Wednesday, September 26, 2018

Government Debt: More Costly than Defense


Never bark at the Big Dog. The Big Dog is always right.

Back in January, I explained that Republicans in Congress were fools to believe that they could grow defense spending without substantial entitlement reforms:
It is simply not possible to grow defense spending without substantial, cost-curbing reforms to the rest of the federal budget. Over the past half century the federal government has fundamentally changed its role in the US economy: in 1962 the federal budget gave $2 to the Pentagon for every $1 it spent on welfare-state entitlements; in 2017 defense spending amounted to 22 cents for every $1 to entitlements. The Pentagon’s share of the federal budget has fallen from 49 percent under President Kennedy to just below 15 percent today.
I also noted that back in June 2017, Representative Cheney (R-WY) and her dad, former Vice President Dick Cheney, wrote:
Providing for the defense of America is the most sacred constitutional obligation of the U.S. Congress. If Congress fails in this, no balanced budget, no health-care reform, no tax reform, no entitlement reform will matter. If lawmakers fail to provide the resources necessary for the defense of the nation, nothing else they do will matter.
Since then, Congress has increased defense spending substantially, closing in on an all-time-high in Pentagon appropriations. So now that Representative Cheney and other strong supporters of our armed forces have gotten what they wanted, can we now turn attention to entitlements?

The need for entitlement reform is not just a matter of fiscal conservatism. It is, in fact, also a national security issue. Or, as I pointed out in another article back in January, House Speaker Paul Ryan (R-WI) was dead wrong thinking that
we can grow defense spending without entitlement reform. When I made that point last week, the Chinese government proved me right: with a mere whisper about reconsidering their investments in US Treasury bonds, Beijing rattled Wall Street and — if ever so briefly — raised our interest rates. In a financial heartbeat, China demonstrated that our government debt, built over half a century of excessive welfare-state spending, is a major threat to our national security. 
The financial tremors were caused by a recommendation from senior Chinese government officials that the country change its investment policies toward U.S. Treasuries. I noted that the Chinese were simply flexing their muscles:
From a US national-security viewpoint it was perfectly timed. It came just as Congressional budget talks kicked into high gear and Republicans raised demands for more defense spending. The message from Beijing was that if they wanted to, they could stop our efforts at increasing defense spending, and even disrupt our ability to maintain current levels of defense spending.
With $1 trillion in U.S. Treasuries, the Chinese could indeed do some real harm if they wanted to. My numbers from January:
As of 2017, the interest cost on the federal debt was $457 billion. This equals an interest rate of 2.26 percent on the entire federal debt. If the interest had been 0.3 percentage points higher, the same level as it was in 2013, interest payments would have exceeded $518 billion. That would have topped federal spending on income security ($514 billion). At an average interest rate of 2.75 percent, the total interest cost would have been $556 billion, a smidgen more than the $546-billion budget for the Department of Health and Human Services. With a 3 percent rate, the US Treasury would have had to spend $607 billion on interest — $4 billion more than the entire Department of Defense budget.
If the Chinese chose to dump their Treasuries onto the global debt market, it would cause interest rates to rise much higher than three percent. An interest shock wave would have disruptive effects on a Congress that has not only ignored entitlement spending, but actively worked to remove all stops to spending growth. Having thrown out the sequester, dismantled the IPAB panel in Medicare and "suspended" the debt ceiling, our beloved senators and representatives no longer have anything between them and a virtual Autobahn of spending growth.

It is hardly surprising, then, to see a CNBC report three days ago that made exactly the same point that I warned about already back in January: 
The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs. The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive. With less money coming in and more going toward interest, political leaders will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions.
Dear GOP, what is it going to be? Are you going to systematically address runaway entitlements, or are you going to continue to outspend the world's drunken sailors?

We have reasons to fear that the Republican majority on Capitol Hill leans in the drunken-sailor direction. There is growing support among their ranks for a paid-leave proposal from Senator Rubio (R-FL). A general income-security program - the technical term for paid leave - is one of the three missing pieces in the American welfare state, before it becomes a full-blown European behemoth (the other two are universal child care and single-payer health care).

As if paid leave were not enough, the Republican-led Congress has already opened the door for single-payer health care. That would not only destroy the world's best health care system (bruised as it is from Obamacare) but it would also require nightmarish tax increases.

Perhaps emerging signs of a new global debt crisis might motivate the GOP to rethink their spending habits. If not, the United States will be pulled down into a Greek-style fiscal crisis the like of which we have not seen since at least the Great Depression. When that happens, everything the Republicans in Congress have worked for, especially in terms of more defense spending, will be squandered. 

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