Misleading and Dangerous Compromises and Irrelevant Debt Ceilings

The recent budget compromise sounded good. The hated austerity package was lifted and replaced by small increases in government spending. The pundits either praised or largely ignored the new legislation. Supporters on both sides of the aisle pointed out that discretionary government spending would be held in check and that budget deficits would shrink in the next two years. Federal government deficits that exceeded the trillion dollar mark during the worst of the recession would dip below $500 billion in 2015. Many photos were taken of men and women toasting their great compromise accomplishments. As I try to convince you of below, that picture is a lot like Putin getting an award for excellence in portraying Russian history at the opening of the Winter Olympics.  After discussing the debt ceiling I will return to why the above description of the compromise is both wrong and dangerous.

Dumber than the explanation of the compromise is the coming heated political battle over the debt ceiling. Imagine for a minute that our government required each of us to have a 14 foot statue of Justin Bieber in our living room. Okay if you don’t like Justin Bieber, let’s agree on a smiling John Kerry. Soon after the ink was dry on this new legal requirement some crack construction engineer would conclude that the average house ceiling is only 7 feet high and many people would need to raise their ceiling. So what if the enlightened government could not find votes to raise ceiling height? The statue was okay but the voters didn’t want to raise their ceilings. You say – Larry you are on the sauce again but you have to admit that this issue with the budget ceiling is the exact same thing. The agreed budget compromise results in more debt. It might only be $500 billion – but it is MORE DEBT. If the budget compromise implies more debt and that debt exceeds the current ceiling – then you gotta sell the bonds. There is no real debate here. Raise the ceiling!

Let’s get back to the compromise itself. The Congressional Budget Office recently published Federal government budget figures that are based on the recent compromise. They provide estimates of the budget through 2024 (at that point my emotional age will be almost 19).  http://www.cbo.gov/publication/45010

The CBO is usually referred to as an unbiased and nonpartisan publisher of all kinds of budget and economic data. No one really knows that will happen between now and 2024 but the CBO is pretty good at this kind of thing and most people use this information even though they know the future might not turn out exactly as they say. In other words – I am not making this stuff up so I can sell advertising on my blog and become a rich hip urbane globe trotter.

The first thing I look for is debt. No matter what the details are – the debt shows us how it all comes out in the wash. Taxes up, spending down, whatever – let’s see what the compromise implies for the national debt. Most people use the version of the debt called the Net Debt Held by the Public. That is because the gross debt is gross. All teenage girls know that anything gross is bad and the same goes for debt.  The net public debt debt was about $12 trillion in 2013. CBO projects it to be $16 trillion in 2019 and then $21 trillion in 2024. Hmm. The compromise did not reduce national debt. I have a Casio calculator and it tells me the debt will grow by 33% in 6 years; 75% in 10 years. Does that blow your shorts off or what? Your government smiles and tells you that it has compromised and taken care of our budgeting problems. Imagine getting all your personal debt right up to your limit and then asking the bank to loan you another 75% more.

Just to check if you are awake or not please answer the following one question quiz. Is it good for you or not to have one small tiny little smidgen of JD in the afternoon just before nap time?

How is it possible for them to congratulate themselves on slowing spending when they are planning to increase the debt by 33%?  Easy. You tell the truth but you don’t tell the whole truth. Your son asks you if you ate your vegetables today. You say yes but the truth is you had three Bloody Marys with a dozen glazed donuts. The CBO reports that one part of the government spending budget is Discretionary Spending.  DS was about $1.2 trillion in 2013 and is expected to be below $1.2 trillion until 2018. Get out the firecrackers. That is real budget discipline! But Whoa Nellie, that is only part of the story. The whole budget includes DS plus Mandatory Spending plus Interest. I won’t go into all the details but if you just focus on the total of all that stuff, government spending was $3.5 trillion in 2013 and the compromise takes it to $4.4 trillion in 2018 and then $6 trillion in 2024. My trusty Casio says government spending will increase by 28% in five years and 74% in 10 years.

Are politicians disingenuous or what? They parade around congratulating each other and talk about all the touch decisions they made and they end up increasing debt and spending by 75% over the next 10 years. Yet soon they will make a big deal about the people they hurt. They will probably shut down the government over a ceiling fight that makes actually no sense. And the sick thing about all this is that the discretionary spending limits hurt a lot of people. This whole charade is a way to spend even more of our money. DS will have to increase soon because of the misery it creates. But those politicians cannot change how much we spend on interest and they are afraid to touch Mandatory programs like Social Security and Medicare. So watch out for the next compromise – spending and debt will likely go up by 100% next time. Champagne will flow in DC…at least until the bond vigilantes find us out. Check out what is happening in the developing countries right now as their governments struggle yet another time with exploding debts.