Tuesday, January 24, 2017

On the U.S. Government’s Fiscal Imbalance: Federalism to the Rescue?

At the outset of the Trump administration in the U.S., real economic output was projected to grow at an annual rate of 1.9 percent over the next decade.[1] The new federal president was hoping his proposals of tax cuts and $1 trillion in additional infrastructure spending over a decade would bump up the annual growth to 4 percent. I submit, however, that just over 2 percent more in the growth rate would not alter the stark “budget reality” facing the new president and the American people.

With an accumulated federal debt of roughly $20 trillion, excluding “agency debt” and unfunded liabilities of entitlement programs like Social Security, Medicare, and Medicaid, the prospect of $9.7 trillion more from 2018 to 2027, as the Congressional Budget Office predicted at the time,[2] makes the matter of 1.9% versus 4% almost trivial. To be sure, such a difference in growth-rate is not trivial to people hanging onto, or in need of, a job. “By 2023, the deficit would reach $1 trillion, and in 2027, a projected $1.4 trillion deficit would be equal to 5 percent of the economy, well over the 3 percent that economists view as the danger point.”[3] Lest it be presumed that a danger point would have an effect on the American consciousness—even in its own self-interest—the world was set to gleefully sail past the 2 degree centigrade increase in the Earth’s temperature—another danger point. To be sure, an economic danger-point for a super-power, or modern empire, does not represent such a pending cataclysm.

Yet a major depression is nothing to sneeze at.  The Congressional Budget Office claimed “that the share of debt held by the public was expected to reach 89 percent of gross domestic product in 2027. Such a high level of debt could increase the likelihood of a financial crisis and raise the possibility that investors will become skittish about financing the government’s borrowing.”[4] Skittish strikes me as a euphemism here. The question is rather why the holders of U.S. Treasury bonds already in January, 2017 had not come to the realization that even $20 trillion in debt would never be repaid. The headless horseman is already dead. Is this really a news flash? I submit that matter of economic growth pales in comparison. Even the matter of an additional $9.4 trillion in debt, which does not take into account proposed tax cuts and increased infrastructure (and military!) spending, can be realistically viewed as an interesting fact past the finish line.

The fiscal dynamics of the U.S. federal government had been off track since at least the deficits during President Reagans’ terms in office in the 1980s, with the exception of a surplus in the late 1990s—only half of which went to retiring some of the debt. The imbalance can be reckoned, in other words, as systemic. I submit that it is a symptom of the broader imbalance in American federalism, wherein the federal government has assumed more and more power at the expense of that of the States since the Great Depression of the 1930s. As I see it, the only way out of the fiscal mess at the federal level is to hold federal taxation constant while transferring most of the domestic programs to the state level. That is to say, the states would have control of the programs, including raising the revenue to fund them. To be sure, individual state governments would have the power to decide whether to continue the programs. Even in terms of military spending, the U.S. military could be allowed to shrink (decreasing the amount of federal taxation going to the military), while more reliance is placed on the armies (i.e., militias) of the States. Most of the federal tax revenue would go to paying down the federal debt.

My overall point is that American government had been off-balance for some time before the Trump administration—the problem is systemic. Furthermore, the magnitude of the imbalance and its accumulated ballast warrant a drastic or fundamental realignment. Lest this seem frightening, especially to the vested interests sustaining the status quo, the inherent incrementalism of American politics means that continuing out of balance while debating how the deck chairs are arranged on this Titanic ship is the most likely course.

[1] Alan Rappeport, “Federal Debt Projected to Grow by Nearly $10 Trillion Over Next Decade,” The New York Times, January 24, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.