The U.S. Federal Debt Hits $40 Trillion

The U.S. GNP in 2025 had been $30.77 trillion (nominal). Even though that represents a real growth rate of 2.1 percent, according to the U.S. Bureau of Economic Analysis, the total dollar-amount of economic output of the bloc was almost $10 trillion lower than the total federal debt, and this does not count the respective debts of the member-states. In fiscal year 2025, the net-interest paid on the federal debt amounted to $970 billion, which translates into nearly 20 percent of the federal government’s revenue and exceeded the $917 billion in defense spending. The milestone of $40 trillion in federal debt, reached on August 19, 2026, can thus be put into perspective at the federal level of government. It is no wonder that Europeans had been raising concerns regarding the issuance of federal debt by which the E.U. could aid Ukraine militarily. Things can get out of hand, fiscally, at a federal level.

The Reagan, Bush, and Trump tax cuts, along with the increases in both social and military spending over those decades, can be cited as having exasperated the federal debt. The words of Kush Desai, a White House spokesman, regarding the approach of the second Trump administration in “slashing waste, fraud, and abuse in federal spending while accelerating economic growth to get America’s debt-to-GDP ratio trending in the right direction” can be regarded as insufficient, given the huge size of the federal debt.[1] By insufficient, I mean to suggest that an orientation to waste and abuse in the context of extended tax-cuts and an increasing defense budget does not take the amount of debt seriously enough. Even the orientation to the debt-to-GDP ratio leaves out the intragovernmental implications of the debt in terms of spending on interest, for example. Furthermore, GDP is only loosely related to whether any of the debt might get paid off. The electorates would have to elect representatives who in turn would be inclined to spend more tax revenue, even probably increasing taxation, to retire some of the debt. Democracy itself may be inherently oriented to the mentality of spend now by debt and pay (off the debt) later, given the instinct of instant gratification. Electing representatives who are oriented instead to tax cuts and cutting wasteful government spending can be viewed as a manifestation of that very instinct because the orientation can function as a subterfuge. In short, economic output does not translate directly into paying off a public debt; electorates do, and more than the changes in their wages and salaries, it is their political judgment (and values, especially in terms of responsibility itself) that is decisive on whether an extant debt gets paid off. To be sure, the relation of the total amount of public debt to a year’s total economic output is an indication of how long (and how much) it would take for taxpayers to be able to pay off the debt, given their taxable incomes, but the sheer enormity of amount of the accumulated debt and its relationship to the total amount of the government’s annual budget are crucial indicators of whether fiscal policy has become too unbalanced to be tolerated, politically.

This is not to say that being $40 trillion in federal debt does not matter in macroeconomic terms (i.e., to the American economy). Experts were already saying in 2026 that the U.S. debt was “already affecting Americans’ pocketbooks by raising borrowing costs for things like mortgages and cars, lowering wages from businesses that [had] less money available to invest, and creating more expensive goods and services.”[2] Accordingly, Michael Peterson, CEO of the Peter G. Peterson Foundation, a think tank oriented to fiscal policy, said, “If we want to improve our living standards, today and for the next generation, now is the time for lawmakers to put our nation on a more affordable and sustainable path.”[3] To be sure, besides being focused on the nation, and thus not looking at its federal system (i.e., how much public debt was being held by the member-states), Peterson was also discounting the financial drag that is involved in using (and even increasing) federal revenue to pay off debt rather than spend tax dollars in ways that would boost economic growth.

I submit that the extent of the imbalance between the revenues and expenses of the U.S. federal government is itself worthy of attention, for such a large debt means that even the Keynesian policy of having deficits during recessions that would be paid off during periods of economic growth—again, as if GDP were decisive—has been exploited such that deficits have become the norm whether in times of boom or bust. The human instinct for instant gratification can and should be effectively countered both in the psyche and in legislative bodies by the use of reason, unless of course Plato’s theory of a just republic is utterly unrealistic. Reasoning, whether at the ballot box or in a legislature, that is oriented to government (and the very republic!) as a going concern rather than as effectively bankrupt can and ethically should act as a restraint on the passions to spend without having to immediately pay. Even if the majority of voters in an electorate are just fine with government spending without sufficient revenue (taxation), elected representatives can legitimately push back without being accused of double-crossing or betraying their constituents. This is one reason why U.S. senators have a six-year term; even the Electoral College, as it was intended in the Convention, was to be a device by which a federal president could be elected for the good of the country rather than from the momentary passions of the citizens of a member-state. The U.S. House was intentionally designed to be more reflective of an electorate’s momentary passions, but the devise of representation itself mitigates this reflection to some extent, even in spite of the term of office being only two years. The size of the federal debt may indicate that such safeguards within the complex architecture of the U.S. Government have not been efficacious. In other words, the federal government itself may have gotten severely out of balance in terms of electoral politics and governance.

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1. Fatima Hussein, “The US National Debt Now Stands at $40 Trillion,” APnews.com, August 20, 2026.
2. Ibid.
3. Ibid.

The U.S. Government’s Debt: Federalism Unbalanced

On May 5, 2025, the debt of the U.S. Government stood at $36.21 trillion, $28.9 trillion being held by the public and $7.31 trillion being intragovernmental. That total is $1.66 trillion more than the total federal public debt on May 5, 2024. Projected interest payments of $952 billion in fiscal year 2025 would be 8 percent higher than the interest payments made in 2024. By comparison, the U.S. budget for national defense in fiscal year 2025 totaled $892.6 billion. Whether going to investors of treasury bonds or defense contractors and other corporations, the combined $1.85 trillion for fiscal 2025 represents a transfer payment to the wealthy from American taxpayers rich, middle-class, and poor. Meanwhile, Republican lawmakers in the U.S. House of Representatives passed a bill in May, 2025 that would subject Medicaid and food assistance to significantly less money and subject the States with having to spend more on the administration of those programs. Principles of political ideology reside just below the surface. My task here is to flush them out and relate them to each other, rather than to impose my own ideology.

Fresh out of the Trump Administration, billionaire Elon Musk called the tax and spending bill a “disgusting abomination.”[1] Presumably this condemnation has to do with the “multi-trillion tax breaks” and the raising of the debt ceiling an additional $4 trillion, but the CEO of SpaceX would hardly object to the increase for defense.[2] Musk wrote that the “outrageous, pork-filled” bill would “massively increase the already gigantic budget deficit to $2.5 trillion” in spite of the cuts to healthcare and food for the poor that Musk supported.[3] U.S. Sen. Rand Paul promised to vote against the bill unless the debt ceiling would not be raised.

As of early June, 2025, who could say whether Republican opposition in the U.S. Senate would actually materialize beyond the rhetoric designed to give an impression of objection to voters back home. The Republican lawmakers in the House had quickly closed ranks to pass the House bill. Behind the numbers are values and ideological principles that can be difficult to see. Cutting federal programs that help the poor with subsistence living, such as with food and healthcare, can be said to imply a lack of compassion, especially if defense contractors would be getting more business from the federal government, but two political principles are also in play.

One is the belief that the role of government should not include providing even the basics to people; charities and families should supply basic needs to the poor. Overlaid with that principle is one concerning American federalism, wherein the federal government was originally intended to have very limited powers, and one way of limiting them was to make regulating interstate commerce and providing a common defense primary, with other domains of power being handled by the States. This principle is in accord with the differences between States in an empire-scale federal union of states because the state governments can more tightly match social programs with the political ideology of a majority of the voters in a state than can be done by Congress.

These two principles—the first being more general and the second more particular to the American federal philosophy—are not fully consistent, for according to the federal principle, Congress should take care that the state governments are not crowded out in taxing more so as to take on more in domestic programs—domestic being here within a given state. Whereas the view that the proper roles of government do not include making goods and services available to citizens applies to the States too, the principle of federalism favors expanding the taxing and spending abilities of the States according to how much of an entitlement-providing responsibility each state government wants, as per the relevant political ideology of the majority of the citizens of a state.

Re-balancing American federalism so the States regain some of authority that they once had should include managing the transition especially concerning programs relied on by the poor because they are vulnerable to suffering and even dying by slipping between the cracks. Relatedly, because in at least some of the several States, the majority of people believe that government should supply the poor with necessities, the more general political principle that government itself should not supply goods and services to individual citizens should give way to the second, federal principle. Put another way, were Congress to vote to restrict government itself, then more expansive ideologies in at least some States would be choked off. The general government principle should be decided therefore on the state level rather than by Congress.

Taking a page from the E.U., the U.S. member-states could conceivably be given more responsibility in funding defense beyond just militias, which are armies that the U.S. President can borrow. Not that the head of state of California should step over the federal president on defense policy as Macron of the E.U. state of France did in trying to head the E.U.’s defense policy against Russia in 2025. The defense budget of the U.S. Government could be reduced and the states could do more without the latter superseding the former. Together with transferring more non-interstate-commerce domestic programs to the states, the federal deficits could be reduced. President Reagan failed to rebalance American federalism because he favored the more general restrictive-government-role principle and thus did not facilitate states making up for federal cuts in domestic spending. To be sure, the state governments would have done so to various extents, given their distinct political climates.

Restoring power to the member-states heeds the fact that over a continent and beyond, one size (of public policy) does not fit all (States). Curtailing both federal defense and domestic spending while reducing federal taxation by less than the combined cuts but enough that state taxing abilities would no longer be crowded out from expanding to meet the incoming transfer of programs would put the federal government on the road to fiscal responsibility—meaning being able at some point to pay off its debt—while giving the state governments back more of the authority they had when the federal system was designed and put into operation. The horrendous fiscal imbalance of the U.S. (federal) Government can be interpreted as pointing, in effect, to how imbalanced the federal system itself has become. No one at the U.S. Constitutional Convention envisioned the federal level as handling everything of substance while the state governments become like municipal governments, so it should be no surprise that such a lack of fit would be reflected in a massive fiscal imbalance on the federal level.

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1. Bernd Debusmann, “Musk Calls Trump’s Tax Bill a ‘Disgusting Abomination’,” BBC.com, June 3, 2025.
2. Ibid.
3. Ibid.

Holding the U.S. Debt-Ceiling Hostage: A Case of Political Expediency over Statesmanship

In April of 2011, S & P lowered expectations on U.S. Government debt from “stable” to “negative.”  Astonishing, the $14.2 trillion U.S. debt was still rated as AAA. The shift in expectations did not trigger higher borrowing costs because the market presumed that a political deal lowering the deficit would be facilitated by the warning-call. At the same time, Congress and the U.S. president were grappling with the need to extend the federal debt ceiling. The federal government was projected at the time to reach its borrowing limit by May 16, 2011, though the Treasury secretary, Tim Geithner, said he could use accounting options to push the date back to July 8. He assured the public that Republicans in Congress had told President Obama that they would go along with a higher limit. “I want to make it perfectly clear that Congress will raise the debt ceiling,” the Geithner said.  He also said the Republican leaders had assured the president that they “couldn’t play around with the government’s credit rating. They recognize it, and they told the president that.”[1] Such a recognition and statement by the Republican leadership, if true, would evince statesmanship over political expediency, for Republican lawmakers could have leveraged their votes on raising the ceiling to get more in negotiations on the budget. This would be particularly notable considering that appropriations to keep the U.S. Government's non-essential operations going were pawns in a Congressional-presidential power-struggle during the Trump administration. 

However, Rep. Paul Ryan, chair of the U.S. House Budget Committee and later to become Speaking of the House, said that while it was true that nobody wanted the U.S. Treasury to default, “(w)e want cuts in spending accompanying a raising of the debt ceiling. And that is what we have been telling the White House.” A spokesperson for Obama said a debt ceiling vote could not be contingent on upcoming negotiations over the budget.  So, in effect, the matter of default on the U.S. debt was being used for leverage in negotiations rather than held as untouchable.  It is no wonder S & P lowered its expectations concerning the ability of U.S. Government officials to avoid default by failing to raise the federal debt limit. Had the lower expectations been assumed to be a wake-up call for federal lawmakers and the executive, S & P would have been naive.

To say that no one wants default but then to hold it ransom is disingenuous and duplicitous. It is as if to say, “I don’t want to do it but I have to,” when in fact the deed does not have to do it. We see such statements from corporate managers and customer service employees. “Unfortunately, that can’t be done”—weakness that seeks to dominate typically takes assumes the passive voice as if to hide—when in fact the person or especially his boss could. Company policies are in actuality guidelines. Sadly, customers typically enable the false rigidity by taking it at face value rather than questioning it by going above the employee or even manager. 

Rep. Ryan could have resisted the temptation to gain greater advantage on the budget by holding the debt ceiling hostage. Even if he made the statement to cover himself with his political base in Janesville, Wisconsin, he bore responsibility for giving the appearance of putting partisan advantage over statesmanship.  

Given the encroaching nature of expediency whether for power or profit (or both), even verbal statements can get the ball rolling even for other political parties. Soon the government's duty to act in the public interest becomes a mere byproduct, as if by accident rather than primary intention. Given human nature, political expediency and the desire to make even more money are inherently antithetical to any self-enforced limitation. Hence in government, we can say that statesmanship involves voluntarily giving force to a self-imposed constraint or limitation. 

1, “Geithner Confident Congress Will Raise Borrowing Limit,” USA Today, April 18, 2011, p. 6A.

CEOs in 2012: Avoid the “Fiscal Cliff”!

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

The difference is that a downturn from exaggerated rhetoric on the public airwaves would not inevitable, even were sequestration to occur. Even the sequestration alone was not in itself inevitable as 2012 was coming to an end, as Congress and the president had ample opportunity go beyond posturing to avert the $500 million hit by reaching a deal on budget-cuts and revenue increases. Making matters perhaps worse, the corporate executives who were discussing their plans publically in November 2012 may have been depicting their intentions overly pessimistically in order to manipulate the contours of an eventual deal between Congress and the White House, or just to press the federal officials to get to a deal—anything. In other words, as laudable as it is to pressure elected representatives to work together for the good of the entire economy, advertising exaggerated corporate plans to do it could play into the self-fulfilling prophesy.

Bank of America CEO Brian Moynihan said at an investor conference in New York in November that uncertainty about U.S. tax and spending policies had already prevented many clients from investing in 2012. At a meeting of CEOs hosted by the Wall Street Journal, Mark Bertonini of the health insurance company, Aetna, said, “The American people are going to suffer, because we’ll lay them off.” Besides the fact that stoking fears as a means to manipulate public opinion and federal lawmakers is ethically problematic, the CEO’s claim might be exaggerated, or at least overly simplistic even as it is in line with the financial interest of an insurance company that would be negatively affected by the budget cuts to hospitals.

The Journal itself provides a reality-check in making the following observation: “To be sure, there is a difference between CEOs issuing warnings to influence a policy debate and actually making cuts. Companies juggle a range of factors when deciding whether to hire, fire or invest, and many say privately they are more influenced by broader shifts in technology and demand than the fiscal cliff.” Merely in using the term cliff, however, the Journal is unwittingly complicit in the game. About a week later, the Journal would blatantly state that for investors, the stakes   were high.

Bertonini’s claim of eventual layoffs could have very little to do with Aetna’s actual contingency plans—the claim being primarily to manipulate rather than inform. Even defense contractors and hospitals, which would be directly impacted by the sequestration (but also by a Congressional agreement, albeit less so), had probably already factored the possibility into their operations in 2012 so any further downturns in 2013 from the sequestration would probably be more muted than the cliff rhetoric would suggest.

Already in 2012, the eurozone’s quarterly GDP numbers, including the third-quarter “slump” of -0.2 percent, was “weighing on” executives at American companies in terms of their cautiousness in investing and hiring at a time when consumer demand in the U.S. was running at its highest level since mid-2007. That is to say, world events prior to the anticipated “fiscal cliff”were also playing a role in the business outlook in America.

Warren Buffett, the founder of Berkshire Hathaway, said the U.S. has a "very resilient economy" and so going over the so-called cliff would not be permanently crippling. To be sure, the senior statesman of business could have been trying to manipulate Democratic leaders to push for higher tax revenue from the rich. However, Seifi Ghasemi, CEO of Rockwood Holdings, a specialty chemical manufacturer, said in late 2012 that preventing another war in the Middle East and bolstering Europe’s economy were bigger concerns” at the time than avoiding the sequestration of across-the-board budget cuts. With the exception of Newt Gingrich saying on ABC This Week that the U.S. economy was big enough to handle a $500 million hit, Buffett and Ghasemi were lone wolves in the wilderness in downplaying the "cliff" theatrics that the sky would fall should the budget ax fall early in 2013. At the conference of CEO’s hosted by the Wall Street Journal in November 2012, 73 percent of the executives said they were more concerned about sequestration than even the E.U.’s debt crisis—this in spite of the fact that the Economist had just come out with a major piece on the uncompetitiveness of France representing a new danger to the euro.

The involvement of CEOs in the chorus of “the sky is falling” rhetoric in order to manipulate public policy for financial gain should strike us as nothing new. It is crucial to note, however, that the topic here was systemic in nature, meaning that the U.S. economy as a whole and the fiscal viability of the U.S. Government itself were presumably at issue. The stakes are perhaps too large where the risk is systemic for CEO’s to “hyper-drive” the public discussion into hysteria just so profit won’t be as negatively affected by government cuts.

Whereas corporate public affairs offices are typically oriented to getting favorable regulations (i.e., strategic use of regulation) or deregulation oriented to a particular industry, the “fiscal cliff” would impact the entire economy—the question being how much. Using the sequestration “debate” to eke out more financial gain or avoid a loss for one’s company can be dangerous for the system as a whole if the manipulation distorts the problem. In my view, fiscal cliff is inherently distortive, and thus any public manipulation based on it is also problematic. To “join in”for financial gain is not exactly being socially responsible.

Whether in public or “behind closed doors,” corporate involvement in the public policy process has more legitimacy ethically speaking when the effort is to “save the ship” where the “ship” is the system as a whole, and thus far from narrower benefits, such as to the companies themselves. To be sure, companies have a financial interest in the general condition of the macro economy, but the more systemic the suggestion, the less immediate the financial benefit to a particular firm. The more immediate the benefit is to a company, the less credible are its managers’ efforts to manipulate public opinion and officials.

Rather than “fear mongering,” the CEOs at the meeting hosted by the Wall Street Journal in November 2012 could have suggested possible ways that sequestration could be obviated by an agreement by Republicans and Democrats leaders in the U.S. Government. Specifically, the executives could have oriented their comments to suggesting new ways that Congress could raise revenue and cut the federal budget in ways that are wiser than simply across the board. Optimally, the suggestions would be oriented to the problem at the systemic level and thus reflect such a perspective.

Implying that a corporation’s particular financial interest is never completely overcome by a societal perspective, the Wall Street Journal reported in November 2012, “Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. . . . (S)ome say fears of the fiscal cliff are overblown.” The split by sector suggests that the prescriptions even at the macro, or societal level at the very least take into account an industry’s own financial interest. It is as if what is good for the part is presumed to be good for the whole. To be so inclined does not make a CEO or company look good in the public discourse.

A suggestion with even an indirect financial benefit to one’s firm can easily be discounted by public officials and even the general public as lacking sufficient credibility to be trusted. An executive’s venture into the public square can easily be for naught under such circumstances. It would be better to remain quiet than suffer the loss in reputational capital. The alternative to either one is for the CEO or public affairs director to limit the company’s particular benefit from a systemic-oriented suggestion to public relations, which is itself a valuable long-term intangible asset. That is to say, time and energy spent coming up with the most respectable (i.e., clever) suggestion can do much more for one’s own company than trying to profit more directly from manipulating public discourse in a self-interested way. The numbers will take care of themselves. Ever notice that when people recognize a clever suggestion made by someone, they don’t accuse the person of trying to manipulate things, but, rather, praise him or her for the insight? CEO’s wanting a share of the leadership podium at the societal level might keep this observation in mind.

Given the expertise and societal position, at least potentially, of CEO’s, contributing toward solving system-wide problems in the political economy can even be regarded as a part of corporate social responsibility, as long as the financial benefit implied by a given suggestion is not too direct or exclusive to the executive or his/her company. Financial self-interest exculpates the ethical merit that is inherent in the very notions of responsibility and duty that are salient in ethics. In public discourse, it is better to be oriented to mapping the general course of the ship (i.e., the political system and/or financial system as a whole) around icebergs rather than trying to reserve a deck chair with a better view. We expect people to wrangle for position, whereas we take notice when individuals take a stand in spite of themselves for the greater good of the system.

 J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com

Consider, for example, J.P. Morgan’s decision in 1907 to take the weight of the banking crisis on his own shoulders by leading banks to save Wall Street by infusing the needed capital into the system. Contrast this vaulting of business leadership to the societal level with the vaunted self-protective orientation of Wall Street bank CEOs in September 2008. Business leadership raised to the societal level is rare indeed, and thus particularly valuable—and yet countless CEO’s settle for strategic leadership of significantly less value.

It is not as though opportunities are rare. In November 2012, President Obama presented CEOs with just such a platform at the White House just as he was entering into negotiations with Congressional leaders on a possible deal that would avert the “sky from falling.”To have optimal credibility with the president, the CEOs would have had to treat the meeting as falling under “corporate social responsibility” in that they would have had to take the perspective of the U.S. as a whole, and thus be on the same page as the president, to be credible. Put another way, the president would hardly have been expecting this, so a CEO achieving such a height would have stood out above the crowd and thus have had the president’s ear.

As an example of a perspective oriented to the political system and at the same time justifying business leadership on the societal level, David Crane, CEO of NRG Energy, said in referring to members of Congress and the president,“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other. CEO’s, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.” This statement is more oriented to a systemic flaw—that of gridlock in the federal government—than to getting something for NRG. Furthermore, the pragmatism, and one could add experience, of CEO’s could come into play should executives feel like doing some “pro-bono” work for the American people.

In conclusion, distorting public discourse in order to gain financially can contribute toward the general sense that a cliff is just ahead. Such participation is not constructive. In contrast, being oriented to coming up with a clever suggestion geared to a societal problem even (and especially!) though one’s company would only rise or fall along with all the other boats (i.e., the benefit of which being systemic in nature), can raise a CEO from strategic leadership to societal leadership. Only at this level can duty be reconciled with benefit in terms of credibility and the related reputational capital. CEOs following JP Morgan’s example in 1907 in willing the leap to societal leadership wherein the focus is on saving the system could make all the difference on whether the U.S. survives its own accumulated icebergs. Regarding the question of survival and the related implicit call to CEOs to “step up to the plate” for the good of the “team” (or ballpark), the U.S. Government’s gigantic accumulated-debt of over $16 trillion and deficits of over $1 trillion stood out even in 2012 as huge red flags much more dire than any $500 million so-called “fiscal cliff.”

Sources:

Kate Linebaugh and Stobhan Hughes, “Companies Warn About Cutbacks,” The Wall Street Journal, November 14, 2012.

Damian Paletta and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” The Wall Street Journal, November 14, 2012.

Brian Blankstone and William Horobin, “Euro-Zone Economy Shrinks Again,” The Wall Street Journal, November 16, 2012.

Maureen Farrell, "Buffett Not Worried About Fiscal Cliff," CNNMoney, November 16, 2012.

Jonathan Cheng, “Investors Show Optimism That Cliff Will Be Avoided,” The Wall Street Journal, November 20, 2012.

Honeywell’s David Cote: Carrying the Water in Washington

In the midst of the talks in Washington in 2012 to avoid the so-called fiscal “cliff” with a bipartisan deal, the Wall Street Journal reported that David Cote, the CEO of Honeywell, a $48 billion “industrial giant,” was at the time “the business executive most in the middle of the fiscal-cliff debate.” The Senate Finance Committee Chairman Max Baucus (D., Mont.) said, "People on both sides of the aisle are sending messages through Dave. He's become an active participant.” For a sitting CEO to have ensconced himself so deeply among the power-players in Washington did not come controversy-free. Even though his company had a vested interest that a deal be reached, the matter of his involvement raises larger implications, positive as well as negative.

David Cote, CEO of Honeywell. Civic duty or getting "his people" back in line in Washington?       Bloomberg News

 "I'm being accused of all kinds of nefarious motives just because I'm a CEO," Cote claimed. He also conceded his cause diverts a lot of time from his job but says he tries to make it up from his personal time. In any case, "the best for my shareholders is a robust economy," he explained, "which can't happen if the country is gridlocked over debt." True enough—a rising tide benefits all boats. However, as the Wall Street Journal points out, “Cote's efforts could benefit his business. Absent a cliff deal, deep cuts in federal spending on defense and many other programs will kick in. Success in averting them could help Honeywell, an aerospace and defense contractor that draws 10% of its $38 billion in annual sales from the government.” This point could not have been lost on the CEO. Honeywell’s stockholders were not volunteering their CEO in a sort of civic duty or good “corporate citizenship.”

Moreover, that the CEO of a major defense contractor was spending so much of his time as a go-between in Washington so a deal that would obviate automatic cuts including defense spending might have a better chance of being reached by Republican and Democratic leaders points to the depth of interest by the military-industrial complex in the task. I would not be surprised to learn that various government officials, including the Federal Reserve chairman, Ben Bernanke, were not themselves “carrying the water” for the government-dependent sector in stirring up doomsday predictions lest a deal not be reached in time to avoid “falling off the cliff.” Besides influencing the debate itself through ads and other, less transparent means, the sector with the most to lose was “bucking up” to keep the defense contracts coming. From this standpoint, it is surprising that Washington’s political elite had not fallen into line and come up with a deal by November.

“We’re not confident that our guys can govern anymore,” Cote observed as he was carrying messages between Republican Congressional leaders and the White House. While this observation could be oriented to the lack of responsiveness to the “sway” of the military-industrial complex in the halls of power, he said his role as political-deal-facilitator has been a "revelation” on how dysfunctional Washington had become simply in terms of being able to get along. "I meet people on both sides I like and find reasonable,” he said, “but they aren't working together." This is particularly significant, given the interest of the complex that a deal be reached. Might it be that ideological differences on government (or even immaturity) can actually bristle at, or even resist the power of money in Washington?

For instance, has ideology in the Republican Party on the role of government in the economy gone against the interests of Wall Street or corporate America, or is the ideology effectively a reflection of the whatever that base determines is its rightful interest? I suspect that there was no way that Republican leaders were going to let a deal slip by, even given the appearances to the contrary in the meantime as the leaders sought to get better terms by waiting until the last possible moment to seal a deal. However, were such a resolution “in the cards” given the underlying “marching orders,” why would Honeywell’s CEO have been spending so much time “carrying the water” in Washington?

That there might have actually even been a chance that the military-industrial complex could be subject to budget cuts is amazing, considering the power of money in the United States. Put another way, why would a man whose total direct compensation in 2011 was $25 million and whose retirement package assets were at $78 million feel the need to carry anyone’s water—especially given that his “Fix the Debt” non-profit had raised $43 by mid-December 2012 and could unleash television ads against “dysfunctional” elected officials who had not “gotten the message.” Something is really up when a real insider feels compelled to get so explicitly and personally involved—even given Honeywell’s financial interest that a deal be reached.

In short, there are wider implications for David Cote’s involvement amid the political class in Washington. His own, his company’s, and his sector’s financial interests notwithstanding, that a person of his stature would roll up his sleeves and get to work in “dysfunctional” Washington suggests that he is exactly the sort of person to who the American Founders would have called on to serve his country out of a sense of civic duty. Even as Obama was being urged to put Cote in his cabinet as Treasury or Commerce secretary, the CEO was saying, "I can't wait to get out of here and back to my day job." This sentiment, rather than a desire to run for office, should be “just the ticket” needed for admission to a fixed term of “duty” in Washington—then freedom. This is what citizenship means—realistically in the context of even vested interests. Even as Cote doubtless had his in mind, he was also going beyond the pale as a CEO actively working to craft a deal in at the highest level of the U.S. Government.

To be sure, David Cote could have been a rare snapshot of the military-industrial complex getting  "its people" back into line in a Washington "unhinged" from its real principals. However, it could also be that the man deserves a lot of credit for stepping up to the plate in a ballpark not typically frequented by CEOs not only to protect his company, but also to tackle the systemic imbalance evinced in a public federal debt of over $16 trillion at the time. If so, the President would have been well advised to use him well—rather than too much—out of respect for the man’s public service. A restoration of the civic duty of citizenship can indeed be distinguished from the threat of plutocracy to a republic.

Source:

Monica Langley, “Honeywell CEO in the Middleof Fiscal Cliff Standoff,” The Wall Street Journal, December 13, 2012.

On Leveraging the U.S. Debt-Ceiling: How the Market Mechanism Handles Trust

On May 9 2011, U.S. House Speaker Boehner insisted “on trillions of dollars in spending cuts, and no tax increases, as the price for rounding up enough votes to allow more borrowing and prevent the country from defaulting on its debt,” according to the Huffington Post. The Ohio Republican had “said failure to increase the borrowing limit [in the summer of 2011] would trigger a financial disaster for the United States and the world.” On May 12^th in Congressional testimony, Ben Bernanke, chairman of the Federal Reserve Bank, cautioned against using raising the debt ceiling as leverage for getting a particular partisan policy-prescription on federal spending enacted into law. Richmond Fed President Jeffrey Lacker had told Reuters, “I do share the chairman’s concern that going up to the edge and playing chicken on the debt ceiling is not a wise strategy.”

Meanwhile, GOP U.S. Senators and House Representatives had been hearing from constituents warning them not to raise the debt ceiling.  “Enough is enough!” such citizens were saying. This pressure was geared to getting the U.S. Government to live closer to its means rather than resorting to its power to increase the debt it can issue without limit. Even so, U.S. Senate Majority Leader Harry Reid said on May 10^th that tax increases may be needed, along with spending cuts, to help rein in the deficit. Moreover, he warned against ultimatums. “We shouldn’t be drawing lines in the sand,” he said according to The Wall Street Journal. This was not stopping Sen. Bob Corker, who was urging an automatic spending cap of 20.6% of GNP (when the fiscal 2011 figure was estimated at 24.3%) as a condition of passing an increase in the federal debt limit.

Given the existence of contending policy prescriptions, using default for leverage on one side is faulty. Aside from the implicit presumption that one side of the debate has a monopoly on truth, playing with fire where the viability of the financial system itself could hang in the balance does not evince much statesmanship and it could imperil the operation of the market mechanism itself.

Trust is vital in the very nature of a market. If trust is up for grabs, the increased volatility can freeze the market mechanism itself. Rather than simply increasing a price to account for the added risk, a market mechanism can simply close down even if trust is questioned. The reason is that the mechanism reflects human nature itself. Trust does not behave along a continuum as does risk/reward. Rather, people trust someone or something only to a point at which an implicit “all or none” mental calculation or feeling occurs. Beyond that point, the picture itself is fundamentally different. A shift in risk/return does not come into play because fear is choking off any action. In other words, human beings in fear or lack of trust freeze up rather than slow down. The market mechanism’s interval of risk/return tradeoffs reflecting in adjusting price is inconsistent with this feature of human nature as manifested even in a market mechanism. There is thus a fundamental flaw in the mechanism where it diverges from how human nature reacts to fear as lack of trust.

According to Alan Greenberg, former Chair and CEO of Bear Stearns, “Without reciprocal trust between the parties to any securities transaction, the money stops. Doubt fills the vacuum, and credit and liquidity are the chief casualties. Bad news . . . has an alarming capacity to become contagious and self-perpetuating. No problem is an isolated problem” (Greenberg, p. 3). Money simply stopping trumps price adjusting to reflect the increased risk from less trust because trust in human terms does not function as intervals of degrees. Accordingly, market theory itself, specifically in its risk/return tradeoff running the gambit, contains a flaw with respect to increased levels of volatility due to “trust issues.”

In using the debt ceiling as a bargaining chip for political leverage, the Republican lawmakers in the U.S. Government were risking the flaw being triggered. In other words, those politicians were implicitly assuming that the market would simply adjust to the added risk rather than shut down. Besides the problem in the lack of statesmanship—a political problem—the market mechanism itself contains a fundamental flaw in need of being addressed. Specifically, higher risk that kicks in even just close to the lack-of-trust-threshold can freeze the mechanism itself due to how human nature handles trust as a more of an “all or none” than “matter of degrees” phenomenon even as we wrongly suppose the market handles trust along an interval of prices. Unfortunately, we love the beauty of the latter even after having realized in September of 2008 that it does not hold.

Sources:

Alan C. Greenberg, The Rise and Fall of Bear Stearns (NY: Simon & Schuster, 2010).

Janet Hock and Carol E. Lee, “Democrats Oppose Spending Cap Plan,” The Wall Street Journal, May 11, 2011, p. A4.

The Huffington Post, “John Boehner, GOP Seek Leverage in Talks Over Raising Debt Ceiling,” May 12, 2011.

On the Danger to the United States of Living off Government Debt: The Case of the Dollar as World Reserve in 2010

Given the $13 trillion of U.S. Government debt in 2010, the dollar was losing out at the time in percentage terms to other currencies as the global reserve currency. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years earlier, but as a report from Emma Lawson of Morgan Stanley showed, other currencies were taking on more of a relative presence. The lesson concerning excessive public debt was not grasped at least through the 2010's, as the debt continued to increase trillions of dollars more.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:

 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd

 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/

Unsustainable Structural Fiscal and Federal Imbalances: The American Union

The nonpartisan Congressional Budget Office (CBO) announced on January 26, 2011 that the U.S. Government’s budget deficit for the year would soar to nearly $1.5 trillion, which represents $414 billion more due to the extension of the Bush tax cuts. The deficit had been $1.4 trillion in 2009 and $1.3 trillion in 2010. According to the New York Times, based on the CBO, “the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 — representing 10 percent and 8.9 percent of the nation’s output.” The budget officials also projected the deficit for 2012 would be $1.1 trillion. These figures dwarf the budget deficits even of the 1980s.

In his State of the Union speech on January 26th 2011, President Obama called for a partial five-year freeze in domestic spending by the federal government — what the New York Times calls “a more gradual imposition of fiscal discipline, while still increasing some spending in education, research and other areas.” It is hardly imaginable how a freeze alone could make a dent where the debt is over $14.3 trillion—a figure that is scarcely conceivable to a human mind, let alone sustainable. It is not clear that the U.S. Government will ever be able to pay off the mammoth debt, let alone arrest the annual increases in the debt (i.e., the deficits).

For their part, Republican congressional leaders used the need for a budget and an extention in the debt-ceiling in 2011 to pressure Democratic leaders to adobt substantial cuts, rather than merely a freeze. As a result, President Obama himself came to urge $4 trillion in cuts over several years. Yet even as the Republicans, whose penchant for less government (and perhaps restoring federalism) dovetailed with more cuts in federal spending, this position too did not take sufficiently seriously the U.S. Government's deficit and debt, for tax increases were to be off the table. 

In short, neither of the major parties were taking the structural fiscal imbalance in the U.S. Government sufficiently seriously.  It is as though they were urging the use of a bicyle rather than a car or train to get from Orlando to Miami in Florida (and let's add just for fun, "in August"). Beyond other objectives (such as less government) being allowed to intercede, the proposals were not sufficient. Were reducing the structural deficits and debt of the U.S. Government the overriding goal, both trillions in tax increases and spending cuts would be instituted over many yeears. I contend that it to be a moral imperative that the debt amassed since the surpluses in the late 1990s be paid off before the mean age in the generation of 18 to 38 year-olds in 2000 retire. The remaining debt could be paid off in incremental installments over many years. Simply passing on our debt for others to pay would be as immoral as it is convenient. 

Fortunately for us, restoring a balanced federalism can facilitate paying off the debt in our lifetimes. Rep. Paul Ryan's proposal for block grants to the state governments for medicaid claims to shift that program for the poor from the U.S. Government to the states. It is thus in the direction of restoring a balance in American federalism. However, the block grant element retains the federal purse-strings, and thus falls short in this regard. Both in terms of reducing the federal government's annual deficits and restoring a federalist balance, Rep. Ryan should have proposed that the states both run and pay for medicaid by raising state taxes. It would be up to the respective voters of the states to decide the level of coverage and the amount of tax increase--taking into account their respective state's' fiscal position so as to deal with any deficit there as well. Medicare too could be transferred to the states, though it would not be prudent to leave it up to the states to fund it until after states such as Florida, California and Illinois have solved their own structural deficits. Policy decisions involving health-care for the poor and the elderly could thus be tailored to the circumstances and ideologies that tend to differ in a union on an empire-scale. However, federal taxes would not decrease accordingly on account of the structural deficits and the objective of paying off the accumulated federal debt. Once the latter is eliminated, the federal taxes could come down.

One might squauk, "But that would mean raising my state taxes without corresponding tax cuts at the federal level!" Correcto! The lack of symmetry here is the mirror image of the asymmetry that has been involved in running deficits of over $1 trillion for years and having amassed a federal debt of over $14 trillion. We like asymmetry when it is convenient but abhor it when it goes against our pocket books. This combination of sentiments is what we must counter, bottom-line.  

Sources:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

Stephen Gandel, “View from Davos: How Bad is a $1.5 Trillion Deficit?” Time, January 27, 2011.

On the State of the (American) Union: Getting Real

It is certainly more politic to declare the state of the union to be strong rather than weak. In his State of the Union speech in January 2011, President Obama ended by stating definitively, "The state of the union is strong." Even though particulars could doubtless be found to support his claim, I contend that he severely understated the weakness in the state of the union at the time.

The $45 billion deficit in the Social Security fund ought to have raised more than a few eyebrows, not to mention the U.S. Government deficit of over $1 trillion and the related debt of $14.3 trillion. To claim strength as if the U.S. were still a going concern as long as such a debt exists is more fitting for a magician than a U.S. President. Furthermore, one could point to the 3.4 million inhabitants expected to be foreclosed by the end of 2011 or the 9.7 million unemployed on unemployment compensation in January, 2011 (51,000 added the last week of January alone), as well as to the 40 million inhabitants within the U.S. still without health insurance (i.e., having to wait until 2014 because of a deal made with the insurance company lobby--a party with a vested financial interest).

The President's State of the Union speech evinces a state of denial going far beyond one man. One might ask, moreover, whether structural or systemic solutions are even possible in a representative democracy, or is the free world destined to be poll- and issue-driven? Furthermore, are we too fixated on the status quo wherein we prioritize our debate on the size and involvement of government (e.g., tax increases vs. spending or tax cuts, rather more revenue and less spending) over the immediately pressing exigency of fiscal balance and the human rights of the least well off (John Rawls' criterion for a just outcome)? Are we destined to have solutions foisted on us by the brute force of necessity? In short, can we bracket our incremental approach based on convenience and think instead about the long-term viability of the system itself? The State of the Union of 2011 notwithstanding, the state of our union is worth taking another look.

Source:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

Political Staying Power: Ethanol Subsidies

“A broad bipartisan majority of the Senate voted [on June 15, 2011] to end more than three decades of federal subsidies for ethanol. . . . [At the time,] Gasoline blenders [received] a tax credit of 45 cents for every gallon of ethanol they blend[ed] with motor fuel. The amendment would have repealed that as well as a tariff of 54 cents a gallon on imported ethanol. . . . The tax breaks . . . cost about $6 billion a year. The House [was] expected to reject the repeal as unconstitutional because tax bills must originate in that chamber, and the White House opposes it. But the 73-27 vote signals that once-unassailable programs could be vulnerable.  [The intent was] to end subsidies for wealthy interest groups and [to make some] cuts before slashing social-welfare programs. [Thirty three] Republicans joined 40 Democrats and Independents in supporting [the] repeal. (E)thanol has come under increasing fire from diverse groups, including food industry groups concerned about rising corn prices and environmentalists who had concluded corn ethanol wasn't an effective way to reduce greenhouse gas emissions.”

At the time of the vote, much of the gasoline sold at service stations across the U.S. contained up to 10% ethanol, in part because of federal regulations that effectively require it. The Obama administration “proposed pushing the blend limit to 15%, despite objections from auto makers worried that higher ethanol levels would damage engine components in cars. Auto makers design many so-called ‘flex fuel’ vehicles to run on ethanol blends up to 85%. But few service stations outside the Midwest offer such fuels.”

“The ethanol industry and its supporters, who have been bracing themselves for an end to the tax break, were critical of the vote. ‘We need a glide path, and not a cliff, for the only alternative to oil,’ said Sen. Amy Klobuchar (D., Minn.). ‘We're talking about pulling the rug out from an industry that provides 10% of the nation's fuel supply.’ . . . The Renewable Fuels Association, an ethanol industry group, criticized the action, noting that the Senate ‘voted less than one month ago to preserve billions of dollars in taxpayer handouts to the oil industry.’ . . . The tax break benefits the ethanol industry, which is dominated by commodity giants” such as Archer-Daniels-Midland “by sweetening the financial incentive for gasoline retailers to use ethanol.”

“Repeal supporters said the $6 billion-a-year subsidy amounts to wasteful support for a fuel whose promises of cost savings, lower pollution and energy efficiency have not materialized. ‘This industry has been collecting corporate welfare for far, far too long,’ said Sen. John McCain (R., Ariz.), who's been fighting the subsidy for years. Mr. McCain offered another measure, to block federal funding for ethanol pumps and storage facilities, which failed 41-59. The House adopted a similar amendment.”

“Food companies and livestock farmers “have complained that their costs have exploded as five billion bushels, or 40% of all the corn grown in the U.S. last year, was consumed in ethanol production. The price of corn has traded above $7 a bushel for much of the spring [of 2011], twice the year-ago level. Some economists doubt that the tax credit is now crucial for the industry. The ethanol industry only began to grow rapidly five years ago when new energy legislation required gasoline retailers to use corn ethanol: 12.6 billion gallons [in 2011], moving to 15 billion gallons in 2015. The tax credit is part of the reason the gasoline industry buys more than one billion gallons a year than required by federal mandate. But if it expires, ethanol demand wouldn't fall below the mandate, preventing financial calamity for producers, said Bruce Babcock, an Iowa State University economist. ‘The ethanol industry doesn't need the tax credit anymore,’ he said.”

It is remarkable that even though the ethanol industry did not need the tax credit, it could still count on the White House and the U.S. House of Representatives to keep the benefit around. This was in spite of the inefficiency of ethanol, the negative impact of ethanol on food prices, the existence of the duplicative mandate, a U.S. budget deficit of over $1 trillion, and a contentious budget-cuts/debt-ceiling debate going on in which cuts were being sought by legislators. The size of the deficit alone (and the accumulated U.S. debt) should have made the affordability of the tax credit a foregone conclusion, yet astonishingly denial seemed sufficient to enable the status quo to continue unabated. That is to say, if a current U.S. Government deficit of over $1 trillion didn’t make the non-essential subsidy a non-starter, what could suffice to do so? To be sure, that the U.S. Senate voted by a substantial margin of senators to end the credit was notable. Politically, however, it merely reflected the split of the agricultural interest on the issue due to the impact of ethanol on the price of corn.

Even considering the U.S. Senate’s action, the staying-power of the status quo in the face of the unsustainable U.S. Government debt of over $14 trillion is truly remarkable in what it says about the ability of a political union based on representative democracy and federalism to deal seriously with dire problems. In other words, one might reasonably ask whether a republic is capable of change sufficient to avoid a train-wreck. Can a people govern themselves when it really counts, or is democracy a matter of convenience? Perhaps part of the problem lies in priorities.

As the U.S. Senate was voting on the ethanol subsidies, the U.S. House was simultaneously rejecting attempts to reduce farm subsidies while cutting the Women, Infants and Children program, “which offers food aid and educational support for low-income mothers and their children,” by $868 million (which represents a 13% cut), and an international food programs that provides emergency aid and agricultural development by $50 million (which represents a 33% drop), according to USA Today. In a governmental context in which budget cuts were very much in the air, the staying power of the ethanol subsidies in the House even as food for the hungry was deemed expendable reveals questionable priorities in terms of budget policy, unless it is the case that large corporations are more in need than women and children. That is to say, if House Republicans were voting in line with an ideological preference for less government, wouldn’t that proclivity apply to corporate subsidies as well as food aid?

Ethanol subsidies, international food-aid, and aid to impoverished people domestically can be prioritized in terms government. For example, it can be argued that feeding citizens (or residents) who are otherwise without enough food is more of a government’s responsibility than is either giving corporations subsidies or sending food aid abroad in exchange for influence in foreign governments. The distinctions between foreign and domestic and necessity and profit are useful in isolating core from peripheral functions of government. In times of budget-cutting, the core should be treated differently than the peripheral. Additionally, it might be asked whether in a federal system the subsidies and food-aid are properly federal or state domains. It could be that federal food aid should be cut completely in order to be picked up differentially at the state level.

Sources:

Naftali Bendavid and Stephen Power, “Ethanol Suffers Rare Loss in Senate,” The Wall Street Journal, June 17, 2011.

The Associated Press, “House Spares Farm Subsidies, Targets Food Aid,” USA Today, June 17, 2011.