It Is Never Enough

Now that the House of Representatives have a majority of Republicans the issue of extending the current debt ceiling of $31.4 trillion has taken center stage.

House Republicans have indicated they are not willing to increase the debt ceiling unless Biden and the Democrats will commit to some cuts in federal spending.

Biden has stated he expects the Republicans to raise the debt limit without any conditions and is unwilling to negotiate on the issue. 

Source: https://www.nytimes.com/2023/02/01/us/politics/biden-mccarthy-debt-limit.html

It will be interesting to see how this plays out.

You can see how how the the federal debt and the debt ceiling have increased over the years in this graphic.

Total federal debt has increased by $7 trillion in the last three years.

$10 trillion in the last five years.

Over $25 trillion in the last 20 years.

This chart puts all of it in a little better context.

Credit: https://twitter.com/WallStreetSilv/status/1620286659765088256/photo/1

It is popular for Democrats to blame every fiscal problem of the federal government on "tax cuts".

All would be just fine if we all paid ( especially "the rich" and "those large corporations") more in taxes.

For example, here is Senator Elizabeth Warren stating that the "Trump tax cuts" are the reason that the debt ceiling needs to be increased.

Listening to Warren you would think that tax receipts are down.

The fact is that those tax law changes facilitated one of the largest increases in federal tax revenues in history. 

Source: https://fred.stlouisfed.org/series/W006RC1Q027SBEA

Were it not for the pandemic the effects of the increased revenues would have undoubtedly been felt earlier and in larger measure.

Do not be misled that this increase in tax receipts is somehow related to the tax increases that Biden and the Democrats passed as part of the Inflation Reduction Act last year.

Almost all of Biden's proposals to repeal the Trump tax cuts on corporations and those making more than $400,000 did not make it into the final legislation that was passed.

Any tax increases that survived were generally not effective until January 1, 20223 or were tied to the increased IRS enforcement measures in the bill (87,000 new IRS employees) to have effect in later years.

This chart also only shows revenues through July, 2022.

On the other hand, here is a chart showing current government expenditures.

You can see the massive Covid spending spikes.

However, notice that even though most of that spending has now ended the level of spending has resumed at a much higher level than it was before.

Source: https://fred.stlouisfed.org/series/FGEXPND

Since the Trump tax cuts took effect in the first quarter of 2018, current federal tax receipts have increased by $1.2 trillion (+ 60% increase).

However, federal current expenditures have increased by $1.8 trillion over the same period.

When it comes to our federal deficit and the need to borrow more and more money to fund the debt, do we have a bigger spending problem or revenue problem?

The annual federal deficit has increased by over $600 billion per year because spending increases are outpacing the significant increases in tax receipts.

Many liberal Democrats argue that the debt level does not matter.

Some have embraced Modern Monetary Theory (MMT) that contends that the government can spend as much as it wants on various projects because it can always print more money to pay for its agenda.

That was the basis upon which much of the spending during the Covid pandemic was based. 

However, MMT ran up against the basic laws of economics involving supply and demand. When there is a lot of something, it is less valuable. Massively increasing the supply of money in the economy  decreases the value of said money.

Inflation is the inevitable result and predictably this is where we have ended up.

The Federal Reserve is now engaged in a battle to tame inflation by increasing interest rates.

However, with every tick up in interest rates, the cost to carry that $31.4 trillion of debt gets more expensive.

For most of the last decade, although the federal debt level was increasing, the interest expense on carrying the debt was relatively stable as interest rates were declining. 

In December, 2022, the average interest rate paid on that debt was 2.36%.

In 2021, it was only 1.57%.

In this FRED chart you can already seen the significant increase in interest outlays in the federal budget due to the interest rate increases in 2022.

Source: https://fred.stlouisfed.org/series/FYOINT

As more short-term, low interest rate debt rolls off and is replaced with higher interest rates, the cost of carrying the federal debt will get more expensive.

For example, about $7 trillion of debt held by the public must be refinanced during fiscal 2023 at higher interest rates.

With $30 trillion of federal debt consider what the additional costs to the federal budget are on each additional increase of 1% in the average interest rate.

+1% in average interest rate=$300 billion in additional interest expense on federal debt

+2% in average interest rate=$600 billion

+3% in average interest rate=$900 billion

An increase of 3% points from 2021 levels still only gets us to an average interest rate on the debt of 4.6%.

That is still less than the average interest rate being paid on federal debt in early 2008.

In 2000 and 2001 the U.S. was paying an average interest rate of about 6.6% on its debt. That is 500 basis points (5% points) higher than we paid last year.

What would have to be done in the federal budget to pay for another $300, $600 or $900 billion in interest costs?

The entire Defense Department budget is around $700 billion.

Simply stated, it would not take much for increased interest costs to wipe out the entire Defense Department budget.

Medicare is budgeted at $766 billion in 2022.

Social Security is at $1.2 trillion.

Higher interest rates on the federal debt threatens to crowd out much of other budget items unless spending is brought under control.

If you don't want to consider spending cuts to get the federal budget under control what is left?

I think we all know.

It does not matter how much tax revenues go up. It is never enough. It will never be enough.

Hold on to your wallet.