Mr. McCarthy, Shut Down this Government

The Speaker offers token cuts in a serious crisis. We must do better.

Yesterday evening, Speaker McCarthy proposed a new plan to avoid a government shutdown that includes an 8% spending cut for domestic agencies and a resumption of the border wall construction. According to Bloomberg, the House GOP factions agreed to this plan and plans to offer these proposals in exchange for a 31 day temporary funding. The bill would also not include funding for War in Ukraine nor disaster relief for victims of the Maui wildfires.

At first glance, these are good proposals on the way to solving our major deficit crisis. The national debt is spiraling out of control, despite President Biden’s claims that he has cut the deficit, it is now projected to be $2T for the current Fiscal Year (FY) - almost double the previous year and the second highest on record. Indeed, our annual deficit has taken a huge dip in the past few years that is entirely unsustainable:

Source: the St. Louis Fed

So Speaker McCarthy’s proposal seems like a good start. The federal government spent $6.2T in FY 2022, meaning that an 8% cut in spending would be approximately $500B cut to next year’s budget (FY2024). This would be a decent first step in pressing towards a balanced budget; however, there would still be a huge gap - $1.5T in deficit remaining for the next fiscal year (assuming no other changes).

But wait a minute. The Speaker’s plan only calls for cuts to “domestic agencies.” It is unclear exactly what he means, but in Washington speak we can assume this means no cuts to defense and no cuts to mandatory spending (Medicare, Medicaid, Social Security, etc). The sad truth is that this small slice of the budget - domestic spending that is non-mandatory - is a paltry $910B according to the CBO. That means that the headline that sounds like Congress is getting serious about fiscal responsibility is just that - a headline. Clickbait. A gimmick. The actual cut of 8% to $910B in spending would total a paltry $72B cut. To give you an idea of how little that is, the “Office of Personnel Management’s” budget for FY2024 is $130B. Can’t we cut 98% of HR? (That’s a topic for another day…)

These deficits are not remotely sustainable.

First, they directly cause increases to prices for every good or service every American buys, due to the fact that the Federal Reserve and the Treasury must print money out of thin air to finance these huge deficits.Healthcare costs, despite the promises of Obamacare, have skyrocketed. The War on Terror cost us $21T. The cost of college is growing exponentially.

Here’s how this plays out, according to economist John Cochrane at the Stanford University Hoover Institute in the Wall Street Journal:

Starting in March 2020, “the Treasury issued $3 trillion of new debt, which the Fed quickly bought in return for $3 trillion of new reserves.” The Treasury then sent checks to people and businesses, later borrowing another $2 trillion and sending more checks. Overall federal debt rose nearly 30%. “Is it at all a surprise,” Mr. Cochrane asks, “that a year later inflation breaks out?”

He likens this $5 trillion in checks to a “classic parable” of Milton Friedman(1912-2006), the great monetarist at the University of Chicago… “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community,” Friedman wrote in “The Optimum Quantity of Money” (1969). If they spent the money, inflation would result.

The Covid checks, Mr. Cochrane says, were “an immense fiscal helicopter drop. People are spending the money, driving prices up.”

Second, each year we finance deficit spending through this method (issuing debt and printing money), the interest costs rise. In fact, because of both our profligate spending in Congress and the Fed’s mismanagement of interest rates over the same period, the US is paying record amounts of interest to service that debt - up 30% year over year, from $150B in calendar Q42021 to $213B in Q42022. Indeed, these levels of debt payment threaten to crowd out all other spending over time, and will exceed our massive defense budget soon.

Third, the inflationary regime currently employed by the Treasury and the Fed means that everything you own and everything you’ve saved is worth less. As the Friedman example indicates, if every one has more money, tangible goods like homes, savings and other assets lose value comparatively.

Perhaps worst of all, this is especially true of working class wages, which never keep up with inflation since the US abandoned the gold standard in 1971, which enabled the current shell game of deficit spending and printing money.

So all of this deficit spending and debt is a seriously bad deal for the American people and #TheCountry. Speaker McCarthy has the right sentiment, but we need bolder action to secure our future for our children and grandchildren.

Let us stop making short term decisions that destroy our wages and our wealth in the long term. Let us hold our leaders and their benefactors (government contractors, government employees, the political class in Washington and all of the crony capitalists getting sweetheart deals) accountable for their folly. They will tell you it is not the right time for reform, but to them it is never the right time because they profit handsomely from the status quo. These are man-made problems and the people can solve them; in fact, 33 States have strong balanced budget requirements.

Let us shut down the government until a Balanced Budget Amendment is passed by Congress. It is time to pay the piper before he forecloses on our future.