By Partha Chakraborty-
(Partha Chakraborty, Ph.D., CFA, is an economist, a statistician, and a financial analyst by training. Currently, he is an entrepreneur in water technologies, blockchain and wealth management in the US and in India. Dr. Chakraborty lives in Southern California with his wife and teenage son. All opinions are of the author alone.)
Benjamin Buford “Bubba” Blue, played gloriously by Mykelti Williamson in the 1994 epic “Forrest Gump”, could recite shrimp recipes, including gumbo, in his sleep. Bubba was born in Bayou La Batre in Alabama. Some two hundred miles west in Louisiana – where denizens are equally animated about their gumbo – are Baton Rouge, Louisiana and its suburb, Zachary, birthplaces of Rep. Garret Graves (R., LA.) and Office of Management and Budget (OMB) Director Shalanda Young, respectively.
The two are key negotiators that reached a debt ceiling deal announced late Saturday. I have always been fascinated by watching elected bodies perform (or not), and, watching the US Congress through this debt-ceiling trauma-drama and following their arguments met my expectations. The deal would surely mark a prime showcase of how democratic processes are supposed to work, and a feather in the cap for the President.
Invoking (or not) the 14th Amendment was a talking point the past few months. Born out of a fear that the Southern states might refuse to honor US obligations post the Civil War, section 4 of the 14th Amendment asserts that “validity” of US public debt “shall not be questioned.” 14th was brought to fore in fights over the validity of an “x-date” – the day US defaults – previously too; among others, twice during Obama Administration ruled out invoking the 14th. Justifiably so.
I am no law scholar; but it is axiomatic that for any economic entity, a default does not negate validity of extant obligations, but imposes new parameters meeting them. 14th is moot in any debt ceiling discussion as I see it.
Existence of US Debt Ceiling is a bone of contention, especially when x marks a spot we can see with naked eyes. The fact that such a mechanism does not exist in major developed economies has been pointed out; the one exception, Denmark, has a ceiling so high that it is irrelevant. It has been opined that if US Congress deems it is necessary to appropriate funds for a project or a cause, it is bequeathed to the next generation, no ifs and buts.
The debt ceiling is designed as a check-and-balance against precisely that thought. It mimics a process any economic entity operates under – you get greedy or stupid and lose sight of the reality sometimes and you hit your credit limit. Existence of a credit limit forces you to rethink choices made before, especially as it comes to their continuation, just as it does for the US Government. QED.
The fact that US Fed can print money, literally and figuratively, is a very crucial wrinkle we will come back to later.
That the US Government is not a model for efficiency is no secret; I argue a functional government with its checks and balances delivering public goods is never meant to be lean and mean. Right concern is the extent of its profligacy. No parable for transparency either, public entities are known to routinely inflate needs, pad with layers and layers of bureaucracy – agencies and permitting bodies included, and bequeath largesse on both constituents and the civil service. It is in the interest of nobody to really put the damper on, except when forced, like right now when faced with a crisis. When that happens, the correct path is to prune up, shape up, and, shore up. This time is no different.
I was struck how little the current bill achieves. According to Speaker Kevin McCarthy, “We will return to 2022 spending levels for non-defense accounts and set top-line spending at 1% growth for the next six years.” The New York Times estimates it reduces Federal spending by only $55 billion in 2024 and another $81 billion in 2025, compared with last estimates of the Congressional Budget Office (CBO). The savings could rise to $860 billion over 10 years, though no cap is assured beyond the second year.
The bill also ends a freeze on student loan repayment currently in place, claws back $30 billion in unspent Covid relief monies, while keeping intact two critical future Covid programs. An incremental $80 billion allocation to the IRS under Inflation Reduction Act gets clawed back somewhat – $1.38 billion immediately rescinded and $20 billion repurposed.
In exchange of these, and a few minor items, the bill suspends the US Debt Limit for two years till end of 2024, past general election. That is a big win for the Biden administration, no doubt.
Work requirement for welfare is a sticking point in today’s discussions but should not be. Last time the US balanced its budget was under Clinton Administration, who concurred with the Republican-led Congress to pass a welfare-reform bill that included work mandates, something (then) Senator Biden supported although it was reviled by fellow leaders of the Democratic Caucus.
In about four years welfare rolls were cut by half, without any social carnage. To the contrary, poverty rates among traditionally high users of welfare also plunged. US unemployment today is at 3.4% and Black unemployment is at 4.7%, both at their historical lows, and 10 million jobs remain unfulfilled forcing some states to consider loosening work rules for the young to reduce dependence on (presumably undocumented) immigrants.
I would be the first to assert this is a good time to incent and motivate people to reskill and seek employment. Work brings more than a paycheck; it brings dignity – interminate dependence on welfare brings nothing but self-fulfilling prophecies of doom.
The story repeats in India and in every disadvantaged people I have come across – women and men are better off beyond dollars and cents when they are gainfully deployed than when not. We can argue about how a welfare to work mechanism is designed, including who and how much, but must never quibble work requirements benefit the recipient in general.
Growing up outside of the US, and through my graduate level training in Economics, I acknowledged and appreciated the power of the US Dollar, backed by the faith and credit of the US, as the global reserve currency. The pillar upon which that stands is the US Treasury Debt – some $4 trillion change hands every single day in the repo market, $25 trillion are in public hands, $7.6 trillion held by non-US treasuries as reserve.
US Treasuries are truly the closest anyone can imagine for a riskless asset, forming the basis of every financial transaction globally one way or the other. We can and do punish rogue nations by severing them from the financial system, because we can and they cannot, thanks to the mighty USD. Everybody appreciates this, and myriad other virtues that flow naturally therefrom.
What is left unsaid for the most part is that such a venerated position is never set in stone.
The more the US goes on an unhinged spending binge at the government level, the more we strain the system. It can be argued that the current default drama was accelerated in its onset as the interest rates started to rise, which was necessary to tackle inflationary pressures on the economy, which was itself fueled by the wall of liquidity erected by the Fed, and the US Treasury, over many consecutive administrations.
At least since the Great Recession, global uncertainty and COVID brought about a flight to safety of the US Treasuries – thereby forcing down interest rates and postponing the pain about to be unleashed. A revert to normalcy, and some unforced errors – including supply chain issues – set off the butterfly of inflationary pressures that, I would argue, brought the US to the brink in the middle of 2023.
If there is no debt ceiling, hypothetically speaking, we will lose a forced correction. The market will surely notice beforehand, demanding increased compensation for assumption of US debt in the form of higher rates, and launching a cascading mechanism that will do the same thing as a default we so dread, even if muted and more gradual.
What the Fiscal Responsibility Act (2023) does is to put a Band Aid to a problem we have become too good at pushing the ball down. The mighty US financial system is vulnerable if stretched too thin, too fast, and without a thought or care. The only remedy we know that works – in theory and numerous times in practice globally – is a lesson in prudence, limiting profligacy and limiting the reach of the government to where nothing else can work.
And we have to do that consistently, through days of rain as well as through days of honey and peaches. Only then the debt will not balloon to a level we can no longer service, even if we have the intent. Only then, the faith and credit of the US shall continue to truly be recognized for the privilege it bestows. Only then we can be comforted that we live in a single superpower planet with its awesome power and responsibility.
It is jokingly suggested that Director Young and Rep. Graves hashed out the deal while exchanging family recipes of gumbo, laced with some profanities. If it were left to my hands, I would discard the debt and watch the sausages as they are made. The Fiscal Responsibility Act does none of that – it does not reduce the debt to any significant amount, it puts no end to the sausage making machine.
And that is a shame.
