Envision the scene, staged for our entertainment. A cool pink dawn comes, and Joe Biden is sitting in his shiny blue 1968 GTO, revving the engine. A mile away, facing him on a straight desert road, is Kevin McCarthy, in his 1967 dusty red Mustang muscle car, smoking a last cigarette.
The game is “chicken.” The drivers accelerate toward each other down the single lane. If both pull over at the last moment, it’s a draw, but it was very exciting. If both go straight, there is a fiery—and completely avoidable—crash where everyone dies. To win, a driver must go straight and have his opponent swerve, at the last second.
The cars are powerful; this will only take a few seconds. But as the President accelerates, he sees something worrisome: McCarthy has thrown his steering wheel out of the car! Dang, now he can’t swerve. By eliminating his option to compromise, he has won the game.
But JB is no wimp. He throws his steering wheel out the window. His supporters, lining the road, all cheer and jump around.
And then McCarthy does something amazing: he throws another steering wheel out the window. Turns out he has a whole stack of them, on the seat beside him.
Of course, Biden is an experienced politician. He has a stack of unattached, nonfunctional steering wheels, too. Soon both of them are tossing them out the window by the handful, making sure everyone sees they are serious: “I ain’t turning. You better recognize!”
Debt Ceiling Follies
In the past month or so, I have met a lot of folks who know exactly what to do abut the debt ceiling. They all agree that the solution is obvious. What they don’t agree on is the nature of that solution. Here’s the problem: Voters, and I mean nearly all voters, want three things.
A. Increase government spending on stuff they want.
B. Cut taxes, so they have more money.
C. Reduce the deficit.
For the most part, for Democrats the preference order is A > B > C. For Republicans, the order is more B > A > C. The last important politician who wanted something different was William J. Clinton, who appeared to favor C > A > B.
The idea of a “debt ceiling,” implemented in 1917, was to force politicians who wanted to increase spending, or to cut taxes, to take account of the way those two impulses added up. Of course, that seems silly in a way, because the level of spending is decided by legislation, and signed by the President, and the various tax rates are decided by legislation, and signed by the President. If spending is where the Congress and President want it, and taxes are where the Congress and President want it, then the annual deficit must be what they want. And the debt is just the accumulation of deficits over time.
This all worked reasonably well as long as fiscal conservatism was a separate norm that most politicians cared about. But, as I pointed out almost four years ago, there has been a decline in the norm of concern for deficits. My concerns then seem pathetic in retrospect; the ratio of debt-to-gdp was only 105 percent back then. We have blown through 30 percent in the summer of 2020, land leveled off above 120 percent. Just for comparison, the level of government debt for Greece—considered high enough to create a serious crisis in 2007-2008—was about 120 percent.
The problem we face is clear: Voters want increased spending, lower taxes, and lower deficits. That’s actually true; they really do want those things. There’s nothing irrational about that, though. I want to lose weight, eat an entire cake, and sit on the couch and watch Netflix. I really do want all those things.
Thomas Sowell famously said that the first rule of economics is scarcity; the first rule of politics is to ignore the first rule of economics. So politicians of both of the state-sponsored parties refuse to cut spending, maneuver to cut taxes for their most powerful supporters, and then complain loudly about deficits.
People often complain about the “irrationality” of politics, but there is nothing irrational about the process that has given rise to our crushing debt burden. Voters really do want lower deficits, provided it does not involve either cutting spending or raising taxes.
There are two problems that no one is talking about. In fact, politicians don’t want to talk about the two real problems, which is the reason that we are all watching Biden and McCarthy play chicken instead of solving problems. The two problems are D.A.F.T., and interest.
“Deficits Are Future Taxes” (D.A.F.T.) If the government cuts taxes, without cutting spending, the deficit will increase. There have been points in U.S. history where the opposite may have been true, but rates are now low enough—in fact, nearly half of all Americans pay zero federal income taxes—that tax cuts raise the deficit. But increased deficits must be financed in the future, either by increased taxes or more borrowing. If we use future taxes to pay for current deficits, plus interest, then tax cuts today are really tax increases on future generations. In fact, it appears that the U.S. is bent on implementing the largest intergenerational wealth transfer in human history.
Interest: If we don’t cut spending, then spending will be cut for us when debt service becomes such a large budget item that it crowds out the spending that the left loves so much. In fact, by 2026 interest payments on the debt may be 10 percent of total federal spending. To put that in perspective, total defense spending is 12 percent of the budget. When you add the fact that Medicare and Social Security are 30 percent of the budget, and transfers to the poor for health and income security are 30 percent, there’s no budget left.
So, I’ll summarize:
1. The Right’s strategy of cutting taxes, because no one really wants to cut spending, is actually causing a huge tax increase, so tax cuts are fake.
2. The Left’s strategy of using deficits to finance spending has created a budget obligation so large that it is actually causing spending cuts, so spending increases are fake.
Meaning that we can’t cut taxes, and we can’t raise spending, not really.
Of course, folks in Washington understand everything I’ve said. That’s why our political parties are staging this dramatic chicken game: They’re pretending to care about the debt. But they’ve agreed in advance that they will both swerve, at the last minute, because they both have plenty of steering wheels left. And somehow the public will be grateful that the political system has avoided a fiery crash that politicians intentionally created in the first place.