Federal Fiscal Year 2021 ended September 30th with our government facing many challenges. For starters our country may default on its debt within weeks if the “debt ceiling” isn’t lifted. While progressive politicians worry over sea levels rising an inch per decade, these same people ignore a rapidly rising ocean of red ink – deficits over $3 trillion in FY 2020, and almost $3 trillion more this year. The Treasury reported that the deficit for the first 11 months of FY-2021 totaled $2.7 trillion in red ink, despite the fastest GDP growth rate since 1984. Government spending for the 11 months through August rose 4% to a record $6.3 trillion, while federal tax revenues totaled only $3.6 trillion.
After eight months of talking up one $3.5 trillion spending package after another, Congress now faces two imminent realities. They must finalize their 2022 budget, including theoretically funding the deficit, and they must raise the debt ceiling. Failure in either task would result in at least a partial government shutdown. Treasury Secretary Yellen on September 28th did what she said she hoped not to do, telling Congress the Treasury will run out of flexibility to manage US finances without a debt ceiling increase by October 18th.
If lawmakers do not have a 2022 budget in place for the next fiscal year, when might the government start shutting down? Assuming lawmakers don’t have a budget in place by the time October begins, the government is required to reduce agency activities and stop “non-essential” operations. The most recent shutdown lasted 35 days, from December 2018 to January 2019. Interestingly that coincided with a strong market surge (but remember who was President then).
When it comes to “funding the deficit” the populist solution is always to “soak the rich”. However, there aren’t enough American billionaires to finance a single $3.5 trillion budget proposal, much less the full $7 trillion annual operating costs for the federal government. And increased federal taxes would likely only soak the rich once. After year one of fleecing the biggest fat cats, they’ll find legal ways to park their prime assets elsewhere.
There is clearly not enough surplus money in America to fund all of the wishes as well as the real American needs facing DC politicians. Most of us can support obviously necessary infrastructure spending, but that is just a modest portion of what many politicians hope to spend on social change initiatives. One key to funding the most important American needs would be not spending much on wish lists which are beyond our means. Deciding what is vital and spending that money first, while delaying deeper political desires for a welfare state and social change, will be hard for many Democrats to support.
Setting a debt ceiling may be a silly tradition, like a diet club that constantly nibbles on chocolate bars while promising to do better tomorrow. It’s not worth debating this fiction, but it makes great theater. As Jack Hough wrote in Barron’s (“Fiscal Chicken, Anyone? How to End Debt Ceiling Fights,” September 20, 2021), “America has imposed a statutory limit on its debt for just over 100 years and has raised that limit around 100 times. ‘Ceiling’ probably isn’t the best metaphor – debt hat maybe.” Hough reminds us that the federal debt was only 35% of GDP in 2007, but this year will nearly triple that to 101% of GDP! Hough wrote “the debt ceiling amounts to performance art, not fiscal restraint”.
For example, the current Republican “leader” in the Senate, Mitch McConnell, recently said: “Let me be crystal clear about this: Republicans are united in opposition to raising the debt ceiling”. Meanwhile, the Democrats may hope to link a debt ceiling increase to a country changing $3.5 trillion social spending bill under budget rules that would allow it to pass with just 51 Senate votes and thereby avoiding a GOP filibuster. Fortunately, two Senate Democrats come from conservative states and they (along with all Republicans) do not currently support this disastrous leftist spending bill. We’ll see how this commotion works out. Hopefully sanity will prevail.