Drunk On Dollars
Movements Start Small #23
How did you go bankrupt? Two ways. Gradually, then suddenly. –Hemingway
Given a busy news cycle, you likely missed the gripping bi-partisan passage of the Postal Reform Act. It is a classic piece of modern legislation. Seeking to fix the impending insolvency of the US Post Office, it shoveled massive amounts of money to remove accrued debts, but failed to address any of its sources. Real leadership was demonstrated by all!
How much money? $107 billion. To put that in perspective, Fedex - the entire company - is worth about $53 billion as of this writing. Will the Post Office suddenly transform into a low cost, hyper efficient delivery operation with an annual budget surplus? What do you think? The bill literally paid down billions of debt, adjusted health and retirement benefits and yes, funded the purchase of new sorting equipment and delivery vehicles. Expect talks of insolvency to return in a decade or so.
Literally no one views it as a fix. In fact, the law forbids the Post Office from considering fundamental service changes to match the changing times. So delivery will be guaranteed six days a week…anywhere in the country. All while physical mail volumes continue to decline dramatically. New losses and debts will mount.
Sadly, this has become the state of our nation. Money is “free” so truly fixing things is not required. Politicians can hide problems by kicking the can down the road. But, they also can say to voters, “look how much I care, I am spending big money on this issue!”
Gas prices are high…how about a free gas card!
College is too expensive…loan forgiveness!
The world is getting more dangerous…more military budget!
The supply chain is broken…let’s subsidize chip fabs!
Housing affordability is out of reach…more government housing!
No matter where you stand on these issues, it’s hard to argue we are getting to root causes in these responses. In most cases, we just paper over the problem with more dollars. And we wonder why Americans are so cynical about politics.
But, the bigger question is what makes us think we can afford it? How did we get so used to spending trillions without blinking?
Well, decades of getting away with unbridled spending has fooled us into believing there are no real trade-offs. Bush and Trump had their massive tax cuts (and spending!) Obama had the financial crisis bailouts and healthcare reform. And everyone took the spending to an insane, new level during Covid.
Despite it all, over two decades interest rates and inflation remained low (mostly thanks to Fed policy and cheap foreign labor). Economists started declaring new laws of money. And the debate turned away from whether to spend trillions, but how many trillions and what special interest would get them. Tax cuts! Military! Climate change! Universal Basic Income! We can’t afford NOT to do it!
But, the spending streak is starting to show its dark side. We now have $30 trillion in total federal debt. We plan to add at least $1 trillion more each year - in good times! And we are committed to well over $100 trillion in unfunded entitlements (e.g. Social security and Medicare/Medicaid). $100 trillion!
Don’t worry, many say, the rich will pay for it! Really? If we confiscated the wealth of our top 400 richest individuals - as in took everything - 100% wealth and income tax….we would raise about $4.5 trillion - or enough to pay for about ⅔ of our Covid relief. That’s it! And we could not collect more - we took it all! The fact is tax receipts have never been higher and any proposal to increase them will be a rounding error on the current spending pattern. I am not against new taxes (they will need to be part of any solution), but again they avoid the real issue.
Ok, but we have the reserve currency and interest rates remain low. So, we can afford to borrow, some say. Here we get to the crux of the issue. Yes, even after a recent run up, the government can borrow for 30 years at about 3% per year. But, this is a manipulated price. The treasury issues debt and the federal reserve buys it. In other words, we are printing money - a lot of it. If we had to sell this debt load on the open market, the interest rate would be higher, likely much higher. Yes, the biggest market in the world, the credit market, is fixed! But the more we print to keep these rates low, the more inflation we will have. So, there are limits.
As we fight inflation, for every 1% our interest rates are allowed to go up, the federal government will owe $300 billion a year more in interest - about double the annual cost of Obamacare. In 1982, we let rates climb to almost 15% to curb inflation. If we get there…well, interest alone will exceed 100% of our tax revenues.
The cliff is coming. The good news is, like at the Post Office, more money is not solving most of our problems anyway. Ideas, innovation and technology are doing that work. Our government must move into this mode. And while progress is possible, trade-offs will be inevitable. The incumbents across our economy that depend heavily on the government - companies, NGOs, people - profit from the current way. They will resist the change - always claiming even more money is the key. But, that choice is fading fast.
A new approach must emerge. How do we solve problems while spending less? We need to produce more than dollars. We need an abundance agenda built on the back of better ideas. There are promising signs it is emerging - on both sides of the aisle. Next time I will dig into this path and how it might be the next big wave in our politics.
Good Links - Money Edition
Inflation isn’t funny. Unless it’s Dan Aykroyd doing Jimmy.
San Francisco tripled its budget for the homeless. What happened? It got worse.
The right claims the military is underfunded. Perhaps. But the accountability and waste is out of control here too.
Did all that BLM money solve racial equity? Not exactly.
Who wins in the end with free money and manipulated low interest rates? The rich.
Elon Musk to solve world hunger? If only spending money could solve these complex problems.
I think you give entirely too much significance to public debt and ignore the impact of private debt. See this Steve Keen article for more explanation and historical context: https://braveneweurope.com/steve-keen-what-is-the-role-of-public-debt-and-private-debt-in-the-next-great-financial-crisis
This may be your best post yet. I can’t wait for the next one!