Several readers responded to our July 30 commentary, “The Cost of Debt Ceiling Crisis” (https://www.cumber.com/market-commentary/cost-debt-ceiling-crisis). We thank them for their input, and here are their remarks.
This comment in favor of a rational tax policy came from Paul Horne, an independent international market economist since he retired as Smith Barney’s international economist.
Thank you, David, for this ... analysis of the costs of the political brinksmanship that clearly motivates extremists in Congress.
I was struck by your single reference to what I consider one of the crucial flaws in the entire deficit/debt debate: Tax revenues. Here is the reference: “Were they, in fact, to otherwise pass a 10-basis-points tax on all borrowing, there would be outrage by citizens. The impact is the same, but the hidden tax of bad policy allows obfuscation.”
Our head-in-the-sand attitude toward taxes is shameful, especially in a country that spends around 68% of GDP on consumption and income inequality is unprecedented in our lifetimes.
The OECD reports that the U.S. has the lowest total tax burden (municipal, state, federal taxes and Social Security) of any of the major developed market economies: Around 26% of GDP vs. an OECD average of around 34%. See: https://www.oecd.org/tax/revenue-statistics-united-states.pdf .
The decline in the U.S. tax burden since 2000 (in fact, well before 2000), is occurring despite the fact that our ageing population, slow growth of the labor force and very slow growth of total factor productivity have limited our potential, non-inflationary GDP growth to less than two percent. I note too that income inequality has not been offset by capital spending growth that would enhance potential growth.
And all this while our national needs are growing rapidly: ageing, healthcare, education, infrastructure and affordable housing are only the most important issues needing more public spending.
Yet any mention of raising taxes, in a progressive, measured way, is met with outright rejection or outrage. “It is not politically possible!” is the usual response. End of discussion.
Yet the extremists in Congress insist on reducing spending on our social safety net, tax collection and infrastructure while never losing the opportunity to insist on new tax cuts. Even though there is no lasting correlation between tax cuts and trend GDP growth.
It would be so beneficial if reasonable people could agree on progressive, gradual tax increases in line with our potential, non-inflationary growth rate. And to adjust the parameters of our social safety net such as the eligibility age for and contributions to Social Security, and extending Medicare/Medicaid authority to negotiate medical and medication prices at a national level.
This input came from Harry C. Moser, Founder and President, Reshoring Initiative:
I would love to see a similarly detailed article on:
- The cost of the ongoing growth of the debt to GDP ratio.
- Political changes that would increase budget discipline, since the debt ceiling does not work.
I believe: The ultimate impact of the rising debt to GDP ratio will be orders of magnitude greater than that of occasional debt ceiling crises. If the media and leading analysts such as yourself opposed the rising debt as aggressively and consistently as they have the debt ceiling, congress and the president would act. There would then be less excuse for debt ceiling crises. If there still were debt ceiling crises, the resulting negotiated debt reductions would be much larger.
Carmen Reinhart and Kenneth Rogoff defined the problem. Ray Dalio predicts a “Big Cycle Debt Crisis.” Stanley Druckenmiller and others have taken strong positions. Almost everyone knows the debt trend is unsustainable, but the government does not act. We need to create enough pressure to act to offset the temporary political pain of acting. Stopping the ratio from growing should be almost as important as stopping CO2 levels from rising.
Amy Cutts, President, AC Cutts and Associates, contributed:
An excellent primer on what happened and what the cost is. You did not include reference to the actual, technical vs intentional, default that occurred in 1979. The impact of that "mistake" was a 60 basis point increase in the T-bills rates that lasted at least 6 months and increased borrowing costs by $12 billion (Rob Westcott cited as sources for his slide on this as Macrobond Financials, New York Times, Wells Fargo, Bloomberg, Brookings, but there were other things on the slide). ... if you thought there was space, this note on the technical default is worthwhile. I see it as a nice companion to the section on the trigger letter. We know how devastating a default is, even when it was a mistake and not intentional. But it is not critical to the story you are telling.
That some members of Congress act like toddlers when they can't have a candy bar is truly astounding. They really do seem intent on burning the house down, though I don't think they realize they are still in that house.
Ed Lane of Lane Asset Management wrote:
David, .… While we don’t have to worry about the debt limit again until January 2025, the budget process promises a very painful government shutdown in just a few months. While compromises may be reached at the last minute on spending and taxes, I say may, I’m less sure the social issues will go away as “easily.”
Finally, here is a recent St. Louis Fed paper on a closely related topic:
“Assessing the Costs of Rolling Over Government Debt,” https://research.stlouisfed.org/publications/economic-synopses/2023/06/02/assessing-the-costs-of-rolling-over-government-debt
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