The left revolted as expected following Kirsten Senema joined fellow Senator Joe Manchin and announced her opposition to their party’s $3.5 reconciliation bill. trillion over the decades. With the votes of all 50 Senate Democrats needed to enact such legislation, neither of them nor any other Democrat has a veto over the entire package.
A progressive organization announced a series of Arizona Cinema TV commercials, “It’s Becoming a Problem.” These two senators are subjected to a daily dose of vitriol that often exceeds even that directed against Mitch McConnell. They are seen as traitors, working with Republicans to sabotage conclude Democratic control of Congress and the White House that took a decade to build and would require a blitzkrieg of legislative activity prior the next election in 15 months.
Except that Cinema and Mansion are absolutely right. We can’t afford a massive $3.5 trillion government expansion.
Before the pandemic, the national debt was $17 trillion. The pandemic has added nearly $5 trillion in unused (mostly necessary) legislative costs.
On top of that, Democrats have already enacted a $1.9 trillion “stimulus” bill filled with non-essential items such as bailouts for states with big budget surpluses. The bipartisan infrastructure deal presented in the Senate Wednesday night would add $600 billion over the decade in unused spending, and the president’s proposed 8.4 percent increase in discretionary spending would cost $1 trillion over the decade. Adding $3.5 trillion over the decade to that settlement bill — plus another $1 trillion to renew policies with artificial expiration dates, such as expanding child credit — would hoist the whole 10-year price to $8 trillion.
It is fashionable to dismiss cost and deficit concerns during this period from lower interest rates. In addition, critics assert that Japan has shown that rising debt levels do not matter. These assertions are remarkably short-sighted.
First, Washington will need to fund not only today’s $8 trillion spending spree, but also the underlying $105 trillion of primary deficits projected by the Congressional Budget Office over the next three decades. These deficit estimates — paid almost exclusively by the projected $100 trillion cost of Social Security and Medicare systems more than they would collect in payroll taxes and premiums — already assume peace, prosperity and low interest rates.
However, anyone with student loans knows that when debt grows too big, even low interest rates won’t make monthly payments simple. Similarly, the CBO estimates that even with lower interest rates, interest will become the largest component of the federal budget, consuming half of all tax revenue within three decades. And if interest rates go up, the government’s reliance on short-term debt means all that debt will move to higher rates. Every percentage point that interest rates are overhead the baseline the community relies on will add $30 trillion to interest costs over three decades in terms of lengthy-term costs, like adding an additional DOD every time interest rates rise by one percentage point.
This one-percentage increase in interest rates overhead the baseline would shove the level of debt in 30 years to 264% of the economy. At that point, interest payments alone would cost two-thirds of all tax revenue, and the annual deficit would exceed 12 percent of the economy. This is not a far-fetched scenario. It’s just the CBO’s baseline as interest rates gradually rise to five per cent over a few decades.
What does this shortage unkind for families? Even under a low interest rate scenario, simply stabilizing the national debt at the current 100 percent of the economy would require a gradual doubling of payroll taxes to 30 percent, or a European-style value-added tax (mainly national sales tax) that gradually rises following 30 percent over three decades and even then, the modest budget deficit will persist.
In this context, borrowing an additional $8 trillion this decade — $60,000 per household — would just put gasoline on the fire. Even assuming interest rates never top 3 percent again, this year’s spending spree alone will add $240 billion in interest costs to the federal budget each year, forever. That’s $240 billion each year that could provide free public college, fund major climate initiatives, or significantly expand health concern coverage. Instead, it will be spent on interest for bondholders.
Some Democrats are suggesting that the Fed could fund all this unused spending through the printing press. While the economic effects of the Fed’s $3 trillion in recent government borrowing are undetermined, it’s silly to assume that it will – or should – finance this $8 trillion spending or a significant part of the $100 trillion primary debt in this way. The numbers are too big.
Other Democrats assert that we can only tax the rich. However, even combining nearly every progressive tax increase — including a 70 percent income tax bracket, higher capital gains taxes, Social Security taxes on all wages, an 8 percent riches tax, and a 77 percent estate tax , a carbon tax, and exorbitant unused taxes on Wall Street and businesses – they won’t even balance the core budget over the next decade, let alone this unused spending spree. Even this assumes that aggregate marginal tax rates of close to 100 per cent do no harm to the economy.
We can pin our lengthy-term solvency to hopes that interest rates will never go overhead 2% again, but that would be extraordinarily reckless. As for Japan’s debts mentioned overhead: It has benefited from rising domestic savings to finance its debt, yet the nation has suffered from slow economic growth rates for three decades.
This leaves the choice of burying our heads in the sand and hoping for an indefinite miracle. The danger of rising debt is that – like global warming – by the time you feel its effects firsthand, it’s too late to confront them without much pain. Countries that find themselves with unsustainable debt confront three painful options: historic tax increases, severe spending cuts, or running the printing press. It is much better to make responsible decisions today to avoid these dreadful choices.
This doesn’t unkind the Progressive Wish List is lifeless. Instead, it means that anything worth doing is worth paying for. Republicans certainly should have paid for the $1.5 trillion tax cut. Responsible Democrats should scale back — and shove — their top priorities from the remaining $6 trillion from this year’s $8 trillion wish list (or cap their unused borrowing at $1.5 trillion to match the GOP’s tax cuts).
Progressives can meet many of their goals if they are willing to address the $100 trillion in Social Security and Medicare shortfalls expected over the next few decades. Even reducing benefits for wealthy seniors could preserve trillions of dollars in the lengthy run. Modest proposals such as family leave, child tax credits, and clean energy investments could be funded by curtailing existing programs, or by a smaller tax increase. But if progressives instead want to spend like Europeans, they must be prepared to tax like Europeans. This means preparing the middle class for significantly higher income and salary taxes, and creating unused exorbitant value-added taxes.
Spending trillions of dollars on popular benefits is simple, especially when you can eliminate painful costs to coming taxpayers. Cinema and Mansion deserve credit for claiming that unused features are being introduced in an economically and financially sustainable way. Today’s TV ads may be bad, but tomorrow’s taxpayers will thank them.
Read more at The Daily Beast.