Many people probably aren’t going to love hearing this, but they need to: if there’s one issue we need everybody to get a little more Republican on, it’s the federal government’s budget. And here’s why.
Over the last month or so, we were all inundated with “news” about a potential government shutdown. Last weekend, Republican Speaker Kevin McCarthy reached an agreement with Democrats and the White House to pass a bill that would keep the government operating until mid-November[1]. It was a trivial win for the country, but still a win nonetheless, though it appears to have come at a cost, as McCarthy subsequently lost his speakership as a result.
But while most media outlets have been quick to cover how “hardline” Republicans decided to oust Speaker McCarthy, what was worse was that in the lead up to this past weekend’s government shutdown deadline, very few in the press actually laid out the bigger issue so that people could understand it. Instead, they kept reiterating how “extreme,” “ultra-right-wing” and “hard-line” Republicans were refusing to compromise, instead choosing to try and reopen the deal Speaker McCarthy cut with Democrats and the White House in May (to avoid a debt a debt default) and cut discretionary spending further. Here’s just a few examples from Bloomberg, allegedly a much more “centrist” outlet because of its connection to the financial world:
The coverage of this shutdown, however—just like with the debt ceiling negotiations from earlier this year—has been extremely one-sided. Republicans were criticized because they wanted to cut spending and because of their tactics, not just the latter. We can argue about whether threatening a shutdown was tactically greedy by Republicans given McCarthy had just struck a deal on this very same issue only four months ago (I personally think it was), but what is harder to argue with is how anyone who wants to cut spending, or, worse-yet, even talk of balancing our budget, is routinely labeled an extremist, or an “ultra-right-winger” in the press. These words get tossed around in politics a lot these days, but as a result of this, there’s a tendency to label everything “the other side” does as extreme, even something as simple as trying to limit spending (let alone cut it). It was no different in this latest dispute over the budget, as the articles above show.
The broader budget situation is almost never discussed in any real detail by “news” articles. This is ironic because this should have been the issue. This was, after all, a debate over the county’s fiscal affairs. When our country’s fiscal situation is discussed in any level of real detail in the media, it tends to paint the picture that the problem could easily be solved if rich people and corporations “paid their fair share” of taxes. Of course, when you ask someone who subscribes to that notion what “their fair share” is, no one ever really gives a good answer. What you quickly realize is that “their fair share” really means “more,” and no amount of tax increases is likely to change that answer. Because of the media’s unwillingness to give this issue a fair shake though, many people aren’t fully aware of how bad our fiscal situation really is. We very well may already be in a hole that we can’t get ourselves out of.
This post will attempt to provide a broader but still digestible analysis of the US budget so that readers can perhaps understand why “extreme” Republicans keep asking for further spending cuts, and why some of them are willing to allow debt defaults, shut the government down, and presumably use any other tactic that results in more fiscal discipline. I’ll state it upfront: in my view there’s a way to do things, and Republicans have been excessive with their tactics. But when you evaluate this issue a little more deeply, you realize why some conservatives have decided that the problem just isn’t going to be solved “the regular way,” as the late John McCain used to say. I happen to think that if the press wasn’t routinely labeling conservatives who would like to see more fiscal discipline as “extremists” and “ultra-right-wingers,” we might be able to get our house in order in a more civilized way, and without these dramatic arguments over money every four months.
So let’s get to it. According to the Congressional Budget Office’s latest forecast, the federal government will run a budget deficit of about $1.4 trillion dollars this year. Even if we exclude the interest we owe on our debt, the “primary” deficit will be about $1 trillion dollars. To put this in some perspective, if you exclude interest, the federal government this year will spend 20% more than we take in in revenues (taxes). And if you include interest (which you of should), that number goes to 35%, more than a third greater than the income we bring in.
A reasonable person might ask, is this still because of COVID? The answer is no. Most of the COVID-related spending is now out of the federal budget. In 2020 and 2021, for perspective, we ran budget deficits of around $3 trillion in each of those years (that sadly makes our situation now seem infinitely better, though sadly that isn’t the case). Last year in 2022, more of the COVID-related spending fell out of the budget, and that continued into this year. Fiscal 2023 then is much more of a “normal” or “post-COVID” year.
As a reminder, there is the “deficit”, and there is the “debt.” Our deficit is the gap between what we spend and what we take in (from taxes and revenues) each year. A surplus would be if we brought in more revenue than we spent. Once upon a time we did actually have that problem (in the 90s), but we are lightyears away from that today. The debt by contrast, is the amount of borrowings we’ve taken out to fund our deficits. So to use an easy example, if our national debt last year was $100, and we ran a deficit this year of $20, our national debt at the end of this year would be $120. Repeatedly running deficits therefore adds to the debt. As of the end of last year, our federal government’s debt was $24.3 trillion, which amounted to 97% of the nation’s gross domestic product (or GDP for short). Framed a different way, that’s $73,506 of debt for every man, woman, and child in the country. Not exactly a paltry sum.
You might ask, well, so what? If you’re a normal person and you’re busy, it wouldn’t at all be unreasonable for you to ask this, especially considering we’ve been running deficits for over 20 years now. Why is this all of a sudden such a problem now? The answer actually is that we don’t know if it is or it isn’t. But we do know that someday, whether that day is tomorrow, next week, next year, or next century, this is going to be a major problem. And for a couple reasons, but more on that in a minute.
First, let’s explain why this is in fact a spending problem and not a revenue problem, as it is so often conveyed as in the press. Said differently, let’s show why we aren’t simply being undertaxed and that we are instead actually overspending. The chart below shows federal government revenue as a percentage of GDP. Though it’s technically slightly different, the country’s gross domestic product can also be thought of as the country’s income as a whole, simply because one person’s production is another person’s income. The charts below show both total federal government revenues as a percentage of the income generated in the United States, as well as individual income taxes as a share of GDP as well.
Both these charts show the same thing: taxation as a percentage of our income is about as high as it’s ever been. Now let’s look at the spending side of the equation:
The above chart shows that while it’s thankfully receded from the COVID highs, government spending is still as high as it’s ever been as a share of national income. Thus, if revenue is already at or above the high end of its historical range, and spending is also at all-time highs, that should make it pretty clear that we’re giving plenty of money to the government, and that we’re not under-taxed (if we were undertaxed, we’d see our taxation as a percentage of GDP be below the historical averages, not above). Our problem is not a tax problem: it’s a spending problem.
So what are we actually spending this on? I’ll spare you the line-item by line-item breakdown, but you can generally think of government spending in 3 buckets: “Discretionary,” which includes both defense and non-defense spending; “mandatory,” which includes things like Social Security, Medicare, etc.; and then lastly, interest. Here’s how each of these three buckets has changed over time, both in relation to GDP, but also as a percentage of the overall federal budget.
As you can see from this first chart, discretionary spending has actually declined over time, though not in terms of actual dollars spent, but rather both in terms of its share of the total federal budget, and also in relation to GDP (which is probably the best way to benchmark it). This has been more than offset by the growth in mandatory spending (primarily entitlements) from things like Social Security, Medicare, etc. Notably though, while interest has remained relatively in-line with its historical levels in terms of its relationship to GDP, this is only because the US has benefitted from very low interest rates over the last twenty years. As of now, the average interest rate on US debt is 2.7%, per the CBO. This compares to current market rates of ~4.75% across the yield curve. If interest rates were to never move from here, the incremental spending from our interest would almost double, and that’s before we incorporate additional debt that we’ll rack up in coming years.
Let’s return to why this is a problem. There’s several reasons. First, and most importantly, when we continually run these kinds of deficits, we run the risk that lenders are no longer willing to lend money to the US government. Think about it: if you as an individual continually spent 35% more than you earned in income, you would be hard pressed to find a bank to continually lend to you. If that happens for the US government, there’s no telling where interest rates would go, simply because almost all interest rates in the economy are ultimately tied to the rates on government bonds (for those that don’t know, a “bond” is a loan, and is often the way the government borrows money; when we go to the bank, we get a loan, but the US government is too big to borrow from any one bank, so it issues bonds to divide up the loans into smaller pieces). This includes mortgage rates, auto rates, the rates businesses borrow at, etc. etc. If investors really started to become concerned that the US might not be able to pay back all its debts, interest rates across the economy would go up, and go up in a big way. This would make starting a business, buying a home, or buying a car, very difficult, and would almost assuredly cause a major recession, and potentially something worse. So that’s the big reason.
There are other reasons as well. If we continue to run deficits, the interest payments eventually begin to crowd out more and more room in the budget. That leaves less room for other programs, and even for defense spending. Given we already have entitlements that are massively unfunded, “discretionary” spending is going to increasingly become crunched from both sides of the budget. Additional government borrowings can also “crowd out” private sector investment, simply because investors don’t have unlimited amounts of money to put to work. Thus, if I have $100 to invest, and the government makes it appealing to me to lend to them, that’s money that I would no longer be able to put towards investing in a business, buying a house, or buying a car.
To give you a sense of what all this looks like visually, below are a few charts. First, let’s look at the primary and total deficits as a percent of GDP. As noted above, “primary” deficits are deficits excluding spending on interest (so discretionary spending plus mandatory spending). The total deficit includes paying the interest on our debt. As you can see, following the period of surpluses in the 90’s, we’ve been running steady deficits since then, with significant worsening during both the Great Financial Crisis and then again during pandemic (2020-21). The chart shows historical figures, and then the CBO’s forecast out to 2030.
What’s driving our deficits going forward? The answer is entitlement spending. Discretionary spending is actually already back to the levels it was at the end of the Clinton Administration (2000) as a share of GDP. It’s Social Security, Medicare, and other entitlements that are the real problem. Ultimately our deficits from these areas drives our debt, and this becomes a bigger and bigger problem over time, as the chart below shows. This chart includes CBO forecasts out to 2052.
If these forecasts play out, our debt becomes even more problematic pretty quickly. Part of this is because of what we talked about earlier, which was that the interest rates that we’re currently paying on our debt (2.7%) are so far below where rates currently are (~4.75%). In the chart below, the CBO forecasts the average rate reaches 4% only by 2053. That could very well end up happening much sooner.
Here’s the real problem: no one wants to cut spending anymore. Republicans historically have been the party of fiscal discipline, but more recently this is only when they are in the minority in Congress. They don’t care about fiscal discipline when the president is a Republican, and they’ve been total hypocrites in that regard. During the Bush Administration, Republicans routinely ran deficits (even when they controlled both houses of Congress), and this was also true during Donald Trump’s presidency as well. It’s only when a Democrat is in office where they all of a sudden care about spending again. That not only annoys Democrats, it annoys Republicans. It also makes their more aggressive tactics of late seem that much harder to get on board with as well.
Even in this latest dispute though, Republicans were advocating only for an additional $120B in spending cuts to discretionary spending. Entitlements were not to be touched. Presumably it’s too close to an election season to take on that thorny topic, but a year from now, it will not be surprising if a Republican president (should that happen) chooses to again kick the can down the road in the interest of political expediency. This is why we need people to better understand the budgetary situation, and to realize that while it seems like a “not my problem” issue, it most certainly is their problem. The sooner fiscal discipline becomes more of a consensus issue again, the easier it will be for our elected officials in both parties to act on that without being worried about losing their jobs.
But it’s worth asking the question: are Republicans actually better historical stewards of the budget and better fiscal disciplinarians than Democrats? The answer is probably yes, but it’s not obvious. Both parties’ presidents can make excuses: President Bush had 9/11 and two wars, Obama had the Great Financial Crisis, and Trump and Biden both had COVID. Here’s a visual of how deficits as a percent of GDP have looked over time under both democratic and republican presidents.
What does this chart look like if you total it all up? The table shows both primary and total deficits as a percent of GDP when both democratic and republican presidents are in office. The answer actually shows it makes minimal difference if a democratic or republican president is in office.
What about control of Congress? Congress, after all, controls spending, not the president. While this gets more complicated because of times of divided government, here Republicans come out looking a little better. Thankfully for purposes of our analysis, in 50 of the last 61 years, Congress has been controlled by one party, with only 11 of those years consisting of one party controlling the House and another controlling the Senate. We’ll therefore do the same thing we did above, where first we show a chart, and then we show a table. Note that this second chart also includes gray bars, which indicates a time when there was divided control of congress.
Now here’s the same table to synthesize both the congressional historical record, and also to compare that to the results of various kinds of “divided government” (where either one party controls one house of Congress and the other controls the other, or where one party controls the presidency and the opposite party controls all of Congress). Note that for purposes of this table, I look at only primary deficits (so I exclude interest) since the debt is more a product of prior spending decisions than ones actually controlled by the people in power at that time.
Here the results look a little better for Republicans, but not by a mile. The best results actually come when one party controls congress and another controls the presidency. But bottom line, if we’re comparing democrats versus republicans in terms of fiscal stewardship, republicans are probably slightly better.
There’s one other qualitative comment we should make on the historical record as well, which is that while Republicans have been hypocrites in terms of only caring about spending when they don’t control the presidency, at least Republicans care about controlling spending some of the time. Though it’s hard to quantify this, it’s fair to say that when democrats are in the minority in Congress and do not have the presidency, they rarely, if ever, advocate for spending cuts, or even spending discipline. They generally continue to advocate for growing government.
Thus, despite their historical hypocrisy and mixed track record, of all the people in government, Republicans are the ones most likely to restore fiscal discipline. Democrats today do not seem to have any impetus to cut spending (with the possible exception of defense spending, but even there, it’s really not clear anymore), and really haven’t since Bill Clinton in the 90s. Our standards for spending unfortunately just keep getting worse and worse, but they are likely to get worse faster under Democrats than under Republicans.
To be perfectly clear, this isn’t meant to be a plea to vote Republican, but as the title of this post suggests, instead it’s simply to be more of a Republican on this issue. Furthermore, even if the record on fiscal austerity isn’t as obviously skewed in favor of Republicans, Republicans philosophically are still more aligned to be the party of fiscal discipline, and it’s likely that ultimately they’ll return more to their “roots” in that regard. For those three reasons then: a slight advantage in the historical record, the fact that they do care about spending at least some of the time, and also because controlling spending is more likely to align with their party’s philosophical principles, all point towards them being the most likely culprits to right the ship of state, at least when it comes to the budget anyway.
To summarize:
First, our fiscal situation is not good, and we need to start taking actions on it now. If we don’t, it will affect your life, and likely sooner than we realize.
Second, our fiscal problem is a spending problem, not a taxation one.
Third, while entitlement spending is the real problem, we’re likely going to have to make cuts across the board to fix things. This doesn’t mean we need to cut everything by 50%, but it does mean that drastic changes need to be made, and everyone and every part of the budget needs to sacrifice. We need to tighten our belts everywhere we possibly can to give ourselves a better chance to pull this off.
Lastly, while neither party has been that impressive in terms of fiscal stewardship, for a variety of reasons, Republicans have the edge on controlling and managing spending. Thus, since getting our fiscal house in order will affect interest rates, jobs, and the economy more generally for everyone, we need everyone—including you—to be just a little more Republican on this particular issue. Doing so will remind our elected officials that people care about our financial future, and will more easily allow them to make hard decisions without fear of losing their jobs. We cannot expect elected officials to make hard decisions if we’re just going to vote them out of office for doing so. Almost no one in the private sector commits career suicide voluntarily, and we shouldn’t expect politicians to either.
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