- by New Deal democrat
There is a quote, allegedly from Alexander Frazer Tytler over 200 years ago, but apparently actually originating in 1951 from a conservative columnist in Oklahoma, that “A democracy … can only exist until the majority discovers it can vote itself largess out of the public treasury.” But what if instead it is the wealthy who, by backing pliant politicians, are the ones who vote themselves money out of the treasury?
That seems to sum up the fiscal state of the US in the 21st century, because three times in the past 25 years - in 2001, 2018, and last year - when the GOP has had complete control of government, there have been increasingly massive tax cuts favoring the wealthy.
Add in the incompetence and corruption of the current Administration, and the US appears to have begun a vicious cycle of inflation and interest rate increases.
Let me begin with the fiscal situation. Below is a graph of of the annual gross federal deficit (blue, right scale), and the deficit as a percentage of GDP (red, left scale) since the turn of the Millennium:
The two emergency stimulus programs during the Great Recession and COVID stand out, as do the Bush tax cuts, and to a lesser extent the Trump 1.0 fiscal policies. Note that the graph ends in 2025, so the effect of last year’s tax bill do not appear yet.
Let’s compare this with the post-WW2 record until the turn of the Millennium:
Note that deficits were quite small until the late 1970s, typically no more than 2%, and then exploded during Reagan and George HW Bush’s terms to over 20%, until Clinton brought the situation (very briefly) back into surplus. But since W’s tax cuts in 2001, only in a few years have deficits been less than 2.5% of GDP, and they have worsened over time to about 6%, even during the post-pandemic Boom.
Decomposing the deficit situation shows that it is both an increase in outlays and a decrease in taxes collected:
As of last year - even before the Billionaire Bust-out Bill - only $3 were being taken in for every $4 being spent. And as the below graph of the 365 day moving average of the YoY% change in tax withholding payments shows, there has been a marked deceleration in tax payments that began last December and has continued this year:
Almost certainly, the fiscal situation will once again have been ratched further into negative territory.
The Bond Market has noticed, and it has not been amused. The trend in both the 10 year (red) and 30 year (blue) Treasury bonds has been higher ever since the pandemic:
With the exception of late 2023, the yields on both of these Treasuries is at levels not seen since before the Great Recession.
And there is every reason to suspect that this situation is going to worsen. First, here’s the diffusion index for prices paid from the most recent ISM manufacturing and services reports:
These are both near their worst post-pandemic inflationary levels.
And here are the averages of the prices paid (blue) and prices received (red) diffusion indexes from the NY and Philadelphia regional Fed reports:
With the exception of the post-pandemic surge, both of these are also near their highs since the turn of the Millennium.
Much of this has gone to the spending spree by the upper tiers of income, as indicated by the weekly Redbook reports:
And let’s not forget that the Iran situation shows no signs of ending, with gas prices on their way back up:
Let’s put this together. We have a widening deficit, and increasing interest rates, meaning that an increasing share of GDP is going to have to go to interest payments on deficit financing. And we have a corrupt Administration that has raided the treasury for the benefit of wealthy cronies. The Administration is also so incompetent that it has caused inflationary increases in consumer prices both from tariffs and from the results of its Iran fiasco.
And there is no sign of this ending anytime soon.
To return to the beginning theme of this post, about a decade ago economists Daron Acemoglu and James A. Robinson wrote “Why Nations Fail,” positing that countries with a strong rule of law and a widespread distribution of benefits, succeeded, while “extractive economies” typified by a ruler at the top who is above the law who along with his cronies siphons off as much created wealth as possible, fail. This is because in the former case innovation is incentivized, while in the latter case there is no point in being innovative since the ruler and his cronies will simply appropriate the wealth for themselves.
The US may well have passed the transition point into an extractive society, and the trends in interest rates and inflation are the first noticeable symptoms.
