Taps Coogan – August 6th, 2020

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Back in January 2020, the CBO was forecasting that the interest expense on the national debt would rise to nearly half-a-trillion dollars in fiscal year 2020, overtaking Medicaid to become one of the largest categories of government spending, by far the fastest growing, and on track to overtake military spending by the end of the decade.

That was before Covid. The real deficit for fiscal year 2020 will likely be roughly four to five times larger than the forecast in 2019. Large budget overruns are inevitable in 2021 as well. That additional debt will add to the burden of federal interest payments. Lest you think that lower interest rates will solve the problem, the drop in rates since Covid has reduced the interest cost of 10-year treasury by about two-thirds, not enough to fully offset a four to five fold increase in new borrowing.

In 2019, the Social Security Trust Fund reported that 2019 was likely to be the peak of the ‘Trust Fund’. They forecast that by 2020, the Social Security taxes being paid by current workers, plus the interest earnings on the Treasury debt held by the Social Security ‘Trust Fund’, were likely to be less than the payouts to retirees for the first time since at least 1982. They forecast that the ‘Trust Fund’ would run completely dry by 2029. Medicare’s H1 trust was forecast to run dry by 2026. All that was before Covid struck and 32 million people (20% of the workforce) unexpectedly lost their jobs and stopped paying into the system (practically speaking).

In both 2018 and 2019 we noted that the annual rise in the national debt was roughly the same size as the entire Congressional discretionary budget. In other words, all non-entitlement, non-emergency, and non-interest expense spending from the federal government was debt financed. Every federal agency, the military, the court system, the prison system, and pretty much every government function other than entitlement benefits, servicing the debt and emergencies is now debt financed. This was true prior to Covid. It’s wildly more true now.

Meanwhile, in private sector America… pre and post tax corporate profits have been flat for years and corporate debt has sky-rocketed to the highest levels on record. This was true before Covid and it is doubly true now.

At the heart of the myriad of seemingly intractable economic and social problems plaguing the nation is the simple truth that neither households, nor corporate America, nor the government can finance current expenses without incurring debt at a pace that exceeds economic growth. American economic productivity is simply insufficient to sustain our standard of living and our bourbon-esque levels of government waste. However much time the US had to resolve that fundamental problem, Covid has shortened the timeline to the next handful of years.

Realistically speaking, higher inflation via endless money printing and deficit spending is probably the only politically feasible ‘solvent’ for these problems. It’s a tragedy, because it will make matters much worse.

In a perfect world, one in which we clearly do not live, America must expeditiously tackle its byzantine structural problems. Now is the time for free-market advocates to rally around a hopeful and believable ‘Real Deal’ to restore economic dynamism before we are swallowed whole by the failure of the ‘New Deal’ and the economically illiterate plans currently being floated to replace it.

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