“O villain, villain, smiling, damned villain!”
Every election year, conservatives are duped by an incumbent or a candidate with an R next to his or her name with promises of fiscal conservatism: ensuring government is small, reduced spending, keeping the state out of the economy, and making taxes as low as Mayor Bill De Blasio’s 2020 polling numbers. Yet, when this person arrives in Washington, the politician contributes to racking up the national credit card, leaving constituents stumped: Didn’t Mr. Smith say he was going to Washington to resuscitate fiscal sanity? Indeed, for every Rep. Thomas Massie (R-KY) or Sen. Rand Paul (R-KY), there are dozens of neoconservatives, RINOs, and Rockefeller Republicans.
Crunching the Numbers
The Treasury Department recently reported the July budget numbers; they were not pretty for President Donald Trump and the Republicans. According to the Treasury, the July budget shortfall widened to $120 billion, up from $77 billion in the same time a year ago. It would have been $9 billion higher if it were not for adjustments in the timing of federal benefit payments and tax receipts.
So, this must mean that federal revenues declined, right? Nope. One senior Treasury official stated that July was a record month for receipts, climbing 12%, thanks to higher revenues from income, payroll, and corporate taxes. Also, Washington’s revenues from customs duties surged 59% last month. The real problem on Capitol Hill was the behavior of drunken sailors. Spending surged 23%, driven by greater outlays on defense, Medicare, and Social Security.
Overall, the budget deficit for the fiscal year (FY) 2019 has skyrocketed 27% compared to the first ten months of the last FY. During this time, spending has increased 8%, and receipts have edged up 3%. The White House is already warning that it anticipates a $1 trillion deficit.
A Drunk Sailor Who Spends
Legendary economist Milton Friedman said, “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” But he also averred, “Governments spend whatever they take in and then whatever they can get away with.”
Republicans generally have the right idea when they cut taxes, whether at the corporate level or at the personal rate. And, no, the federal government does not need to find a way to “pay for tax cuts” because politicians are giving the people back their money. This is perhaps one of the more infuriating arguments from the left because it implies that the fruit of your labor belongs to the state.
That said, any tax cut needs to be followed by a reduction in spending. It is here that the GOP has failed.
Although President Trump’s across-the-board tax cuts have yielded an increase in revenues, as predicted by the Laffer Curve, they have not been enough to cover the tab. They never have and never will; this was true under former President Ronald Reagan and former President George W. Bush. Now it is correct under President Trump.
Remember, spending is just another penalty because it will need to be paid for somehow – tax, borrow, or print. By refusing to bring down expenditures, which have topped $3.5 trillion, today’s politicians are passing the burden to future generations, who will be forced to pay for the spending one way or another. All you are doing is delaying the levy for instant gratification and immediate political capital.
When a Republican administration presides over an astronomical deficit and raises the national debt to historic levels, it provides leftists with ammunition to shriek to the heavens about how tax cuts are not a successful public policy. They simply need to point to the ballooning debt and deficit – past and present – to prove their point. Interestingly enough, their current 2020 proposals will send the debt into interstellar space, so if they are suddenly worried about accounting they should study their plans.
At the same time, it is understandable why any politician – Republican or Democrat – would want to avoid reining in the two big-ticket items that affect the books: Social Security and Medicare. Anytime you propose modest reforms to ensure the soon-to-be insolvent programs can survive a few more years, you are accused of hating old people and wanting to push them off a cliff. Perhaps this is why Trump pledged not to touch the entitlements.
Creating a Bond
So, how exactly is the federal government getting away with all this deficit-financed spending? The Treasury is turning to the bond market to fund its outlays. But there might be a cap to all this borrowing, which has been on an upward trajectory since Trump received the keys to 1600 Pennsylvania Avenue.
After the Trump administration and Congress agreed to a two-year delay of the debt ceiling, preventing a shutdown or a federal default until 2021, the Treasury announced it would borrow $814 billion between July and December. While this prevents taxpayers from having to endure a bigger tax bill, flooding the bond market with Treasurys has many wondering if there is sufficient short-term liquidity to cover the supply and avoid raising near-term borrowing costs and inverting the yield curve deeper.
On one hand, the Treasury is rejuvenating its cash balance. On the other hand, this pattern is fueling long-term bonds generating a lower yield than short-term debt.
But the Treasury has gotten away with it so far because investors around the world are buying US debt. And you can thank the incompetence of foreign central banks for this because they are helping their bonds slip into subzero territory. As Liberty Nation reported, $15 trillion, or one-quarter, of the bond market offers traders with negative yields. From Sweden to Germany to France, many developed economies are selling negative-yield bonds – the Treasury considered it in 2017 but abandoned the idea.
It seems that no matter what happens, investors will always turn to the US in uncertain times. Maybe when President Donald Trump championed European Central Bank (ECB) Mario Draghi on his performance, it was all part of his grand 4D chess strategy.
Satire website The Babylon Bee ran this hilarious headline in February 2018: “Republicans Announce Plan To Pretend To Be Fiscally Conservative Again The Moment A Democrat Takes Office.” This is not far from the truth.
The GOP typically gets into office by lambasting the Democrats’ tax and spend ways, grieving about burdening our children and grandchildren with obscene levels of debt. Yet in 2016, with control of the White House and Congress, nothing was done to tackle the $22 trillion debt, the bloated deficit, enormous interest payments, and the $3.5 trillion outlays. Even Trump has gone on record saying that the party will ax spending later. By the time the government employs across-the-board reductions, it will have been too late.
On this file, the Republicans have turned satire into reality.