Wednesday Morning Rant

You know, Paul, Reagan proved that deficits don't matter. We won the mid-term elections, this is our due.
-- Vice President Dick Cheney to Treasury Secretary Paul O'Neill, Winter 2002

Cheney and all like him were wrong about limits. Deficits do matter. There are three unspoken words that must be tacked on to the end of Cheney's statement in order to make it accurate. He should have said, "deficits don't matter for a while." The game can go on for some time - and the US government was able to play a much longer game than most, for a number of reasons - but "for a while" eventually reaches its end.

Well, we've reached the end of "for a while."

Net interest costs were $659 billion in FY23. Interest is the sixth-largest spending category in the federal budget, and is an ever-increasing cost both because of rising interest rates and because we keep compounding the problem. It has become unmanageable, and nothing can be done to reduce it without driving the budget back into surplus. The bond market is not going to reduce interest rates, and the Fed can't force it to. If the Fed decides to end-run the market and just monetizes the debt directly, it can bring down interest expense but at the cost of more inflation, which demands more spending, which produces yet more inflation, etc. The Fed can't fix this.

But the interest is a symptom, not the core problem. Assuming that the only things the government paid for were Social Security, Medicare/Medicaid, defense, other welfare and interest, we're still a trillion bucks in the hole. Government finances are so grossly overextended that even flat-out canceling most of it isn't enough. It is akin to a bankrupt individual cutting out the $5/day donut habit when the real problem is that he can't afford his multi-million-dollar house and fleet of exotic cars anymore - that he can't afford his lifestyle anymore and, bluntly, never could.

There is no fixing this without the equivalent of getting rid of that house and those cars and digging out from under the debt. In US government finance terms, that means dealing with Medicare and Medicaid. Receipts from the dedicated tax in FY23 were just $343 billion, compared to $1,737 billion in medical spending (Medicare is about half that, the rest is Medicaid and other health services). Medical spending alone ran a deficit of $1,394 billion, or about 82% of the total budget deficit. The rest is mostly in Social Security, which has program deficits representing about 15% of the total budget deficit and it can be fairly easily fixed. It would be politically unpopular, but there are a number of ways to shore up Social Security and keep the program.

The elephantine medical spending problem, however, cannot be fixed with modest changes. It is so large that without massive changes, it eliminates the possibility of controlling the deficit or even of the United States continuing as a going concern. It is, for all intents and purposes, the entire problem. There are several ways to do this, ranging from massive reforms throughout the medical industry to bring overall costs down in combination with ruthless cutting within the programs and outright cancellation of many CMS functions (likely including the elimination of Medicaid as an ongoing program), to nationalization of the entire medical industry along with new tax sources so that access can then be rationed to contain costs.

But don't bet on either. Ending deficit spending is wildly unpopular politically and the system-wide balance of power, fear, dependence and corruption can't survive a multi-trillion-dollar reduction in spending. Too many rice bowls get shattered at all levels. Grinding the US federal budget back into surplus so the debt can be managed will probably cause at least a 20% hit to GDP, at least half of it in the medical industry. Nobody wants to be the guy who's legacy is "caused an economic depression."

So the US government will probably just nibble at the edges. It will cut out the $5/day donut habit while trying to continue financing a lifestyle it cannot and never could afford. This will go on until the bond market enforces austerity or the whole damn thing just falls apart under the weight of failed obligations and opportunistic outsiders eager to carve off a piece of the corpse for themselves. It's tidy austerity now or messy austerity - maybe even messy up to the point of collapse - later.

The US government will not under any circumstances choose austerity now.

posted by Joe Mannix at 11:00 AM

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