The looming United States debt-ceiling crisis, which by the end of this month could make it impossible for Washington to pay its bills or its debts, is the product of politics, not economics.
Buyers of U.S. government bonds still want them. Holders of T-bills don’t plan to burn them. The U.S. Treasury is having no trouble financing and refinancing. Out in the real world, there’s no crisis.
What there is instead is a manufactured crisis. It’s kind of like the Doomsday Machine in Dr. Strangelove, though less funny. The Republican Party, which controls the House of Representatives, is saying that unless President Joe Biden’s administration agrees to big spending cuts, it will refuse to raise the government’s (artificial) borrowing limit.
That would cause the country to default on its debts. Minor side effects would include blowing up the banking system and paralyzing the global economy. It’s like if you told your spouse that, unless they promise to never buy another pair of shoes, you will cause the bank to foreclose on the family home.
On the plus side, the Republicans probably won’t go through on the threat. They discovered this game of high-stakes chicken during the presidency of Bill Clinton, and though the government was temporarily shut down on several occasions in the 1990s and 2010s because of a lack of funding, the GOP always had to compromise in the end. National paralysis wasn’t a political winner.
So even though Donald Trump last week endorsed the plan – “if they don’t give you massive cuts,” he told a CNN town hall, “you’re going to have to do a default” – it remains hard to believe the Congressional GOP leadership would actually do it.
The crisis is a bit like fake news – except if the people faking the news had the power to create the events they wished were happening. Republicans want to believe that the U.S. is in the midst of an immediate and existential fiscal crisis; by happy coincidence, Republicans can, if they wish, create such an existential crisis, immediately.
But unless Republican politicians insist on pushing the U.S. into debt default, there’s no fiscal crisis.
However, the U.S. does have a long-term fiscal problem. It won’t sink the country next week, or next year. It may not even have an impact this decade. Large countries with their own currency have a remarkable ability to keep on borrowing and borrowing, and borrowing some more, often at remarkably low rates. That’s handy for Washington, because it has no plan to do anything other than run large deficits as far as the eye can see.
This year’s shortfall is expected to be US$1.5-trillion, or nearly 6 per cent of gross domestic product. This despite the U.S. economy being at the peak of the economic cycle and at full employment. Even so, the U.S. fiscal gap is as wide as it is, and the Congressional Budget Office projects it to grow over the next decade.
To put it in perspective, a deficit of 6 per cent of GDP is equivalent to Ottawa running a deficit of around $160-billion – four times what the Trudeau government has penciled in for this year.
This is the point when I am supposed to trot out that old cliché: “Spending is out of control!”
But U.S. government spending isn’t out of control. Quite the contrary.
American governments outspend their peers on the military and prisons, and not much else. The U.S. social safety net is very thin when compared with Western Europe and even Canada. It’s part of the reason why Americans can expect to live, on average, six years fewer than people in other rich countries. Compared with the rest of the rich world, U.S. poverty and inequality are more widespread and more stubborn.
There’s no arguing that the U.S. has a big gap between spending and revenues, but that’s not because spending is out of control. Spending is low. It’s just that tax revenue is even lower.
In 2019, the richest Western European countries collected about 40 per cent of GDP in taxes. In Germany and the Netherlands, the figure was just shy of 40 per cent; in Norway, Finland, Sweden and Austria, it was a bit more than 40 per cent; in Denmark, 47 per cent. In Canada, tax revenues were 33.1 per cent of GDP. (Surprise: Canada is not a high tax country. But that’s a story for another day.)
And in the U.S.? Tax revenues were just 25.2 per cent of GDP. That’s down three points since the year 2000.
The U.S. is a very low-tax country. And when it comes to social programs, a country gets what it pays for – and what it doesn’t pay for, it doesn’t get. With one exception: The U.S. would have even less in the way of social programs if it were not inflating its spending power with large deficits.
The logical fix would be to raise tax revenues, rather than dropping an already low level of spending down to the even lower level of tax revenues. But that’s less likely to happen than a U.S. debt default.