Postscript on budget and debt


As I write, it looks like we have a deal on financing the debt ceiling and a framework for the nation’s budget, that is unless some grandstanders decide to muck up the agreement. As expected, there will be some winners and some losers, but that’s the way it works in a democracy. While this article isn’t about winners and losers, at this moment it appears there are enough votes in the House and the Senate to move this agreement to the president’s desk for signature.

The 200-plus CEOs of the Business Roundtable have express approval of the deal. The U.S. Chamber of Commerce has voiced approval. Wall Street seems to like it if only because it forestalls a default which would probably lead to a recession and roil financial markets around the world.

Joshua Bolten, the CEO of the Business Roundtable said, “In addition to raising the debt ceiling, this agreement takes steps toward putting the U.S. on a more sustainable fiscal trajectory. This deal also makes a down payment on permitting reform, and helps to clear the path for new energy infrastructure projects.”

All that being said, the process for taking care of the nation’s debt obligations have gotten fouled up in recent years. Allow me the following analogy as a simple way to make this point. Forget the nation’s finances, let’s think of home finances.

I’m set to pay off accounts payable to our credit cards, our home mortgage and our car payments. But before I write the checks, I say to my wife, “I’m not going to pay these debts unless you promise to stop spending so much on groceries, clothes, medical appointments and especially toys for the dogs.”

“Whoa,” she says to me. “What? Are you kidding me? Look, if you don’t make our mortgage payment or our car loan payment or at least the interest we owe on the credit cards, our credit rating will be in the tank and our financial future will be in the toilet. Listen, here’s the deal, you write the checks to preserve our financial credibility and credit rating and then I’ll sit down with you to talk about how much we both are spending, and what our priorities are.”

In other words, paying what we owe is job number one to maintain the full faith and credit standing of the United States. No one loves a deadbeat. It’s Congress’s job to take care of those obligations.

Passing a budget comes next. That process usually starts with the President sending Congress a pro forma budget, his take on what the spending priorities of the country ought to be. Congress agrees or disagrees with the President’s projections and assumptions and the deliberations begin. Congress has the constitutional authority to make appropriations that regulate the expenditures of money by the government. At the end of the day, Congress and the President have to find enough common ground to allow the passage of a national budget.

Holding the nation’s good credit and financial reputation hostage to the constitutional appropriations process is a relatively new and disturbing thing. Wikipedia explains it this way. “The House of Representatives in January of 2011, demanded that President Obama negotiate over deficit reduction in exchange for an increase in the debt ceiling, the statutory maximum amount of money the Treasury is allowed to borrow. The debt ceiling had routinely been raised in the past without partisan debate or additional terms or conditions.”

But let me move on to a tale of two Nobel economists, adding an interesting twist to this whole thing about servicing the nation’s debt. Paul Krugman, New York Times columnist and Nobel Laureate, wrote that the US doesn’t actually have to pay off its $31 trillion mountain of debt, hitting back at the idea that government finances can be compared to household balance sheets.

Business Insider wrote that Krugman went on to say that “though individual borrowers are expected to pay off debts, the same isn’t true for governments, (and) that’s because unlike people, governments don’t die, and they gain more revenue with each passing generation. Governments, then, must service their debts – pay interest and repay principal when bonds come due – but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue.”

Though the debt-to-GDP ratio hovered around 97% in 2022, interest payments on that debt is only around $395 billion, according to the Office of Management and Budget, or around 1% of last year’s GDP.

I thought I’d fact check this tantalizing notion by checking in with another Nobel Laureate, Chris Sims, my brother, also a Princeton-based Nobel Laureate in economics. His take?

“Krugman is right… (he said) But some people (not Krugman) suggest that this means government debt is “free,” so we might as well let it grow without bounds. As Krugman points out, we do have to service the debt —- pay interest on it —- and also… our debt to GDP ratio, though large, is not an emergency requiring a drastic adjustment of budget policy. On the other hand, it implies that debt finance is not “free”, and that when the debt to GDP ratio is growing, some tightening of fiscal policy is needed. This doesn’t have to be all, or even mostly, adjustment of spending. It is spending minus taxation that requires adjustment.”

It’s an interesting proposition that national debts might just be infinite entities or lifeforms.

Bill Sims is a Hillsboro resident, retired president of the Denver Council on Foreign Relations, an author and runs a small farm in Berrysville with his wife. He is a former educator, executive and foundation president.

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