Are you enjoying the heated congressional battle over this year’s all-important budget?
Republicans are getting closer to coming up with a plan the Council of Economic Advisors promises will increase real economic growth to 5.2 percent over the next four years, with up to 7.4 million new full-time American jobs saved or created during the next four years, an increase in investment up to 14.5 percent in the next four years, up to $11,600 in higher wages per worker and up to $13,300 more in take-home pay for a family with two children.
Democrats are protesting that the Republicans’ “One Big Beautiful Bill Act” moving through Congress “actually doesn’t reduce this deficit, it blows it up,” as Texas Representative Greg Casar put it. “Ultimately, it is about tax cuts for billionaires and then cutting health care and other essential services for the American people,” he went on to say.
Actually, there are some beautiful points in the proposals, but both supporters and opponents agree on the long-term effect. After four years, the deficit could increase by trillions since, of course, Congress will not kick the ball further down the road for four more years—right?
Regardless of the outcome of this particular battle, we should all recognize this debate as a symptom of a much more dangerous disease. Although acknowledging that is too rare in Washington, some truth-tellers, such as the American Enterprise Institute’s Yuval Levin, explain that the whole budget of domestic discretionary spending being debated is not even the real problem. As he wrote recently:
All domestic discretionary spending is now about 14 percent of the federal budget, while entitlement spending amounts to more than 50 percent, according to CBO figures. More importantly, the growth in federal spending is heavily concentrated in entitlement spending, while discretionary spending is declining as a share of the budget and the economy. It simply isn’t possible to offset the coming growth of Social Security and Medicare spending by curbing domestic discretionary spending. This means that any effort to seriously improve the fiscal trajectory of the federal government has to be focused on entitlement reform. There is no alternative.
Of course, dissatisfying and dangerous as it may be, there is in fact an alternative, and just about all elected officials have taken it. Knowing their constituents oppose cuts in Social Security and Medicare entitlements, congressmen simply ignore the incredible sums we spend on the programs. Even minor cuts in the less popular entitlements like Medicaid almost sank the whole present bill. As far as serious solutions, Levin encourages congressional Republicans to recall that they were once more open to discussing the real problems as recently as 2017 and need to face up to the debt facts today. “Ignoring the fiscal challenges our government faces is bad enough. But today’s GOP is pretending to address them while actually making them worse.”
Clearly, the electoral risks of touching “third rail” entitlements are enormous and might even have cost the GOP the 2018 Congressional election for even discussing entitlements. So, what can be done? The bare fact is that nothing short of a massive economic crisis could make significant entitlement debt cuts possible. A massive recession was required in 1932 to create entitlement underfunding right from the beginning, and only a like event could seriously reform it. Only serious stagflation in 1980 made it possible for the Ronald Reagan-Paul Volcker market readjustments and Social Security age cuts. Even then, those limited changes caused significant political losses in the following midterm election. But the market did recover, followed by Bill Clinton’s claim that the “era of big government is over.”
The job of serious observers worried about a fiat money debt crisis must be to intellectually prepare the way to reform.
That recovery lasted until the Great Recession of 2008, which saw the adoption of George W. Bush’s and Ben Bernanke’s Troubled Asset Relief Program (TARP) policies to support banks and firms directly to stabilize the financial system rather than allowing the market to find its own level and recover. Suppressed further by the American Recovery and Reinvestment Act of 2009 by Barack Obama, the Federal Reserve did not finally lift its suppression of near-zero fund rates until 2022. Even if the market has recovered somewhat since then, the current budget debate cannot be understood apart from these shortsighted and destructive government interventions.
Under all current plans, the long-term debt crisis remains. In responding to the recent Moody’s reduction of the US credit rating, the Wall Street Journal headlined that “Washington Deserved a Downgrade” for not reducing long-term debt. But the Journal was still confident that the dollar’s reserve-currency world advantage would still allow the debt to be handled. As long as the Federal Reserve allows Congress to escape its deficits by printing dollars and suppressing debt within its own money accounts, the flawed system will survive on artificial life support. But as securities expert Ruchir Sharma and the Journal’s Gerard Baker emphasize, the dollar is under world pressure too.
The only real solution is cutting the debt, and the only way is with cuts in entitlements. Yet, it is also true that any serious action to reduce them would be political suicide—unless things get so dire that elected officials are forced to cut. Even then, any sufficient reductions would soon be joined by a crisis over the dollar reserve status, which has been the main instrument supporting the whole US fiat money system.
Going back to a gold-backed dollar would be the safest solution (and Reagan tried). But the former US director of the European Bank for Reconstruction and Development, Judy Shelton, has an interesting alternative, endorsed by George Gilder. Her new book, Good as Gold, proposes a fifty-year US Treasury bond refundable in gold to create some anchor with a real money base, although she prefers a true gold standard as a more permanent solution. In his first term, President Trump nominated her to the Fed board, and a Senate vote for advancement only failed by three votes. That was a shame; desperate times need serious people who will implement imaginative policies rooted in economic realities. Sadly, it seems like there is little appetite for boldness like Shelton’s on Capitol Hill.
As Levin emphasizes, however, congressional support is as essential to solving the debt crisis as the president’s. One explanation for the lack of legislative leadership is the weakening and de facto abandonment of the seniority system since the 1970s. That old approach was a proven means to provide legislative leadership because it secured genuine institutional knowledge and promoted real deliberation. Any president serious about reforming this broken process should demand a return to a seniority system with competent and powerful committee chairmen to deal with his cabinet.
Ideally, a serious economic crisis would come soon, in the next year, still with a risk-taking president and a supportive Congress. Meantime, the job of serious observers worried about a fiat money debt crisis must be to prepare the way intellectually—remembering that the last time there was such an opportunity, rather than taking advantage, a Republican president added a whole new entitlement called Medicare Part D, and the time before that a Republican president created today’s fiat money system. The lesson to be learned is that the intellectual advisors and decision-makers supposedly most likely to make the reforms were the ones creating the current crisis.
