This article was published by The McAlvany Intelligence Advisor on Wednesday, October 17, 2018:
There was a moment in the 1981 film Chariots of Fire when Eric Liddell was bumped onto the grassy infield during a quarter mile race. Once he recovered, he was 30 yards behind the pack of runners. Let Simon Burnton of The Guardian tell the story:
In Stoke on Trent in July 1923, in a race run over a quarter of a mile, England saw just how true this was. At the first bend he tripped over the legs of the English runner JJ Gillies, falling off the track. By the time he was back on his feet, the last of the other runners was 30 yards away and moving fast, but Liddell attacked them with such pace that he finally overtook Gillies three yards from the line to win before collapsing, spent, to the ground.
“The circumstances in which Liddell won the event made it a performance bordering on the miraculous,” wrote The Scotsman. “Veterans, whose memories take them back 35 years, and in some cases even longer, in the history of athletics, were unanimous in the opinion that Liddell’s win in the quarter-mile was the greatest ever track performance that they had ever seen.”
The U.S. economy, as astonishing as its performance is, is no Eric Liddell. JJ Gillies [the federal government] is just too far ahead.
On Monday, the White House officially announced the final numbers for Fiscal Year 2018, which ended September 30. They are ugly: the gap between revenues and spending widened by $779 billion over the previous year, a jump of $113 billion (or 17%) despite increased revenues. This is the third consecutive year of rising deficits, with no apparent end in sight.
The White House blamed the usual suspects: the rising costs of “entitlement” benefits (i.e., Social Security, Medicare, Medicaid, and others), and increasing interest costs to service the rising national debt.
Those interest costs increased by one quarter this year over last, from $263 billion in 2017 to $325 billion in 2018. By 2020, the Congressional Budget Office (CBO) estimates that interest costs will increase by another 50 percent, to nearly $500 billion.
There is no more talk of how the expanding economy will throw off revenues sufficient to start shrinking the national debt. Now, according to Office of Management and Budget (OMB) Director Mick Mulvaney, the best that can be hoped for is some eventual shrinking of the government’s annual deficits:
America’s booming economy will create increased government revenues. But this fiscal picture is a blunt warning to Congress of the dire consequences of irresponsible and unnecessary spending.
Going forward, President Trump and this Administration will continue to work with Congress to make the difficult choices needed to bring fiscal restraint, which, when matched with increasing revenue, will reduce our deficit. [Emphasis added]
The CBO begs to differ. In April, the nonpartisan group projected a $1 trillion deficit in fiscal year 2020, two years from now, and nearly doubling to $1.9 trillion by 2028. This is after taking into account the robustly growing economy under Trump.
As far as that “irresponsible and unnecessary spending” that Mulvaney referred to, Congress’s hands are largely tied thanks to promises, commitments, and programs previous Congresses have enacted. Of the $4.2 trillion the government spent last year, six percent went to interest and 65 percent went to mandatory entitlement programs, leaving less than 30 percent to pay for everything else, i.e., military, education, etc.
And there’s precious little incentive even to cut any of those “discretionary” programs for at least two reasons: one, it’s an election year; and two, the real crisis isn’t likely to hit before the next ten years, according to the Congressional Budget Office:
If nothing is done sooner, the crisis point could come in about another decade, when interest costs as a share of GDP (gross domestic product), federal revenue, and outlays hit their highest levels in modern times, and the Medicare and Social Security trust funds begin to reach their breaking points.
Poor Mulvaney. He is in the same boat as was David Stockman, President Ronald Reagan’s OMB Director. Stockman proposed the strategy later called Reaganomics: cut tax rates and the growing economy will generate more, not less, tax revenues. But Stockman quit when he was unable to achieve the rest of the strategy: persuading big-spending Republicans to cut government spending to offset the initially reduced tax revenues. In his book, The Triumph of Politics: Why the Reagan Revolution Failed, Stockman criticized the failure of those Republicans to cut government spending in order to offset the loss of tax revenues under Reaganomics. This resulted in the national debt nearly doubling during his brief four-and-a-half-year tenure as OMB Director.
If the past is prologue, then OMB Director Mulvaney is facing the same challenge: nowhere to cut and no interest by Republicans to do so even if there were places to cut sufficient to offset the coming rising deficits. With the national debt pushing $22 trillion, taxpayers could see the debt skyrocket to $30 trillion, $40 trillion, or even higher before that “crisis point” is reached.
Speculation abounds as to what happens next. One school of forecasting predicts that bondholders will no longer be interested in buying U.S. government debt for fear of default. At that point, the Federal Reserve will “reluctantly” step into the breach and starting buying the increasingly worthless paper from the U.S. Treasury, setting off the ultimate solution to the national debt crisis: default through inflation.
It will be a moment in time that will be remembered much like that of Liddell’s accomplishment – but for vastly different reasons.
The Guardian.com: 50 stunning Olympic moments: No8 Eric Liddell’s 400 metres win, 1924
U.S. Debt Clock: $21.6 trillion, and counting
Pie chart: where does government spending go?