Daniel Sutter: The debt ceiling and the national debt
The United States faces potential default in June as we run up against the debt ceiling, currently at $31.4 trillion. Whether the debt ceiling is good policy depends largely on one’s attitude toward Federal spending. Is our national debt sustainable? I will defer to the judgment of financial markets. Interest rates compensate savers for being patient and for bearing default risk, the risk that borrowers may not repay the loan or interest payments. The “risk-free” interest rate is what investors would charge a borrower with no default risk. When default risk increases, investors will first demand a higher interest rate and then stop lending altogether. U.S. Treasury securities have long been viewed as the risk-free investment. The inflation-adjusted (or real) interest rate on 10-year U.S. Treasury securities, courtesy of the St. Louis Fed, stands at 1.3 percent, over two percentage points higher than at the start of 2022. But this interest rate hike is widely attributed to the Fed’s tightening of monetary policy to combat inflation. The debt to GDP ratio stands at historically high levels. But economists Jason Furman and Larry Summers argue that real interest payments as a percentage of GDP better measures indebtedness. This measure is not at record levels, suggesting that Washington has untapped credit. Nonetheless, our current budget situation is troubling. The Congressional Budget Office (CBO) estimates this year’s deficit at $1.5 trillion, the third largest ever and 7th largest since 1962 as a percentage of GDP. Yet the economy is not in recession. We are at peace, and the COVID-19 pandemic is over. This represents a structural and not cyclical deficit. Deficit projections depend on future policy choices, so let’s consider entitlement spending. The CBO projects that Social Security and Medicare spending will increase from $2.3 trillion this year to $4.2 trillion in 2033. The deficit will increase significantly unless we cut spending or increase taxes. Credit markets are voluntary; nobody must purchase Treasury bonds. At some point, credit markets will say no more Federal borrowing. We would be wise to keep some credit for emergencies. Imagine financing World War II without any borrowing! Now let’s turn to the debt ceiling, beginning with its history. Congress enacted the ceiling in 1917 to keep from having to approve each issuance of Treasury debt. The ceiling has been raised over 100 times since World War II and suspended on several occasions. Fiscal conservatives use the ceiling as leverage to push spending cuts, like the 1985 Gramm-Rudman-Hollings Debt Reduction Act and the 2011 budget deal. The ceiling creates policy uncertainty for our economy. Uncertainty is unavoidable in life and especially business but hurts investment. Government affects business in many ways, so uncertainty about government policy increases overall uncertainty. Failure to raise the debt ceiling will delay the repayment of bonds, drive up the Federal government’s interest rate, and potentially also other interest rates. A long-term budget agreement would be better than a fight over the ceiling every other year. Evaluation of the ceiling depends mostly on how one views current Federal spending, not creditworthiness. If avoiding default were paramount, a deal could be done easily. Republicans could agree to big tax hikes, or Democrats could agree to freeze discretionary spending. These are not solutions due to their impact on spending. The Biden Administration is considering challenging that the debt ceiling violates the 14th Amendment. I am not a constitutional lawyer, so I will not weigh in here. Fiscal conservatives have voiced opposition to this tactic, but we are a constitutional republic; the constitutionality of any law can be questioned. The inability to reach a compromise reflects our increasingly divided nation. Legitimate government reflects the consent of the governed, meaning all Americans, because we recognize the equal moral worth of all citizens. Today both sides want to force their preferred policy on the other by any means necessary. This is a tell that many now view their fellow Americans as subjects, not fellow citizens. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Consumer Price Index report shows inflation eased
Inflation cooled to 4.9% in April, down from 5% the month before, but the measure remains high. The Consumer Price Index for All Urban Consumers rose 0.4% in April on a seasonally adjusted basis. Over the last 12 months, the all-items index increased 4.9% before seasonal adjustment, the U.S. Bureau of Labor Statistics reported Wednesday. “The index for shelter was the largest contributor to the monthly all items increase, followed by increases in the index for used cars and trucks and the index for gasoline,” according to the U.S. Bureau of Labor Statistics report. Jason Furman, an economist and Harvard professor, said this month’s data was “mildly reassuring” related to what forecasters expected Tuesday and “terrifying” relative what forecasters expected in February. “On balance, the underlying detail is less worrisome than the continued very high headline number,” Furman posted on Twitter. “A bottom-up perspective suggests some slowing of inflation from its current pace.” In March, it had increased 0.1% to 5% over the previous 12 months. Republished with the permission of The Center Square
Dan Sutter: Can we afford this spending?
Washington borrowed $4 trillion in 2021, and national debt as a percentage of GDP is higher than at the end of World War II. And the Biden administration is proposing spending trillions on infrastructure and families bills. Are our politicians bankrupting America? Economists Jason Furman and Lawrence Summers argue no. These prominent economists – Summers was Treasury Secretary under President Bill Clinton and Furman head of the Council of Economic Advisors under President Barack Obama – contend that the national debt, appropriately scaled, is not at an all-time high due to today’s historically low-interest rates. Their paper covers a lot of ground. I will start with interest rates and borrowing. Lower interest rates allow home buyers to get larger mortgages. Lenders compare the monthly payment and a borrower’s income. With lower interest rates, more of the monthly payment can go toward principal. The debt-to-GDP ratio does not consider the interest rate. Furman and Summers argue that the interest-to-GDP ratio (preferably adjusted for inflation) is a better measure, akin to monthly mortgage payment relative to income. The interest-to-GDP ratio is not historically high because of low-interest rates. Can interest rates possibly remain so low? To evaluate this, remember that real interest rates (meaning adjusted for inflation) are more relevant than the official rate. And the risk of a loan not being repaid in full, or default risk, must be priced into the real interest rate. Loans with high default risk, like payday loans, face high real interest rates. Economists refer to the risk-free real interest rate, what lenders would charge on a loan sure to be repaid. The risk-free real interest rate has been zero, and real interest rates have been trending downward since the 1980s across all major industrial economies. Furman and Summers argue that this must be due to fundamental economic factors. Might the Federal Reserve be keeping interest rates artificially low? As a matter of principle, almost all economists believe that money must be “neutral” in the long run. Neutrality means relative to production, which depends on real factors, things like labor, machines, raw materials, and technology. Dollars are ultimately green pieces of paper that cannot magically transform into cars or houses. Any impacts of money on production must be short-term. A thirty-year trend qualifies as the long run. Furman and Summers observe further that long-term interest rates are not anticipating an increase. Interest rates are market-determined prices based on the interplay of the demand for borrowing and the supply of savings. Markets are forward-looking and smarter than any one expert. Furman and Summers believe that at current interest rates, Federal debt of 400 percent of GDP (over $80 trillion) is sustainable. Economists who believe that markets work well, like me, must accept the market’s judgment on low risk-free interest rates. But although Treasury securities have always been the quintessential risk-free investment, Uncle Sam may not always qualify for this interest rate. Loans are voluntary transactions between willing borrowers and willing lenders. Lenders who think that politicians are bankrupting America can choose not to purchase Treasury securities at the risk-free rate. Furthermore, because our debt is always refinanced, investors must sell in Treasury securities to get out of the investment. Investors must believe that Uncle Sam is a good risk and that future investors will as well. The risk-free status of Federal debt depends on investor sentiment, not just economic fundamentals. Because markets are forward-looking, long-term interest rates on Treasury securities should start rising as soon as investors think the national debt is excessive. Markets show no sign of this, as Furman and Summers note. Political talk can be cheap; pundits predicting an impending Federal bankruptcy may still be invested in Treasury securities. Investors lend on favorable terms to the U.S. government because of its ability to tax us. Despite recent record deficits, investors still think that we are good for Washington’s borrowing. But investor sentiment can change far quicker than economic fundamentals. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Congressmen Mo Brooks, Robert Aderholt, and Gary Palmer agree: America needs to ‘get back to work’
Tuesday, Congressman Mo Brooks praised states that are rejecting federal government unemployment payouts. On Tuesday, Gov. Kay Ivey announced that Alabama would end its participation in all federally funded pandemic unemployment compensation programs in June. Other states like South Carolina and Montana have already announced similar plans as well. Brooks stated, “In America, we believe in working for a living. No able-bodied working age person should be living off the hard work of others. Predictably, paying people more not to work than to work has created an unnecessary worker shortage. Joe Biden’s claim that the abysmal April unemployment report isn’t tied to paying people more not to work than to work is an affront to common sense. Employers and small business owners across America are closing or operating at reduced hours because they cannot afford to compete against the federal government’s increased unemployment payments. As I travel the state, I’ve seen examples on nearly every street corner of employers offering good jobs that they are unable to fill. I’m glad economically responsible states are wising up and ending the asinine policy of paying the takers more taxpayer money to stay home rather than work for a living.” Congressman Gary Palmer also praised Ivey’s unemployment decision as well, stating on Twitter, “I applaud @GovernorKayIvey for taking this step towards allowing business to fully open in Alabama. Continued dependence on federal unemployment benefits will only hinder our economic recovery.” I applaud @GovernorKayIvey for taking this step towards allowing businesses to fully open in Alabama. Continued dependence on federal unemployment benefits will only hinder our economic recovery. My full statement here:https://t.co/Tdr2yWk8cf — Gary Palmer (@USRepGaryPalmer) May 10, 2021 According to CNBC, the unemployment rate rose to 6.1% amid an escalating shortage of available workers. Economist Jason Furman stated to CNBC, “I think this is just as much about a shortage in labor supply as it is about a shortage of labor demand. If you look at April, it appears that there were about 1.1 unemployed workers for every job opening. So there are a lot of jobs out there, there is just still not a lot of labor supply.” Montana Governor Greg Gianforte stated, “I hear from too many employers throughout our state who can’t find workers. Nearly every sector in our economy faces a labor shortage.” Robert Aderholt also agrees with Brooks, Palmer, and Ivey on the move away from increased federal unemployment benefits. Aderholt commented on Twitter, “I applaud @GovernorKayIvey for this decision. With so many jobs available across our state, there is no need for endless unemployment benefits. As the recent jobs report shows, this is hurting our economy, not helping it.” I applaud @GovernorKayIvey for this decision. With so many jobs available across our state, there is no need for endless unemployment benefits. As the recent jobs report shows, this is hurting our economy, not helping it. https://t.co/94CDG5F9Kv — Robert Aderholt (@Robert_Aderholt) May 10, 2021
Healthy US job market: How big a political edge for Donald Trump?
Strong job growth gives Donald Trump more evidence for his assertion that the economy is flourishing under his watch.
