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If McCarthy’s Concessions Enable the Next Debt Crisis—Bring It On!

Yes, 15 votes and the slings and arrows of MSM opprobrium were well worth it. That’s because the GOP’s anti-McCarthy insurrection obtained concessions which just might slow America’s headlong rush to fiscal armageddon. And just in the nick of time!

We are referring, of course, to the Speaker elect’s promise that there will be no more debt ceiling increases without off-setting spending cuts; and that in the event of a double-cross a single Member of the House may table a motion to vacate the Speaker’s chair.

Talk about a sword-of-Damocles!

Never has one been hung over a more deserving target with such meritorious exactitude.

Indeed, the proof that Congress has finally done something meaningful about the nation’s appalling fiscal process was tipped by the New York Times, which headlined the matter on Sunday as “McCarthy’s Deal For Gavel Raises Fears on Debt Limit”:

Economists, Wall Street and political observers are warning that the concessions he made to fiscal conservatives could make it very difficult for Mr. McCarthy to muster the votes to raise the debt limit.….That could prevent Congress for doing the basic tasks of keeping the government open, paying the country’s bills and avoiding default on trillions of dollars of debt.

Oh, for Pete’s sake!

As we amplify below, there is zero risk of a default in the absence of a debt ceiling increase, and, more importantly, Congress has NOT been doing the basic tasks of fiscal governance for decades.

It never passes a budget; it runs the government on CR’s and Omnibus Appropriations Abominations; and has put upwards of 90% of the budget on automatic pilot via entitlements, mandatory spending measures, the rapidly growing public debt service payments and the herd of sacred cows which feast in the green pastures on the Pentagon side of the Potomac.

The bottom line, therefore, has been evident for decades to anyone paying attention: Namely, that the Federal budget has become a doomsday machine that cranks forward on its own momentum with virtually no confirming action by the public’s elected Representatives and Senators—save for occasional pro forma passage of an 11th hour 4,400 page Omnibus appropriations bill that no one has read.

For want of doubt, here’s the long-term growth of government transfer payment entitlements benefits since 1954. These are self-evidently the heart of the nation’s fiscal doomsday machine.

Dollar outlays (yellow line) have grown by a staggering 290 times—from $16 billion in 1954 to $4.64 trillion in 2021.

And even when you make allowance for inflation and economic growth, the story is no less relentless. Back in the heyday of postwar prosperity (1954), America was booming and middle class living standards were rising rapidly. Yet these transfer payment entitlements cost just 4.0% of GDP (purple line).

Needless to say, that’s a tiny fraction of today’s entitlement spending at 20.0% of GDP. And this staggering fiscal burden sits atop a national economy that is barely creeping forward on a trend basis–even as virtually every single dime of these expenditures have been authorized in perpetuity.

Government Transfer Payments—Level and % Of GDP, 1954-2021

Likewise, the national defense budget has doubled in inflation-adjusted terms since 1960, when President Eisenhower presciently warned about the undue power of the nascent military-industrial complex.

Since then, the mighty Soviet Union has slithered off the pages of history. So too, the Red Ponzi of China would last 12 months at most if it were to lose its $3.0 trillion per year of exports to the U.S. and Europe as a result of foolishly starting a war against the hand that feeds its debt and speculation entombed economy.

That is to say, the true threats to America’s national security today are a mere fraction of those posed by the nuclear-armed Soviet Union at the peak of the Cold War. That the current defense budget is nevertheless nearly two times larger in real terms is due to the fact that the constitutional processes for managing the nation’s fiscal affairs have essentially become vestigial.

What we have instead is history’s greatest log-rolling machine. This year, for example, the domestic spenders gave the military hawks in both parties the obscene sum of $858 billion for national defense in return for $773 billion of domestic pork. The combination amounted to $101 billion more than last year’s already capacious budgets.

Real Defense Spending Index, 1961 to 2021

Now, on top of the Welfare State and Warfare State, comes the explosion of mandatory interest payments. Like so much else, the Fed’s previous money printing madness resulted in rampant borrowing by Congress, even as artificially low interest rates drastically suppressed the annual interest bill.

Consequently, Congress got the wrong message—the delusion that there is essentially a free fiscal lunch. Just since the year 2000 the public debt soared from $5.7 trillion to $30.9 trillion at present, a 450% gain. At the same time, however, interest expense grew by barely 80% during the same 22-year period.

That bit of arithmetical magic in which the debt grew nearly six times faster than interest expense happened because the weighted average cost of net debt service dropped from 4.0% at the turn of the century to just 1.3%. Then again, exploding debt coupled with collapsing debt service cost is surely one of the great financial parlor tricks of history, and one that is not only unsustainable, but certain to go into reverse during the years ahead.

Federal Debt Service Outlays (Yellow) Versus Federal Debt (Red), 2000-2022

In fact, CBO’s latest Federal spending projections tell you all you need to know. Even with its relatively moderate forecasted rise in treasury debt yields, outlays for interest expense are projected to rise by 200% over the next decade. That’s triple the projected growth of health and social security entitlements and 7X the baseline gain in defense and non-defense discretionary appropriations.

Needless to say, the impending massive explosion of mandatory debt service has not been in the playbook of either the Washington pols or the Wall Street speculators. It was just assumed that wildly growing public debt would never present a carry cost problem.

No longer. Bond speculators finally panicked last year as the Fed shutdown its printing presses and actually embarked upon a $95 billion per month sell-down (QT) of what had been its towering $9 trillion balance sheet.

Accordingly, the Vanguard Total Bond Index lost 13.7% during 2022. That amounts to -20.3% after inflation, making it the worst annual bond return in the past 97 years.

So, yes, America is going to fiscal hell in a hand-basket because there has been no opposition party worthy of the name in Washington. And Beltway lifers like the Senate Minority Leader Mitch McConnell and the new House Speaker, who have hijacked the GOP and stripped it of its old-time fiscal religion, are the primary reason why.

And when we say beltway lifers, we do not exaggerate. McConnell became a Senate staffer in 1962 and has been on the public payroll ever since. And McCarthy joined the staff of Congressman Bill Thomas right out of college in 1988 and thereafter collected paychecks from state and Federal governments without missing a beat.

That’s a combined 94 years on the public teat. That’s a century of house-training in how to keep the monster going and their offices and powers perpetuated come hell or high water.

And that’s also why the courageous 20 dissidents in the US House finally had to break the glass. The three great concessions they wrested from McCarthy—no debt ceilings without cuts, no Omnibus Appropriations bills and the right of any Member to demand a vote of no confidence in the Speaker—amounted to nothing less than liberation of the GOP from the iron grip of the Swamp Creatures who commandeered it decades ago.

Indeed, when it comes to the gut issues of sustainable Main Street prosperity, hamstringing Leviathan on the Potomac, throttling the public debt and safeguarding private enterprise and liberty from the encroachments of the state, there’s nothing more crucial and fundamental than what the GOP has now positioned itself to pursue: Namely, to fight the rise of the public debt ceiling to the last pint of political blood if needs be.

Under the modern Welfare and Warfare States, that’s the only fiscal tool left—clumsy, flimsy, and inconvenient as it might be—to constrain the relentless growth of spending, borrowing and the scope of the state.

For all practical purposes, the Congressional power of the purse was abdicated long ago when the aforementioned 90% of annual outlays were put on automatic pilot to fund entitlements, interest on the public debt, other so-called “mandatory” spending, and the massive military-industrial-intelligence complex.

Accordingly, in the ordinary course there are no meaningful fiscal votes on the floor of the House and the Senate. Entitlements and mandatories keep on spending whether Congress even convenes; and the now $1.1 trillion national security budget (including veterans and foreign operations) reflects a political logrolling armada so powerful it vaporizes all remnants of opposition in its path.

Indeed, fiscal governance via annual appropriations approved by a majority of both houses and signed by the president no longer has even a faint heartbeat.

Proof of the pudding lies in the explosion of the public debt. Notwithstanding some 70 skirmishes on raising the debt ceiling since 1970, the public debt still has increased 80-fold since then (from $380 billion to $30.9 trillion) and has risen from a low of 30% of GDP (1980) to 122% of GDP at present.

Yet remove this last barrier to open-ended spend-and-borrow—that is, the public debt ceiling—and the parabolic rise of these figures during the last two decades will go totally vertical.

Total Public Debt and Share of GDP, 1970 to 2021

As usual, the mainstream press is hyperventilating about the purported nightmare of national default if the debt ceiling can’t be easily raised owing to McCarthy’s weekend concessions. The nation’s most celebrated banker, JPMorgan Chase & Co. CEO Jamie Dimon, even recently claimed that raising the debt ceiling is a profound “moral issue” and that, once done, it should be permanently abolished.

We say, au contraire.

In fact, the debt ceiling is the only mechanism that stands between the relentless borrow-and-spend appetites of the Imperial City and eventual national bankruptcy.

Therefore, when Washington’s latest can-kicking exercise expires a few months from now, its use by the re-awakened majority in the House as a giant political hammer to beat the bipartisan spending brigades into fiscal submission would actually be heroic, not irresponsible.

Moreover, failure to raise the debt ceiling absolutely does not mean default. In the most recent month (November 2022), Uncle Sam took in about $252 billion of receipts, or 5.4 times the $47 billion monthly cost of net debt service. The great beltway lie is that the president is powerless to make these interest payments from available receipts.

In fact, rather than prioritizing other spending and allocating the remaining revenues to those priorities, it’s claimed the president must sit on his hands, making default unavoidable and instantaneous.

That’s a damn lie!

No less a scholar than Harvard Law School’s Laurence Tribe, the dean of liberal constitutional experts, has forthrightly said so—among many others. Several weeks prior to the great August 2011 debt crisis professor Tribe declared as follows:

All of this brings me to my second point: what is the government to do if, come August 3, it does not have enough money to make all of the expenditures that Congress has required by law? The answer, I think, is that it must prioritize expenditures: some payments simply have to be postponed until the Treasury has enough money to make them.

There you have it. Simple as pie. And an action—prioritizing debt service and say social security and veterans benefits—that we would dare say the Roberts Court would bless in a heartbeat, should some lobby group be foolish enough to bring suit against the President’s prioritizing of available receipts.

It’s hard to be more unequivocal than that—a truth that your editor well understands because we confronted exactly that question more than once during Ronald Reagan’s short-lived rebuke to Leviathan. As a later budget director and then Member of Congress, Mick Mulvaney, noted in October 2013 on the occasional of another feigned default:

We’re not going to default; there is no default. There’s an [Office of Management and Budget] directive from the 1980s, the last time we got fairly close to not raising the debt ceiling, that clearly lays out the process by which the Treasury secretary prioritizes interest payments.

The Imperial City fears these words more than Dracula feared a glittering crucifix. Yet what hangs in the balance is whether even a semblance of fiscal sanity can be preserved based on this primal and only remaining source of fiscal leverage—a heretofore remote possibility that last weekend’s events actually now makes thinkable.

To be sure, McConnell and McCarthy were not alone in throwing overboard the only tool of fiscal restraint left in the minority’s arsenal. A while back, after the Tea Party surge in 2010, former Speaker of the House John Boehner repeatedly betrayed his swollen base of anti-deficit GOP back-benchers, eschewing the debt ceiling hammer in favor of “bipartisan cooperation.”

The latter can otherwise best be described as capitulation to the nation’s fiscal doomsday machine. Back then, the House GOP majority had a huge lever in the “debt ceiling” that time and again it surrendered with hardly a fight.

The fact is, had the House GOP leadership held fast and refused to raise the debt ceiling at $14.3 trillion way back in August 2011, and especially on the heels of its Tea Party election sweep, it would have forced the unthinkable on the Imperial City. And that would have made all the difference—including prevention of a more than doubling of the national debt which has occurred during the decade since.

That is to say, the Obama White House would have been required to prioritize and allocate spending down to the level of incoming revenue.

Such an unheard-of exercise of temporarily living within its means would have broken the deadly shibboleth that every dime of Uncle Sam’s bills must be paid once incurred. Instead, payments to military vendors, local governments, student loan recipients, highway contractors, and checks to federal employees and beneficiaries could have been deferred or cut back.

The resulting wailing and gnashing of teeth among the legions at the federal trough would have been a wonder of political history.

In that fraught context, a determined legislative bloc posed on behalf of the taxpayers and producers of Flyover America could have written their own ticket in terms of the entitlement reforms and spending cutbacks that would be necessary to lift the fiscal siege.

The back of the federal doomsday machine—a budget in which the aforementioned 90% of outlays stem from entitlements, debt service, other automatic or contractual spending, and the military-industrial-intelligence complex— would have been broken.

Needless to say, Boehner and then Paul Ryan after him and now McCarthy, too, all took the route of accommodation and surrender in the name of “bipartisan governance.”

But the latter is no virtue of high-minded statesmanship; it’s a pernicious invention of the Beltway’s permanent ruling class designed to keep the pork and entitlements flowing, the national debt growing and the Federal Reserve’s printing presses glowing red hot.

So, here we are once again, but now at a cross-roads were there is finally a choice.

If the House GOP would simply block an increase in the debt limit, Biden and Yellen would be forced to allocate available revenues to interest payments, Social Security, and other priority functions, while positioning everything else for cutbacks or delays.

In so doing, they could even quote the above conclusion from America’s most famous liberal constitutional expert.

Based on current estimates for fiscal 2023, total monthly outlays would average $503 billion, and monthly receipts would average about $394 billion. That means the implied deficit of $1.3 trillion for the year would amount to $109 billion for the typical month.

From the available monthly revenue total ($394 billion), $47 billion, $105 billion, and $12 billion, respectively, could be set aside to fully fund net interest payments, Social Security benefits and veterans’ compensation.

That would leave $339 billion of monthly outlays to be funded from $230 billion of remaining receipts after these three high priority set-asides.

Needless to say, the implied 32% cutback in payments to all other beneficiaries, employees and government contractors and vendors would crystalize fiscal attention in the Imperial City in a manner befitting the crisis created by decades of drift and kicking the can.

For want of doubt, here are some examples of currently budgeted monthly spending and the impact of the implied 32% cutback:

  • Defense contractors: $43 billion less $14 billion
  • Medicare vendors: $85 billion less $27 billion
  • Education aids to schools and students: $22 billion less $7 billion
  • Highway and transit contractors: $6 billion less $2 billion
  • Federal civil service pensioners: $8 billion less $2.5 billion
  • Foreign aid recipients: $7 billion less $2.2 billion
  • Farm subsidy recipients: $3 billion less $1 billion

In any event, such allocated cutbacks wouldn’t take long to work their political magic. Starving the beasts for only a matter of a few days or weeks might actually force Washington to finally come to grips with America’s fiscal doomsday machine.

Fortunately, despite leadership which has 94 years on the public teat, the Washington GOP finally has a chance to break the fiscal stranglehold of the bipartisan duopoly.

Let us hope that the Valiant Twenty and many more are up to the task. They now have the tools.

Reprinted with permission from David Stockman’s Contra Corner.