This week we talk about Rubinomics, government spending, and US federal debt.
We also discuss the Government-Household analogy, the House of Representatives, and the looming government shutdown.
Recommended Book: Quantum Supremacy by Michio Kaku
Early in November 2023, the credit firm Moody's lowered its outlook on the US government's credit rating from "stable" to "negative," pointing at a huge decline in debt affordability—the government's ability to borrow money cheaply, basically—and an ever-increasing, already gargantuan deficit as its primary justifications for that change.
And those issues are on top of another standoff in the House of Representatives over funding the government, which, if something isn't done, will come to a head on November 17.
A previous agreement struck by the previous House Speaker, Kevin McCarthy, expires on that day, and if a new collection of 12 funding bills, which are what allows the government to pay for things, are not passed by then, the government could be shut down, possibly further diminishing the government's rating, on top of the many other consequences of not providing funding for things like national defense, energy and water development, and the Justice Department.
This new reduction in outlook by Moody's follows a recent downgrade by Fitch back in August, when that ratings firm dropped the US government's rating from AAA to AA+, largely because of all the down-to-the-wire negotiations about funding the government that have roiled Congress over the past few years, and what that kind of tumult does to a government's ability to say for 100% certain that they'll pay their debts and never default; the US has never defaulted on its debt, but the possibility becomes more realistic-seeming each time these politicians fail to provide funding for essential government functions, including, debt-paying.
Fitch also, like Moody's, cited the general diminishment in fiscal circumstances across the government, though, referring to a collection of variables that have been weighing down the state's capacity to acquire cheap debt.
Ratings are one such variable, as each decrease in a nation's credit rating makes debt more expensive, folks and other states buying bonds and treasuries and the like demanding more interest for the same amount of loaned money—which is what those sorts of financial instruments are, at the end of the day.
But beyond reputation, there are also factors like high interest rates, hiked by the Fed in order to tamp-down on inflation, and the accumulated interest payments that must be paid on previous debt taken out by the government to pay its bills.
So in addition to the government suddenly having to pay more interest on all its new debt, it also has to pay more and more interest on its existing debt, and that latter figure is compounding to the point that a lot of folks who are otherwise generally unconcerned about such things, are starting to take what could turn out to be practical notice.
What I'd like to talk about today is Rubinomics, government spending, and why the US federal debt is becoming a political talking point once more.
In the context of federal spending, fiscal responsibility refers to the balancing of a state's budget so that its spending is almost always close to, or below its revenue.
So if a government brings in a trillion dollars in revenue, from taxes, for example, and spends a trillion dollars to keep agencies running, infrastructure maintained, and its military up to date, that's a balanced budget.
If that same government were to spend a trillion and a half dollars without increasing tax revenues, though, it would have a deficit of half-a-trillion dollars.
And if it were to spend less than it pulls in, if it were to reduce the social safety net programs it provides or spend less on its military, and thus only spent a half-trillion of the trillion it earns in taxes, that would represent a surplus of a half-trillion dollars.
This is similar, at its most basic, at least, to how an individual might manage their money.
Spend more than you make and you'll tend to go into debt, spend less than you make and you can sock money away or invest it, and spend exactly what you make, and your bills will all be paid without accruing debt.
This comparison, though intuitive in a way, at least for the purposes of defining the outline of how this works, is also quite flawed—and economists have given it a name, potentially to make criticizing it that much easier: they call it the Government-Household analogy.
And this analogy is often-touted by politicians, usually when they want to criticize their opponents for their spending by making it seem like they're less capable and responsible than the average heads of a household; why should we good, hardworking citizens be required to assiduously manage our personal economies, but these freewheeling politicians can't seem to balance a budget of billions or trillions of dollars?
The analogy falls apart, though, when you look at the specifics of a household versus a government.
Governments, after all, can literally print money if they so choose. They also tend to get far favorable terms on debt, can increase their budgets by raising taxes, and, oddly, if you think of a government as a household, different facets of a government can owe other facets money, so part of the debt owed might be owed to itself.
While this analogy is often convincing to voters, then, it's not terribly useful as a model for economists and folks working to actually manage budgets of the scale and with the peculiarities of a government's budget.
All that said, there are pros and cons to every possible approach to government debt, as running a deficit, spending more than is pulled in via taxes, means that a state can invest in more programs and infrastructure, and just like a company taking on debt to invest in more manufacturing capacity or warehouses or restaurant locations, that can mean setting things up for growth in the future: a healthy, happy, secure, well-educated populous will tend to do better than the opposite, so spending money on programs that improve and amplify those sorts of things can lead to more revenue sometime later.
On the other hand, just like any other debt, federal debt tends to be paid back with interest, and that means the government taking on such debt will not just be on the hook to pay back the initial, principle amount they borrowed, but more than that—and possibly, especially if debt accrues for a long while, or accrues during periods of high interest rates, for them specifically, or more globally, they could be on the hook for a lot more than that.
The last time the US government had a balanced budget was in 2001, and it's enjoyed the same for five years total in the past five decades—four of which were the years leading up to and including 2001, the fifth being 1969.
This is such a rare state of affairs, in part, because the general economic consensus, amongst economists in the US, at least, is that federal debt isn't a big deal, that it tends to lead to more benefits than downsides, and that it is therefore prudent to not balance the budget, most of the time, because doing so leads to austerity—severe cuts in vital programs and other investments—and that hobbles the nation and its capacity for growth over the long-haul.
Balancing the budget just to balance the budget, then, isn't really such a good thing, according to this prevailing theory; it's a compelling rallying cry for some folks occupying some spots on the ideological spectrum, traditionally those on the conservative side of things more than the left, but not spending also comes with consequences, and those consequences tend to outweigh the downsides of accruing some amount of debt, year to year.
This mainstream sensibility about debt, though, was subbed-out during that 1998-2001 period, during the Bill Clinton administration, when the Treasury Secretary, Robert Rubin, implemented a policy that became known as Rubinomics, which was defined by an attempt to keep the federal budget balanced as part of a larger effort to control inflation and interest rates—the theory being that this would improve perception of the US economy, which in turn would lead to more investment, local and international, and would allow US economic entities, and thus, US citizens, to flourish.
There's been a fair bit of debate as to whether this theory was proved-out by Ruben's policies.
Yes, the US economy absolutely killed it while Clinton was in office, and yes long-term interest rates on treasuries and bonds dropped, making it less expensive for the government to take on debt when it wanted to borrow money for whatever.
The country's GDP averaged around 4% during that period, inflation maintained a 2.5% rate, which is just north of the 2% rate the Fed prefers, and the US economy saw its longest continuous period of expansion at any point in history.
But, and this is a big but, those variables might have also been tweaked by the so-called "peace dividend" of the late-1990s, which was defined by a post-Cold War drawdown of military activity and thus, military spending around the world during that span of time.
They may also have been influenced by a series of new trade agreements, hands-off monetary policies, and the benefits of new technologies that were finally being exploited for profitable purposes after a long period of investment, like the consumer internet.
So there's a chance that Rubinomics played a role in all that monetary flourishing, but there's also a chance that it was either just one of several influences, or maybe it was mostly just a bystander, or even a downward pressure, on the same, the flourishing primarily or totally the consequence of other variables.
Today, part of the aforementioned drama playing out in the US House of Representatives is being driven by a focus on reducing the federal deficit, the total debt the US owes, which recently hit an all-time record high of something like $33 trillion, which carries a total interest payment, as of 2023, of somewhere between $659 billion and a cold trillion dollars a year, depending on who's numbers and analysis you use.
That interest payment, at that level, has become one of the top expenses, of any expense category, for the government, surpassing things like the cost of all transportation and veteran's benefits payments, and approaching, or surpassing, depending on which figure you use, the cost of Medicare or the Military.
It's primarily, right now at least, the further right members of the House that are demanding substantial cuts to the budget, the Senate mostly keen to keep spending levels where they are, and the majority of House Republicans seem happy to do the same, though Democrats are more likely, on average, to want higher levels of spending nearly across the board, again, right now—who wants what tends to change, at least in the specifics, every decade or so.
And this is such a big issue right now in part because of that ballooning deficit, and in part because there's just a lot to spend on, these days, with military and humanitarian funding for Ukraine and Israel on the table, alongside investments in renewable energy infrastructure, in health care, and in other such—by some estimates at least—foundational elements of the government's various programs and priorities.
Last weekend, reports from within the House indicated that the new house Speaker, Mike Johnson, wants to pass a stopgap funding bill to avoid a government shutdown before the November 17 deadline, and to do so, he wants to break the funding extension into two parts, rather than having Representatives vote on all 12 funding bills all at once.
Each bill would cover different aspects of government funding and would extend spending a little further into the future, keeping spending levels where they are, currently, and providing no new funds to Ukraine or Israel—the former of which is a sticking point for a lot of conservative Representatives, and though this approach is meant to win over enough people from both sides of the aisle to get a stopgap funding bill passed in time to avoid a shutdown, folks across the political spectrum have seemed generally unhappy with it; voting on this could begin as soon as today, and we'll see if people are unhappy in the sense that they didn't get what they want, but they're okay to keep fighting for those things they want while the government stays open, or if they're unhappy in the sense that they'll play chicken with a government shutdown in order to prove their point; for what it's worth, analysts seem pretty mixed on whether this will work or not, at the moment.
This general topic, that of the deficit, is likely to only become a more pressing issue, and thus, a more potent political hot potato, as interest rates, which look likely to stay high for at least another year, increase the debt-load the US government has to tend to, making debt more expensive for the government, and safe investment vehicles like treasuries more lucrative for investors—which can have the knock-on effect of making stocks and similar, riskier investments less appealing, possibly hindering economic investment and development even as the government watches the interest payments balloon as an increasingly major expense on its accounting spreadsheets.