Washington’s Fiscal Doomsday

Washington’s Fiscal Doomsday
by David Stockman at Brownstone Institute

If you don’t think Washington is in the maws of a Fiscal Doomsday Machine, think again. And the place to start is with the 30-year CBO projections, expressed as the dollar increase from the current $29 trillion level of publicly held US Treasury debt.

If Washington does nothing except leave current tax, spending, and structural deficit policies in place (i.e. baseline policy), the publicly-held debt will grow by $102 trillion over the next three decades, reaching a staggering 154% of what would be $85 trillion of GDP by 2054.

Moreover, that outcome assumes that Rosy Scenario does not lose her footing for even a moment through the middle of the century. Stated differently, the underlying CBO projections presume that there will be no recession during the 34-year span from 2020 to 2054, and that, in fact, there will be perpetual full employment at about 4% from here on out.

Of course, during the last 30 years there have been three recessions (shaded area) and no such full-employment perfection was even remotely achieved. The short spells of 4% unemployment or under, in fact, were few and far between—in stark contrast to the CBO baseline which presumes 4% unemployment year after year until 2054.

The CBO projections also assume that inflation stays strictly in its Fed-prescribed lane at around 2.0% for the next 30 years, as well. That hasn’t remotely happened during the last 30 years, when the inflation rate has exceeded the 2.0% mark during 17 years, and frequently by substantial amounts.

Likewise, it assumes that the bond pits will have no problem funding more than $100 trillion of new Treasury debt at yields which average just 3.6% over the next 30 years. Of course, the actual weighted average yield in the Treasury market today stands at 4.2% and the fulcrum 10-year note has been cycling around 4.4%, albeit at this point the prospective debt inundation is just getting started.

Again, judging by the last 30 years of history, the odds that interest rates will be pushed down into the mid-3% range and remain there for 30 years running would not seem very compelling, either.

Indeed, during the past 30-year period shown in the graph below the bond pits had the Fed’s big wind at their back as the latter monetized upwards of $8.5 trillion of US Treasury and GSE paper by the 2022 peak. Even then, yields were well above the CBO 3.6% assumption half the time, and were pushed lower only by the massive money-printing spree between 2008 and 2022—a feat not likely to be repeatable again without fueling even more inflation and speculation than we already have.

Needless to say, with a baseline projection of $102 trillion of new debt riding on the back of a veritable Rosy Scenario, you would think that Washington might be forming a fiscal bucket brigade to begin bailing out the sinking budgetary ship. And most especially that it would be led by the GOP—the once and former party of balanced budgets and fiscal rectitude.

Not the Trumpified GOP, however. Again, as we showed yesterday, the Donald’s OBBBA—even with the egregious budget gimmick of terminating new tax cuts and bennies in the 2028 election year to make the cost look lower on the standard 10-year window—would add massively to the public debt.

The head-in-the-sand GOP leadership and White House economic policy pimps say not to sweat the extra debt because it is only $3 trillion on paper over 10 years, and, besides, much of that can be purportedly absorbed through enhanced “growth.”

Actually, what drives revenue growth is nominal GDP and the CBO baseline assumes an average of+3.7% growth per annum for the entire 30-year period through 2054. Given that nominal GDP growth averaged exactly 3.9% during the 20 years ending in Q1 2020—a period in which the Fed’s printing presses were running red-hot—we doubt there would be much additional nominal GDP growth tonic from essentially extending existing tax law (i.e. the expiring 2017 Trump tax cuts) through the next three decades of massive rising debt burdens.

In any event, on a 30-year basis, the OBBBA as written would add $117 trillion to the public debt, which would rise to an additional +$133 trillion when you price out OBBBA without the accounting gimmicks. Now, how anyone thinks that quintupling the public debt from $29 trillion to $162 trillion over the next three decades is a plausible route to the Golden Age of Prosperity actually extends well beyond our powers of imagination.

Even then, the truth is surely far worse. Just remove one brick from the edifice of Rosy Scenario—perpetually low interest rates—-and the fiscal dragons truly come surging from the budgetary vasty deep. That is, if you assume the weighted average UST yields will clock in at 4.25% rather than 3.5% over the next three decades, the added debt from the permanent extension of the OBBBA would amount to $156 trillion.

That’s right. Faced with a veritable Fiscal Doomsday Machine as embodied in the current CBO baseline, the Trumpified GOP has essentially embraced a budgetary path to a $185 trillion public debt by mid-century, representing a crushing 218% of GDP. In a word, the GOP has surrendered to fiscal calamity lock, stock and barrel.

But that’s not the entirety of the matter. As it happens, given the GOP’s allergy to taxes, cowardice on entitlements, and thirst for Forever Wars and a massive Warfare State, there is no way the nation’s runaway debts will be tackled from the Republican side of the aisle. To remind, when you set aside defense, which will cost $9.7 trillion over the next decade, Veterans at $4.1 trillion, Medicare and Social Security at $15.3 trillion and $20.6 trillion, respectively, and interest at $13.9 trillion, these GOP Sacred Cows add up to $63.4 trillion over the next decade.

That’s 71% of total baseline outlays of $89 trillion and when you add in $7 trillion of Federal Medicaid—from which the GOP has not yet agreed to cut only a small bite–there is only $18 trillion left. And that’s for the entirety of the Federal government from the NIH to highways, the national parks, farm programs, school lunches, the Bureau of Indian Affairs, the BLM, the Federal judiciary, the Coast Guard and the Washington Monument, too, among countless others.

That is to say, the $89 trillion of spending built into the budgetary baseline is virtually immune to the budgetary knife because after decades of Dem demagoguery on these items the GOP has thrown in the towel, too.

At the same time, the UniParty has come to a frozen standoff on the revenue side of the ledger. When it comes to the possibility of a new revenue source such as a national sales tax or VAT, the Dems are dead set opposed because these taxes are allegedly too regressive, while the GOP is opposed in principle because they are a tax.

At the same time, the income tax is essentially tapped out from an economic perspective. At the present time fully 58.7% of Federal income taxes are paid for by the top 5% of households and 86% by the top 20%. In a word, the preponderance of the nation’s 160 million income tax filers pay no tax at all (about 45 million returns owe no taxes) or after the vastly enlarged standard deduction and increased child credits owe a single digit percentage of their income in Federal taxes.

Indeed, as shown below, in 2022 the bottom 80% of taxpayers paid only $292 billion in income taxes, amounting to just 13.7% of total collections. Against AGI, the effective tax rate was just 5.6%.

At the end of the day, the GOP and Dems have competed their way into a de facto income tax holiday for 80% of households. And we don’t see how you raise their taxes in that competitive environment, while recognizing that the GOP has every reason to staunchly oppose shifting even more income tax burden on the top of the economic ladder.

There is always the possibility of higher payroll taxes or returning the corporate income tax to the 35% level of pre-2017. But there is not a snowball’s chance in the hot place that organized labor would allow the former or that the vast phalanx of business lobbies would permit the latter.

In short, raising taxes is usually a bad idea—especially when the $7 trillion Federal budget is freighted down with Warfare State and Welfare State spending that should be drastically curtailed. But there is no visible combination of political factions within the UniParty arrangement that makes this even remotely feasible—even as the second-best solution of revenue increases is even more beyond the range of political possibility.

That is to say, there is really no escape from the Fiscal Doomsday Machine that has now tightly engulfed the nation’s very governing process.

A version previously published in Stockman’s private service 

Washington’s Fiscal Doomsday
by David Stockman at Brownstone Institute – Daily Economics, Policy, Public Health, Society