Here's Why There Is No Possible Bailout for the Federal Government

Yesterday I noted that even the U.S. economy, the best in the world, cannot support the current and upcoming federal debt. Here I explain the dismal political reasons why a reversal is so unlikely.

Some comments on my article from yesterday on the projections of upcoming federal deficits and debt rightly asked about what politically plausible bipartisan steps the government could take to prevent a catastrophic debt spiral, which I see as arriving within the next decade unless we begin to arrest it now through serious spending cuts.

That is a great question. The problem is that there cannot be any bipartisan deal to step back from the edge. The opposition party does not want the president and his party to solve problems, including existential ones such as this. The Democrats perceive disasters while they are out of power as being in their political interest. They will fight to the death against any attempt to cut spending, because it does them no good and causes them much harm politically.

(If you doubt that, just read this.)

Democrats also believe in Modern Monetary Theory—as it is convenient to their political interests—which argues that the U.S. government can spend as much as it wants without harm to economy, because it has the power to print as much money as it takes to cover any deficit (which it must do to avert an open repudiation of debt). If that sounds like a recipe for inflation and ultimately hyperinflation, that is because it is exactly that.

Finally, the Democrats believe that higher spending always benefits them politically, except for defense spending when Republicans are in office. (The Democrats approve of defense bloat when they are in control of the government and can use it to benefit their interest groups.)

Hence, Trump and the congressional Republicans are on their own if they want to cut spending significantly and save the country. Most of the Republicans probably view that as political suicide, as the opposition (including the entire media complex) would trot out every possible real or imaginary "victim" of their "draconian cuts" that "benefit the rich at the expense of hardworking middle-class Americans."

The Republicans are certainly right about the likely political fallout, and they have convinced themselves that things are not as dire as the numbers show, to salve their consciences as they tinker with the silverware in the dining car while the train roars out of control down the mountain. In this way they too are acting on their perceived political interests instead of what is good for the country, and in the present case that means failing to do what is absolutely necessary to avert a disaster.

Both parties are to blame, though the Democrats' position is decisive in itself. If even a few of them were to support spending cuts, the nation and its economy could be saved. They will not do that.

That leaves small moves such as the current recission bill, which would reduce annual federal spending by around 0.02 percent. Such a minute change would be symbolic only, yet it could mark an important change were it to pass and embolden Republicans to make real spending cuts.

Unfortunately, I cannot see that happening. It seems that this dynamic cannot change until the crisis arrives. At that point, it will be too late to save the current system as Trump is trying to do.

The current U.S. (and global) economic system is not a free-market order by any means, but what would arrive in the wake of an economic catastrophe and collapse of the federal government's authority and capability to protect the nation from invasion and internal civil chaos is anybody's guess.

I would much rather not find out. I would prefer to see the government implement necessary fiscal, regulatory, and governance reforms in an orderly way.

That, as I have argued, is Trump's approach. It probably has to happen this year or it will not work.

That would require a major change in the two parties’ views on federal spending, both its current trajectory and the premises behind the enormous increases in entitlement spending, which are driving the massive deficits.

Like the Cowardly Lion in The Wizard of Oz, the Republicans would have to find courage. The Democrats would have to find a brain. Neither party has a heart, but we can cut the deficit without that.

Trump and his team appear to understand these grim truths. Trump, however, is no wizard—neither the magical one nor the con man. Congress and the Federal Reserve are not going to perceive the reality (no brain) and act on it (no courage).

So-called entitlements are the central problem. Trump’s pledge not to touch Social Security or Medicare at present is workable and in fact wise, in my view, because substantial cuts to those programs would be the equivalent of a repudiation of government debt, an obligation the government took on when it began taking money from people’s paychecks and promising to pay it back at an economic return far, far below what people could gain by investing it in the private sector. Debt repudiation is death to a government’s credibility.

Trump is right to keep that off the table. That stricture, however, leaves an enormous amount of money on that table, in entitlements such as Medicaid and food stamps. Sufficient cuts to those programs would forestall the disaster.

The media and other Democrats and socialists would characterize such benefit cuts as breaking a promise by the federal government. The pledges to fund Medicaid and food stamps are completely different, however, from those for Social Security and Medicare. The Medicaid payroll tax was a promise to workers that the government would spend it on other people, not on the workers themselves.

As one of the workers who paid in to that system for decades, I am certain that I am by no means an outlier in thinking that bringing on a fiscal and economic catastrophe in order to keep the promise of spending my money on a bloated program that has contributed greatly to the ruination of the nation’s entire health care system is not a good trade. It is overwhelmingly likely that the vast majority of workers would prefer elimination of Medicaid altogether if it would avert this disaster.

The promise to use taxpayer money to provide Medicaid, food stamps, and the like was always conditional, based on an ability to pay it.

That ability is now gone. The spirit is willing, but the coffers are tapped out.

However, even talking about just getting rid of blatant fraud and waste in those programs results in instant political destruction of those why suggest it. Real reform would require a combination of courage and brains highly uncommon among members of Congress.

Given all these observations, a sensible and peaceful resolution to the nation’s fiscal problems seems extremely unlikely.