The debt limit debate is the most significant economic discussion currently and it seemed appropriate to put out a brief bit of information about it for the radio audience. As the discussion at the national level is mind-bogglingly political at this point (read that as trying to blame the other side for all of it) I thought it good to put out some basic information.
The larger aspects of the debate get at political parties and preferred economic policy approaches. Currently Democrats favor spending plans and approaches while Republicans favor tax cuts. The fact that, for the most part, both parties ignore the other side of the fiscal policy toolkit pretty much explains why we are where we are. So let’s briefly look at the situation we have in terms of the fiscal policy space:
So in this graph we have monthly federal receipts and outlays, with outlays typically above receipts, or deficits. Government needs to finance these deficits and that eventually becomes debt. I also include smoothed lines for each series (Loess method). Of note, the outlays go up starting in 2018 well ahead of the dashed red vertical line, which represent President Biden taking office. The receipt line remains mostly flat and only starts to creep up slightly in 2020.
I would not call this a hopeful picture overall, as far as fiscal policy goes. I will also say that if you blame one party over another you are likely guilty of confirmation bias in your news sources because there is plenty of blame to go around for everyone. In fact a recent paper from Alexandre Cunha and Emanuel Ornelas (Journal of the European Economic Association 2018 16(3): 781-824) lays out the problem for the US in pretty clear terms. There is a hard debt limit and insufficient political turnover to induce any form of cooperation on economic policy. Both sides keep playing a waiting game for their return to budgetary policy control so they can engage in their preferred policy and extract economic rents as a result.
Now what does the debt situation look like? It is pretty scary too.
Included here is the recent history of debt outstanding, the current debt limit that is the topic of debate, and the a 24 month forecast of the debt (exponential smoothing method). What does this show us? The debt became a problem starting in early 2020, and was going to be an issue. Now if the Republicans took the Senate and President Trump remained in office, I doubt we would be debating the debt ceiling right now, since it was lifted as part of the tax cut bill during President Trump’s term. However we are currently debating the issue without really debating the issue. There is plenty of frame shifting going on and it is probably one of the silliest things we can see in economic policy debates. Why?
Most of these outcomes are pretty well predicted when tax and spending policies are set. That is, we are allowing politicians to largely come back and say they now do not like the math, or that they really did not know the math ahead of time when they voted on the legislation. That is either not doing their job, or doing it badly, but go back to the paper I mentioned and the lack of turnover means political figures are not too worried about getting voted out. So there you go.
Taxing and spending decisions need an injection of reality to return some semblance of fiscal sanity to the debates and discussions. At the very least it could reduce the amount of gaslighting coming out of Washington, D.C. and give us the real choices we face as a nation. The full faith and credit of the United States should not be a tool of political opportunism.