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FISCAL RESPONSIBILITY
of the matter
Does no one in Washington understand the wise saying make hay while the sun shines?
America’s fiscal course is unsustainable, and we all know it. Year after year our spending has increased while our revenues have fallen short. But instead of tackling this shortfall head-on and jeopardizing their re-election bids, our leaders have chosen to borrow enormous amounts of money to cover it.
In July 2019, the United States economic expansion entered its 10th year, making it the longest on record. At the time, according to The Wall Street Journal, “more than 20 million jobs had been created so far in the expansion that started in mid-2009, and the net worth of American households — the value of assets such as stocks and housing minus debts such as mortgages and credit cards — had increased by $47 trillion.”
Unemployment was low and job creation seemed solid. In fact, the labor market had experienced an astonishing recovery from the 2007-2009 Financial Crisis. In July 2019, the seasonally adjusted official unemployment rate was 3.7 percent.
Although there is debate among economists about the magic unemployment target, this is a great number. Some would even say that America had reached its full productive capacity — meaning we were finally at a point where almost everyone who wanted a job actually had one and that our workforce was producing at near to full speed. By many measures, the U.S. economy looked strong.
But, as always, here is where we got ourselves into trouble. During our claw back from the 2007-2009 Financial Crisis, it was impossible to know how long the economic expansion was going to last. After all, the U.S. economy looked pretty great before the Financial Crisis also, to the point where practically no one saw it coming. In other words, everything was great — until it wasn’t.
Therefore, while we were fortunate enough to be in an expansion, the smart, responsible course of action would have been to use those critical years to solidify our financial stability; spend money on investment in our future through cutting-edge research and development and intelligent infrastructure projects; and finally tackle the root causes of the financial Apocalypse that is quickly bearing down on us (a.k.a. Social Security, Medicare, Medicaid and pensions).
Instead, Congress and the Trump administration drowned us in debt, passed extremely expensive tax cuts, started trade wars, restricted legal immigration, eviscerated regulation, and allowed our workforce to remain in denial and ill-prepared for the harsh realities of the 21st century workplace.
So, let us get this straight. We went from the longest economic expansion in history to a $3.1 trillion deficit and so much debt that it exceeds our entire gross domestic product.
How does that wise saying make hay while the sun shines sound right about now?
That much of this happened on Donald Trump’s watch comes as no surprise since he obviously has no problem accruing massive debt (nor a problem with just walking away from it and leaving others — like hard-working Americans who built his casinos — holding the bag). But clearly, between 2017 and 2020 the rest of our leaders got lulled into the false sense of security they always seem to find in-between inevitable economic calamities. They fell right back into their destructive habit of reacting to negative outcomes as opposed to proactively anticipating and preparing for them.
We've heard some people argue that, since interest rates were so low back then, it’s no big deal to borrow whatever and whenever we want. This is a preposterous thing to say. Even if we paid zero interest on borrowed money — heck, even if China and Japan paid us to borrow from them — we still have to pay the money back.
It would be one thing if we borrowed money to buy ourselves state-of-the-art airports, subways, railways and ports; sophisticated fiber-optic lines, bandwidth and wireless networks; modern schools, roads, bridges, levees, dams and water systems; hi-tech electricity-distribution grids; or extensive high-speed rail systems. But that’s not what we have spent our money on. We have borrowed for consumption, not investment. As a result, we don’t have squat to show for our trillions of dollars of debt. Nothing. Nada.
We don’t have to be Nobel Prize-winning economists to understand that continued borrowing for consumption rather than investment is not good. We don’t need a Ph.D. in economics to understand that there is a significantly negative relationship between crushing debt and economic growth.
Let us quickly paint a picture that ain’t pretty. If we allow this to continue, our government will eventually become basically paralyzed. The United States of America will be unable to borrow money to respond to short-term financial emergencies such as wars, recessions, or economic calamities like the 2007-2009 Financial Crisis (when we desperately needed our public balance sheets to offset the enormous de-leveraging of private ones) or things like the economic fallout caused by the Covid-19 pandemic (when American families were in dire straits).
If we keep borrowing for consumption rather than investment, we will eventually be unable to find financing for our long-term productive capacity, where borrowed money can be repaid with actual income. Interest rates will likely increase, which will exponentially increase the pain of our indebtedness and make it more expensive, if not impossible, to raise capital, invest in innovation, and create jobs.
We will be at the mercy of foreign countries who already own 7.4 trillion — or 24 percent — of our public debt (Japan owns 1.1 trillion and China owns $859 billion). Investors will eventually lose confidence that we can repay our debts or have the political will to, which could initiate a debt crisis and worldwide panic. Next comes a run on the dollar.
Then comes this little issue known as inflation, a phenomenon everyone seemed to completely forget until it blew in like a hurricane in 2021. Before the last couple of years, “inflation” sounded like an antiquated word from the past. That’s because many economists thought it was. But they have been proven quite wrong.
This is exactly the kind of thinking we're talking about when we say we get lulled into a false sense of security and, as a result, fall right back into the destructive habit of reacting to negative outcomes as opposed to proactively anticipating them.
Who couldn’t see this coming?
While it’s true that, after significantly increasing our federal debt coupled with the drastic measures the Fed took after the 2007-2009 Financial Crisis, the anticipated higher inflation did not come to pass. But that in no way meant it was dead and buried forever.
Even before the Covid-19 stimulus packages, the evidence was not nearly strong enough to believe that inflation was no longer a potential threat to our economy. Fast forward to December 2021, when prices shot up 7 percent, the largest spike in almost 40 years. By September 2022, the consumer price index — which monitors changes in the cost of things like food, housing, fuel, and utilities — increased by 8.2 percent over the previous twelve months, which was another almost 40-year high.
Inflation is scary because it causes serious short-term pain for many American households. Longer-term, high inflation strikes at the very heart of the financial security of the middle class, affecting savings accounts, pensions, and home ownership.
Plus, thanks to years of financial irresponsibility, inflation is more dangerous than ever since both federal and corporate debt is so high and the balance sheet of the Federal Reserve is so bloated. These factors alone could greatly diminish the effectiveness of a reduction in bond purchases or higher interest rates, tools the Fed uses to address inflation. < Note: In 2008, right before the financial crisis, the Fed’s balance sheet was $900 billion. By 2015 it had ballooned to $4.5 trillion. Today, it is over $8 trillion. >
Fear should not dictate policymaking, but this is not unjustified fear. We're not being hyperbolic…this could very well be our future if we don’t do something fast. Being happy-go-lucky people, we absolutely hate being a buzz kill. But the time has come where there is really no choice:
This has got to stop. We must be more fiscally responsible.