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Michael Cianchette is a Navy reservist who served in Afghanistan. He is in-house counsel to a number of businesses in southern Maine and was a chief counsel to former Gov. Paul LePage.
The debt ceiling fight is simultaneously one of the dumbest and one of the most consequential debates presently facing our nation.
It is dumb because the money is already spent. Congressional Democrats passed recent spending bills when they were in the majority. They deserve a chunk of the blame because they should have made sure the cash was available — through taxes or debt — before authorizing the Biden Administration to spend the money.
But Republicans don’t get a pass, either. They took over the House of Representatives and they must now govern responsibility. Saying “the other guys did it” does not make the problem go away.
Signs indicate that the impasse may be resolved soon. That’s good. Then we can move to the important part of the debate.
Washington is full of weasel words when it comes to debts and deficits. The Biden Administration has crowed about their “historic” deficit reductions. FactCheck.org charitably called this claim “misleading.”
It works like this: imagine Jim, who has a baseball card worth $5. The world goes a little awry and he raises the asking price to $50. Then, he “slashes” the price to $10. Now he can say that the price has been reduced 80%, right? Just ignore the fact that it is still double where it began.
The kicker is that people sometimes fall for it. It’s human nature.
JC Penney is a famous case study on this phenomenon. They were lagging in the marketplace, so their corporate leadership launched a bold new strategy. Instead of coupons, percent-off deals, clearance sales, and other mish-mashed discounts, they would offer simple, consistent, clear low pricing.
Physiologically, people get a rush from feeling like they “won” something they purchased on a discount. Imagine two of the exact same shirts: one listed for $30, the other marked at $80. However, the $80 shirt is on a 50% off sale and you have a $10 coupon towards a single item. The $30 one has no discounts.
So, to walk out of the store, you would spend $30 dollars on either shirt. But you feel better about walking away with the one that “normally” costs $80.
Politicians know about this phenomenon, too. Hence feel-good claims about “historic” deficit reduction. It’s malarkey.
The reality is America’s national debt has skyrocketed in the past several years through massive annual spending deficits. This isn’t a partisan issue; majorities in both parties played the game. Expanded unemployment, paycheck protection programs, the “Inflation Reduction Act,” stimulus checks – all of these were funded with dollars the government did not have.
So, to finance the spending, the Treasury Department sold bonds. Those bonds were bought by the Federal Reserve, who created dollars from the ether to finance their purchase.
To reverse course, the federal government needs to take in more dollars than it pays out through programs. The surplus returns dollars to bondholders, including the Federal Reserve, and removes those dollars from circulation. In practical terms, that means increasing taxes and reducing spending. Neither of those actions are politically popular.
In order to restore sanity to America’s financial picture, everyone will need to participate. Even if you take every nickel of net worth of the 25 richest Americans — ignoring the havoc that would unleash on the financial markets — you would be able to pay approximately 6% of the national debt.
Back in the late 1990s, the last time Washington had a surplus and paid down debt, middle income Americans paid about 17% of their income in federal taxes. The top 1% of earners paid nearly double, around 33%.
In 2019, those effective tax rates were 13% and 29% for each group, respectively.
On the spending side, in 1998 under President Bill Clinton, the federal budget was around $1.65 trillion, or 18.5% of GDP. Under President Joe Biden this year, federal spending is estimated at $6 trillion and 24.5% of GDP.
To return to the posture of the late 1990s, you would need to tax an additional 4% of everyone’s income while cutting federal spending by 25%. In other words, you would need to tick off every voter, every business, and every special interest group. And then survive the next election, lest some demagoguing challenger make it all for naught.
This is one of the most difficult challenges we face as a nation. To his credit, Rep. Jared Golden is drawing attention to it. Hopefully others in Congress will level with the American people and do the same.
