Every time the United States reaches its debt limit, we read that it’s important to reach an agreement to lift it. The narrative is that the debt ceiling must be raised, or the U.S. economy will suffer a severe contraction. There’s even an episode in the TV series “Designated Survivor” in which the character played by Kiefer Sutherland places lifting the debt ceiling as the priority to get the U.S. economy on track.
The debt ceiling is viewed as an evil and anachronistic burden on growth. It isn’t.
The U.S. Treasury has announced that it will start implementing “extraordinary measures” to fulfill its legal obligations. These extraordinary measures would give the government the possibility of extending the deadline until early June. Analysts and commentators say that Congress faces two options: either raise the debt ceiling or suspend it. Really? No one seems to think of the urgent need to cut spending.
Blaming the deficit on tax cuts makes no mathematical sense and assumes a confiscatory and extractive view of the economy: that the private sector must always provide rising revenues to a government that always spends more.
It’s interesting to see how the debate has shifted to tax cuts, which didn’t reduce receipts, instead of spending that never generates the announced fiscal multiplier or reduces the deficit.
Those who say that the deficit would have been solved by eliminating the last tax cuts have a problem with mathematics. There’s no way that any form of revenue measure could have covered a $1.6 trillion increase in spending. Even if you believe in the idea that the government will always collect higher receipts from massive tax increases, which is false, only one year of mild recession would balloon the deficit and debt again.
The solution to the U.S. budget deficit isn’t more taxes. Even in the most optimistic receipt scenario, there’s no tax hike program that would even start to address the structural deficit, estimated at $1 trillion a year. Expenses are annual and consolidated, but receipts are cyclical and depend on the health of the economy. Therefore, revenue measures never reduce debt.
When governments say they'll only tax the rich, they’re treating citizens as if they’re children. There’s simply no way in which the government would collect every year between a half-trillion to a trillion more only from a handful of rich people whose wealth is mostly in shares.
Deficits are always a spending problem. However, none of the parties want to address the ballooning levels of U.S. debt by reducing expenditures. Therefore, they always agree on increasing public debt, which makes the economy weaker.
The solution for many is printing money and raising taxes. More taxes hurt the recovery, damage the job improvement potential, and reduce investment in the economy. More taxes mean less growth and no deficit improvement. More taxes and more printing mean that—added to those negatives—real wages decline, deposit savings evaporate, and the inflationary tax destroys the middle class.
Those who say deficits are reserves that the government creates for the private sector and that deficit spending is good for growth because a monetarily sovereign country such as the United States can spend and borrow as it pleases are simply lying. If deficit spending were a source of reserves that benefited the private sector, the United States’ productivity, growth, investment, and consumption in real terms would be off the charts, not sluggish, and real wages would be rising, not falling. The UK and Japan have proven that pushing the limit on debt, taxes, and spending only brings stagnation and declining real wages.
Printing money and raising taxes aren’t social policies. They are profoundly anti-social, as they destroy the middle class and make the economy weaker. Raising the debt ceiling is also extremely negative for the middle class because it means more taxes, lower purchasing power of the currency, and stagnation in the future.
There’s plenty of room for efficiency in the U.S. budget. However, if there’s an incentive to pass the imbalances to the next generation, governments and voters will agree to do it. There will be a point where the United States’ ability to disguise its massive imbalances using the currency and debt markets will evaporate as confidence in the economy and the government diminishes. If uncontrolled spending isn’t addressed, that moment may come sooner than many think.
