Let’s Talk About the National Debt, PAYGO and the Big Dem Debate.

So an interesting debate is brewing within the democratic caucus regarding the rules of PAYGO (or “pay as you go”).  VOX has a particularly excellent breakdown of the debate here I would recommend everyone read. They also have a pretty basic description of the rule itself:

The rule means any legislation increasing mandatory spending (like entitlement programs) or cutting taxes — and therefore increasing the deficit over the next 10 years — would have to be offset with budget cuts to mandatory spending or tax increases. The rule can only be waived with a majority vote.

The purpose of the rule is to keep spending in check, and it dates back to 1990 following the ostentatious spending of the ’80s Reagan years.  George H.W. Bush and Clinton endured periods of it in order to balance the budget, but once the economy boomed and we had a surplus it was largely waived.  After 9/11, Bush let it expire indefinitely in order to get his tax cuts passed and start the military build-up necessary for two wars.  Obama reinstated PAYGO but in 2010 a more GOP House created the more draconian “CUTGO” which required any mandatory spending increases to be offset by spending decreases elsewhere– you couldn’t raise taxes to make up the difference.  When Trump passed his tax cuts, the PAYGO and CUTGO provisions were waived.

We’ll get to the democratic debate shortly, but let’s first chat about why they enacted PAYGO in the first place–the ballooning national debt.

The National Debt

The national debt of the United States is the debt, or unpaid borrowed funds, carried by the federal government of the United States, which is measured as the face value of the currently outstanding Treasury securities that have been issued by the Treasury and other federal government agencies. The “deficit” or “surplus” usually refer to the federal government budget balance from year to year, not the cumulative amount of debt. A deficit year increases the debt, while a surplus year decreases the debt as more money is received than spent.

In general, government debt increases as a result of government spending, and decreases from tax or other receipts, both of which fluctuate during the course of a fiscal year.  Historically, the US public debt as a share of gross domestic product (GDP) has increased during wars and recessions, and subsequently declined. The ratio of debt to GDP may decrease as a result of a government surplus or due to growth of GDP and inflation. For example, debt held by the public as a share of GDP peaked just after World War II (113% of GDP in 1945), but then fell over the following 35 years.

As of October 28, 2018, debt held by the public was $15.8 trillion and intragovernmental holdings were $5.8 trillion, for a total or “National Debt” of $21.6 trillion.  If you would love to see what that looks like in real time, I suggest you check out the National Debt Clock.  Debt held by the public was approximately 77% of GDP in 2017, ranked 43rd highest out of 207 countries.  The Congressional Budget Office forecast in April 2018 that the ratio will rise to nearly 100% by 2028, perhaps higher if current policies are extended beyond their scheduled expiration date. As of December 2017, $9.3 trillion or approximately 45% of the debt held by the public was owned by foreign investors, the largest being China (about $1.18 trillion) then Japan (about $1.06 trillion).

So how has it looked in the last 40 years?  Well it took our nation 205 years to pass $1 trillion in national debt for the first time, which was in 1981.  It took only 6 years to pass $2 trillion and only another 3 to pass $3 trillion.  This is largely due to the Reagan years of cutting taxes and increasing military spending.  By the time we were about to pass $4 trillion, voters had had enough of the Reagan/Bush years and voted in Bill Clinton.  For most of the 90’s it stayed under $5 trillion (and even slightly declined due to a surplus caused by a booming economy).  After 9/11 and the Bush tax cuts, Medicare Part D, and two foreign wars, the next 8 years doubled the debt to $10 trillion. With the Great Recession, falling revenues, and the need for economic stimulus, the Obama years saw an increase from $10 to $18 trillion, although deficits were decreasing by the end of his term.  With Trump, his tax cuts increased deficits to over $1 trillion a year and we are now well over $21 trillion only two years in.  If something is not done to improve the government ledger, the country faces financial catastrophe.

The PAYGO Debate. 

Which brings us to the big debate within the Democratic Caucus right now.  If you’ve noticed from the preceding paragraph, Republicans love to take the opportunity of power to pass huge tax cuts and increases in spending favorable to their side, without any offsets to revenues or other spending.  It creates an ungodly mess, but they throw one helluva party for their side.  Over the past 40 years, Democrats have been the party of fiscal restraint and responsibility.  Sure, debts skyrocketed under Obama, but fiscal stimulus was necessary, especially when you consider most economists thought that the eventually passed stimulus was too small.  When he came into office, deficits were $1 trillion and the economy was cratering, and when he left it was half that and the economy was having the longest stretch of positive economic news in a generation.

However, with the inclusion of new, more progressive members to the House, some Democrats are saying it’s their time to throw the party for their constituents.  Pet issues like Medicare for All, Student Loan forgiveness, free college or subsidized day care are hugely popular with their liberal base.  The catch is that these are also costly programs, and the PAYGO rules get in the way creating another obstacle for them to maneuver.  While the passage of any of these programs would likely be hugely popular with most Americans, they would all blow a hole in the deficit if offsets are not considered.  Just into the Speakership, Nancy Pelosi is a huge proponent of the PAYGO rules and control of the government finances would be a positive improvement.  But a contingent in the Democratic caucus are already whispering about how to undo the PAYGO rules, and if the size of the group gets large enough, they can cause real concern for Pelosi’s tenure as Speaker.

Here we are, Day 1 of the new Congress, and it’s already interesting.  More to come.

 

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