lock on the 2024 GOP presidential nomination.
• Election integrity in Nebraska. I live in Omaha NE and the Nebraska Secretary of State has just reported that a manual audit of 10% of the votes cast last month discovered a discrepancy of only 11 votes (0.023%), between machine and hand counting, in the 48,292 votes counted in the audit.  In other words, it can be concluded that vote counting in Nebraska is very secure.

Conclusion.  Americans have the good fortune to live in a country with a long tradition of sound democratic government.  There will always be real or perceived threats to political stability in a democracy, a polarized electorate and Donald Trump’s narcissistic persona being two current examples.  But things are much better than they seem!  These two threats are likely in the process of dissipating.  Of course, “eternal vigilance is the price of liberty.”  But let’s not overreact to perceived threats to our democratic system.

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