The Debt Ceiling That Truly Matters – Any Room Left On Your Credit Card?

Following Your Money
By Rob Zimmerman

The drama, and perhaps all the feigned trauma, of debt ceiling jousting concluded with the debt ceiling raised yet again. We have had 100+ debt ceiling raises since 1917, when the law was created. It’s a vital tool to assist Congress in its Article I constitutional authority providing oversight of the Executive Branch, notably the Treasury Department’s issuance of debt.

The work that truly matters must be brought forward: getting the US economy to grow at rates we have traditionally enjoyed. These growth rates have allowed our nation to prosper to levels not enjoyed anywhere else at any time in recorded history. We will take an in-depth look at the debt picture of the US consumer, particularly Generation Z.

The economic picture at Main Street USA matters far more to us than political games that matter only to the Beltway and its corporate media shills. Regrettably, the recoveries from the Financial Crisis and post-pandemic have been tepid at best. We estimate the annual cost from the lack of growth at over $10,000 per person, pain felt by all.

The additional government revenues would help close our deficits and restore the viability of the Social Security Trust Fund. The baby-boomer and buster generations now doubt the integrity of their retirements, with younger generations at a loss of hope for their futures. How many of us used to look at a better future than our parents as a traditional part of American Exceptionalism?

The debt ceiling was increased to never imagined levels, with interest to be paid by Generations X, Z, and their children. It’s our task to ensure a pathway to prosperity for them. Otherwise, we risk a Japan- and Western Europe-style no-net-growth economy with class warfare over its crumbs.

Key Takeaways:

  • The debt ceiling arguments from the radical left are just smoke screens hiding significant objections to their policy of non-stop and unneeded spending programs.
  • There is no default risk to payment of interest on US government debts. Moreover, claiming the 14th Amendment is a pathway to expanding the debt ceiling is fantasy.
  • In the most recent debt deal passed last week, the debt ceiling was raised yet again. However, as part of the bill, if Congress fails to pass a budget by the New Year, as is typical, it will trigger an automatic discretionary spending cut of 1% - which would be the largest spending restraint in recent memory.
  • US economic growth since the 2008 Financial Crisis has been tepid in most years. US government deficit spending has funded programs that have provided no long-term benefit to the US economy.
  • Previously, deficit spending in the past has often provided either a Keynesian pump priming to get short term cash to private citizens to spend and invest and/or projects enhancing a competitive advantage that grows the economy. “Stimulus” packages are now well excessive of the lost value of economic activity during the slowdown.
  • Absence of this historical growth, particularly in rebounding from the Great Recession and post-pandemic, has hindered development of our national wealth to the significant detriment in our working classes and younger generations. The money spent by government to enrich government is not helping Main Street USA invest.
  • Without real growth in the economy, our citizenry will bear increases in their debt load, particularly in the form of high interest credit cards. We are seeing this play out, most sadly for Gen Z, who are already are stifled with higher delinquencies and will face the added pressure of 2023’s continuation of student loan payments.

What The Headlines are Not Saying:

For the past month or so, the financial pundits have been panting all over themselves pontificating about an approaching “default” should the US government reach the debt ceiling of $31.4 Trillion. It’s a recurring and uneventful story as we have 100+ prior debt ceiling data points since 1917 that government has traversed without default. Nearing the “Down to the Wire” date calculated by Treasury Secretary Janet Yellen, “crisis” headlines have become staples of the political talking heads.

However, negligible commentary is found regarding the impact the increase in the debt levels We The People are incurring. Washington is way too oblivious to the challenges in our daily lives in a stagnant growth and inflation overloaded economy.

Let’s ask the real tough questions….how does the US economy look and what does our leadership in the House of Representatives need to do to get our economy growing again?

The American Consumers’ Debt Position:

  • Credit card debt increased 15.2% during 2022 according to the Federal Reserve Bank of New York. Delinquencies have also increased, particularly felt by Gen Z.
  • Year-end 2022 US Household Debt is at a record $16.9 Trillion, an increase of $1.32T, or 8.5% from 2021.
  • This takes our consumers backwards. The debt increase is well beyond the 2022 rate of inflation of 6.5% as well as the private sector wage gains of 5.1% for 2022. Real GDP growth was a pedestrian 2.1% for 2022.
  • Most of the household debt remains in mortgages, considered an investment in a stable asset – housing. This obscures interest rates increases borne by those originating mortgages. Originations declined significantly in the 4th quarter of 2022, reverting to pre-pandemic levels. Consumers pulled back when costs went up.
  • Moreover, student loan payments are to restart in 2023, placing more economic pressure on Gen Z.

Those with any sort of business experience know that whenever your customer is hurting, the hurt will soon be shared with you. Again, the Democrats are oblivious to this pain based on all the spending they have passed to fund their pet projects. We estimate the lack of growth to the economy from the Obama and Biden wasteful spending policies costs each of us over $10,000 per year.

Next, the Political Landscape:

To keep the growth of government unimpeded, at the detriment of the rest of us, here are the political facts the “default” fearmongers, including Joe Biden, choose to ignore:

There will be no default of US Treasuries. Tax collections are more than ample to cover the interest owed on all US treasuries. Monthly interest payments in the past year have ranged between 7% and 29% of revenues. The interest due WILL be paid on your savings bonds as well as all the US treasury bonds held in mutual funds, pensions, IRAs, ETFs, or directly by you.

If you have a treasury bill or bond maturing, it can be rolled over, or refinanced, even if the debt ceiling has been reached. Or you could even keep your cash as needed to pay for the higher cost of living under Bidenflation.

Claiming the 14th Amendment allows the president to override the debt ceiling has never been tested, let alone permitted, by any court. The post-Civil War 14th Amendment states in Section 4: “The validity of the public debt of the United States, authorized by law, …shall not be questioned.” This was written to protect those financing the Union debts to end slavery. Congress is constitutionally granted by Article 1 the proverbial power of the purse. Secretary Yellen has commented “it’s legally questionable whether or not that’s a viable strategy.”
The most recent comparable situation was the 2011 joust between President Barack Obama and House Speaker John Boehner. The Budget Control Act of 2011 reflected cuts across government including sequestration provisions and targets.

  • The first step raised the debt ceiling by $900B with $917B to be cut over 10 years. There were no tax increases.
  • The 14th Amendment was raised by outliers but did not get close to serious talks.
  • President Obama wanted a “clean” bill raising the debt limit by $2.4T without spending cuts. The House of Representatives defeated it 97-318.
  • Negotiations were extended well beyond the May 16, 2011 reach of the ceiling. Then Treasury Secretary Timothy Geithner directed "extraordinary measures" to fund federal obligations. The deal was signed on August 2nd, 2011.
  • There was no capitulation by the newly elected Republican majority despite incessant media hostilities.

This jousting is critical to the House of Representatives asserting its budgetary responsibility.
Alternatively, in subsequent Congresses, Speaker Pelosi completely concentrated traditional budget preparation and review to her office, pushing the annual Omnibus(t) spending packages through her caucus. No time to read the bill; “You’ll have to pass it to see what’s in it”. This process was so abhorrent that House Republicans insisted Kevin McCarthy end it before naming him Speaker.

What’s at Stake:

The fiscal policy of the US Government is off the rails and must be reined in to get our economy growing again. We will go deep into the numbers to show the shortfall to our economic growth resulting from the outrageous spending.

The debt ceiling arguments should be primarily about the wasteful policies behind what we are spending, not just limited to the abhorrent amounts of spending. The Clinton, Obama, and Biden “stimulus” packages in substance were political payback packages to primarily benefit organizations that put them in office. While attending an invitation-only private conference, I heard an internationally known Michigan based non-political economist describing the Obama Era “American Recovery and Reinvestment Act” as a waste of $1 trillion for how little economic activity it created. (Remember the Obama Administration’s backing of Solyndra’s $535 billion in eventually worthless loans created by its profligate spending and subsequent bankruptcy.)

Moreover, the Federal Reserve calculated the economic contraction from the 2008 Financial Crisis at $500B. This is on top of running deficits at three times the amount pre-recession, totaling $2.8T in spending to address a $500B loss of economic output. Ouch!

It’s about the agenda politics, not growing the economy, regardless of the rhetoric and fear behind the left’s “salesmanship”. The Biden Administration emerged from the basement to an economy that had already fully recovered from the pandemic’s loss of economic output. The $2.2T CARES Act fully funded the $2.1T loss in 2020 GDP, with GDP almost back to peak pre-pandemic economic activity.

The CARES Act remains the exception to the rest of the so called “stimulus” packages as it put cash directly into the hands of the America consumers. The remainder of these programs placed significant money into politically connected purveyors of projects that could not be economically justified with investment from private capital. This recovery still didn’t stop the Biden Administration’s 2021-2023 deficits of $2.7 trillion in excess of pre-pandemic levels. This was claimed to be necessary to cover a problem that was already solved.

The programs behind this spending are “cures” worse than “the disease”!

The Radical Left has perpetuated this practice with unnecessary spending for the $1.9T “American Rescue Plan Act of 2021”, and the $1.2T “Infrastructure Investment and Jobs Act”. Moreover, the Wall Street Journal editorial of March 24, 2023, determined the real cost of the Inflation Reduction Act’s energy and climate subsidies at $1.2T, far more expensive than the Congressional Budget Office’s estimates of $391B.

Perhaps excepting the $280B CHIPS and Science Act, these programs have not added value to the US economy as a whole and were substantial in creating the inflation struggles of 2021 and beyond. Moreover, a jobs program in a period of historically low unemployment and an inflation reduction act that does not reduce inflation are 1984 style lies shoved onto the American public.

Saddest of all, these programs have taken the growth out of the US economy. We failed to approach traditional GDP growth rates despite well beyond traditional spending levels, which were ostensibly intended to increase economic growth.

The recovery periods after recessions often experience the highest annual GDP growth rates.
Since 1960, here are the 2 year and 3 year average GDP post-recession growth rates. As a point of reference, US GDP has risen an average of 3% over the past 62 years, and for the 54 non-recession years it has averaged 3.6%.

1970: 2 year – 4.5% 3 year – 4.9%
1974/75:  2 year – 5.0%  3 year – 5.2%
1980/82:  2 year – 5.9%  3 year – 5.3%
1991:   2 year – 3.1%  3 year – 3.4%
2009:   2 year – 2.1%  3 year – 2.2%
2020: 2 year – 4.3%  1st Quarter 2023 – 1.3% (annualized)

Please note we believe 2021’s growth of 5.9% as highly influenced by the CARES Act, the only stimulus program that placed cash directly into consumers’ hands rather than targeting the politically favored. We will exclude 2021 from our determination of the loss of growth to the American consumer.

The shortfall to growth in the Obama years was not limited to his first term. The highest GDP growth rate he achieved was 2.7% in 2015. Over the seven non-recession years of his administration, GDP growth averaged the same 2.2% as in the recession recovery years. As another point of reference, the Reagan Administration averaged annual GDP growth of 3.5%, which included the Great Recession inherited from the Carter Administration. The Obama Administration averaged 1.6% GDP annual growth.

Shortfalls to growth have cost the American consumer dearly, impairing not only their pocketbooks but also the loss of tax receipts that would greatly help fix the federal deficit and the social security trust fund.

Annual GDP growth in non-Obama recessionary years averaged 1.7% less than the non-Obama years. This would take the seven year shortfall to 11.6% even without compounding. Including another 1.3% shortfall from the lackluster Biden economy would take it to 13% of total GDP. At a current GDP of $26.5T, the per capita shortfall comes to over $10,000.

Presuming FICA and Income Taxes at 15% to 20% of these amounts, annual revenues to government could increase by almost $700B should we just get to average growth.
In the timeless words of Margaret Thatcher, “Socialists eventually run out of other people’s money to spend.” Our corollary: When government spends it on pet projects with negligible if any value added, private money sits on the sidelines and does not get invested and does not grow.

Here’s What the Budget Deal Achieved:

Under the debt-limit deal, the most egregious segments of the far-left agenda that were approved by the last Congress were clawed back. This included hiring of 87,000 IRS agents, returning $50+B of unspent COVID money, slowing the freight train of “Green New Deal” spending, and return the US to the work requirement tenets of welfare reform enacted by the Clinton Administration.

Most significantly, House Republican negotiated an instrument whereby the discretionary budget is automatically scaled back by 1% if a budget is not passed by the end of the year. This comes on the heels of years of Congress passing “continuing resolutions” instead of budget that simply extended previous spending. This automatic 1% cut will force both parties to come to a budget agreement in the future, or else force the federal government to reduce spending. Even a 1% cut is a significant step in the right direction. This would reduce spending by about $17 billion, but most significantly, would cancel any automatic increases, which are typical.

Our Next Steps:

Growing the economy is one of the most important responsibilities of government. It encapsulates the Liberty and Pursuit of Happiness ideals of the Declaration of Independence. Our economic successes will substantially determine all others.

  • Growth will get our economy back on track. We must have growth in GDP faster than we grow the debt. Otherwise, revenues (taxes) cannot keep up with the growth of interest payments as a share of the economy. It will create a death spiral that will be slowed only when a financial calamity forces a most painful fix.
  • Encourage the House to make the tax cuts of the 2017 Tax Cuts and Jobs Act permanent. Send pro-growth programs to the Senate and White House.
  • Completely discard the programs identified above that hold our economy back. Growing the economy must be the most critical 2024 election issue! Republicans must distinguish themselves from Democrats to succeed!
  • Restore programs that reward innovation. For those of us old enough to remember 1960s and 1970s era urban smog, which is most responsible for enhancing air quality? A) The Clean Air Act, B) Establishing the EPA, or C) Adopting Catalytic Converters.
  • We need higher wages to bring back higher labor participation into the workforce that will help restore the standard of living to our working classes. This must be done by restoring the traditional incentives of working, not a coerced raise in the minimum wage. An increase in minimum wages has proven to be a pathway to reduced hours for the most vulnerable levels of the workforce. Securing our borders is a key step in restoring the integrity to our labor markets, along with ensuring China does not keep its free pass to desecrate the environment with impunity.
  • Get a realistic calculation for the cost of every aspect of the Green New Deal. This would include costs not officially borne through a government entity, but also include the transition and opportunity costs to renewable energy that directly hit consumers. This process would allow us to truly pay as we go to make the best market driven tradeoffs of costs and benefits. We must also develop a Congressional Budget Office that truly understands the dynamics of our economy. Understating costs by two thirds for a ten-year subsidy program totaling $800B in discrepancies is a huge hurt to America.

Our best days can still be ahead for us. Changing our spending toward growth oriented policies is a big Step One.