In my recent review of the U.S. government debt, I reported that, in the 2023 calendar year, Congress borrowed $2,582 billion. This is the actual budget deficit for that year.
I also projected that in the 2024 fiscal year—the Congressional budget period that runs from October 1st, 2023 to September 30th, 2024—the deficit will reach at least $2,200 billion.
In the 2023 calendar year, the budget deficit exceeded all other revenue sources for the federal government. Together with a disturbing bipartisan Congressional refusal to do anything about the budget deficit, this has made the sovereign debt market nervous.
America simply cannot go on like this. We have now gotten to the point where the debt and its economic consequences are a national security issue. But the problem is even bigger than that: not only has the cost of the debt—the interest that Congress pays to its creditors every year—outgrown the defense budget, but the ongoing deficits are now of such a proportion that they can cause a major fiscal crisis—which inevitably escalates into a macroeconomic disaster.
If we want to save America from that, then time is running out. The good news is that there is an awakening underway, with more voices expressing concerns and a desire to urgently fix the debt problem.
Unfortunately, there have been very few proposals made in the public debate that would actually end the budget deficits. Those who have been brought forward fall into either of two categories:
- The penny-plan fix. These are proposals that suggest a small ‘haircut’ of the federal budget, either across all programs or concentrated to the biggest cost drivers. The idea is that if you take a few pennies off every dollar appropriated, it adds up and closes the budget deficit over time.
- The fiscal-commission fix. Recently, an old idea of a bipartisan fiscal commission has resurfaced. Proponents want Congress to appoint a group of experts—presumably under Congressional leadership—who would find a bipartisan compromise on how to best end the endless budget deficits.
I will not delve into the intricacies of either category; suffice it to say that the penny-plan ideas will only provide temporary relief. As the budget cuts eat into the benefits that the federal spending programs provide, voters will start complaining about being denied what they are statutorily entitled to receive. This problem—together with the fact that all the penny plans I have seen come with a date of expiration when spending is supposed to return to a ‘normal’ trajectory—will guarantee that whatever relief in terms of reduced deficits comes out of a penny plan will only be temporary.
Proposals for a bipartisan fiscal commission raise one question: why would it work this time when it has not worked in the past? Changing the format of the commission will not help;it is still Congress that creates the commission, appoints its members, and ultimately decides whether or not it wants to comply with the commission’s recommended spending cuts and tax increases.
The material difference between a penny plan and a fiscal commission is that the former will actually lead to some upfront changes in government spending, while the latter will be nothing more than a reason for Congress to kick the debt can down the road. The penny plan also has another merit: it would get the process of spending reform started while Congress works on implementing the only available permanent solution to the budget deficit.
That solution is called ‘structural spending reform.’
Part II of this article will present the architecture of a new welfare system that would structurally replace today’s welfare state. However, before we get there, we need to understand the theory behind such a reform.
The reason for the federal government’s chronic budget deficits is that the vast majority of its spending programs are designed to provide benefits on the wrong terms. Those who advocate for a balanced budget implicitly assume that the federal government spends money based on how much it takes in from taxpayers. If we just reduce spending to where tax revenue is, the budget is balanced—end of story, right?
Wrong. About two-thirds of the spending by the federal government goes toward programs where the amount to be spent is determined by how many people are eligible for the benefits, and by how much those benefits are worth. To take one example, the Earned Income Tax Credit, EITC, is available to everyone who qualifies, for the amount they qualify for. The amount of cash benefits that eligible recipients get from the EITC is not conditioned on whatever tax revenue happens to come in.
The SNAP program, a.k.a., food stamps, works the same way. So do Medicaid, the SSI income-security program, the TANF temporary assistance program, and so on. The number of eligible citizens is determined by Congress and written into the law governing every one of these programs. The ‘determined’ part is typically a set of eligibility criteria, which leaves the number of eligible citizens open.
This is where the problem lies: the criteria that determine if people qualify for cash and in-kind benefits are written in such a way that the lower your earned income is, the more benefits you qualify for. In other words, government promises explicitly to give benefits to low-income earners,but without any long-term limits on who qualifies as ‘low income.’
While we all agree that government should not give benefits to the rich, it is also important to understand the profound consequences of giving benefits to those with lower incomes. For reasons of macroeconomic mechanics—which I hope to get time to explain in a coming article—this practice of economic redistribution creates its own demand for more and costlier benefits.
It is here that we find the core problem that Congress must solve if it ever wishes to end its endless budget deficits. Congress must, simply, rewrite the purpose of all its entitlement benefit programs in such a way that they are no longer economically redistributive. If, and only if, Congress does this, can it solve the budget deficit problem.
On the other hand, if Congress transitions our entitlement programs from economic redistribution to a model where the purpose of the benefits is strictly to relieve people of absolute poverty, then they will also find that the budget problem is solved permanently.
Check back for Part II tomorrow.
