US Default?

For U.S. Republicans and Democrats, default is a game of chicken where no one veers off course until the last minute.

Rather than finding a long-term solution to the perennial problem – insufficient tax revenue and overspending – the U.S. default crises allows politicians to hold political adversaries (and the world) hostage merely to extract short-term political concessions.

Without a radical change in direction, this game of chicken will continue even if, as is likely, Congress and the White House reach a last minute deal in 2023.

It is time for the United States to reform its fiscal practices. This will require politicians to think of the long-term good of the country, and the world, rather than the short-term goal of re-election.

Impasse number one: Failure to address revenue shortfall

U.S. politicians are unwilling to address revenue shortfalls in a meaningful way. This is an impasse that must be surmounted. Republicans refuse to raise taxes on the wealthy – those most able to pay and who have gained the most from Republican tax cuts.

They also advocate “defunding” the Internal Revenue Service, which would make it easier for the wealthy to evade taxes. On the other side of the aisle, refusal by Democrats to raise taxes on the middle class – the largest group of taxpayers, removes a major source of revenue from the table.

Impasse number two: Failure to address overspending

Both parties in Congress are unwilling to make a serious effort to tackle overspending. 40% of “mandatory spending,” defined as programs subject only to eligibility requirements, involve the inefficient U.S. health care system (mostly Medicare) which is almost untouchable.

35% of mandatory spending consists of Social Security which is also untouchable. Mandatory spending makes up 62% of government expenditures and these programs will increase as the population ages.

28% of the budget consists of “discretionary spending” – allocations subject to Congressional appropriation. Defense spending makes up almost half of this amount – again untouchable – and if the Republicans have their way is likely to be increased over time.

While Republicans have long sought cuts to the remaining discretionary spending (now around $900 billion), reductions will be difficult as much of this money goes towards funding the operation of Executive Branch Agencies, including Agriculture and Homeland Security, as well as transportation and veterans’ programs. Most discretionary spending is discretionary in name only.

The result is that the remaining 10% of the U.S. budget, interest on the national debt, will continue to grow without major reform. This figure will rise with the burgeoning deficit and higher interest rates.

Show an interest in interest

The United States is mortgaging the future of its children. In 2022, the government spent US$1.38 trillion more than it took in. The national debt is verging on $32 trillion – approximately $250,000 per taxpayer.

Money spent paying interest, is money not spent on domestic programs. Even in times of prosperity, Congress is unwilling to balance the budget. 2001 was the last year the United States had a surplus. This bill will come due someday – but not under the present craven Congress which continues to kick the can down the road.

Time to touch the untouchable

The U.S. law imposing a debt ceiling dates to 1917. It is a recipe for brinkmanship. It allows attention-seeking politicians to hold the nation (and the world) hostage, weaponizing the threat of economic collapse, credit rating downgrades and higher interest on the national debt. This tool of partisanship must be removed, but this is only an initial step.

First, and this will cause discomfort to many politicians (but not average households), the President should propose a balanced budget based on increased revenue and greater control over mandatory and discretionary spending.

This would wrong-foot the far left and far right and pave the way for meaningful debate. It is important that both the revenue and spending sides of the impasse be addressed so that the underlying budget issues are resolved.

This will be no easy feat. On the revenue side, it is time to rewrite the U.S. tax code. It should be simple and progressive with no loopholes and few deductions. Only then will taxpayers view the system as fair.

If tax reform does not increase revenue sufficiently, it may also be time to consider a national sales tax or a value added tax. This would be a second-best choice as such taxes impact the poor more than the rich.

Spending should be fair and equitable

Second, “mandatory spending” must be controlled in a manner that is fair and equitable. There is much the government must do in the medical sector, in particular with Medicare.

The government should consider competitive bidding and reference pricing to increase competition and establish benchmarks for medical procedures. Medical school and nursing school admissions should be increased to bring greater competition to the market and to increase medical coverage in rural regions.

Medical and nursing students should benefit from more scholarships and greater access to low interest loans so that medical professionals do not leave school submerged in debt. These professionals might then be willing to sell their services at more reasonable rates.

Tort reform should be implemented to prevent absurd damage awards against medical professionals and hospitals. This would result in lower insurance premiums and reduce medical costs.

Lastly, and perhaps most controversially, the eligibility age for Medicare should be tied to the eligibility age for Social Security.

The importance of social security

Third, following from the above, steps must be taken to maintain a solvent Social Security system. If this means increasing the retirement age again, reducing benefits to the wealthy and requiring more quarters to qualify, this is a price that must be paid.

Fourth, “discretionary spending” must also be addressed, above all in the defense sector. The government should encourage more competition in the procurement process, enforce antitrust laws to maintain viable competitors, foster new entrants in the defense sector, including small businesses, and reduce Congressional influence over procurement and basing decisions that favor individual jurisdictions.

Time for true leadership

The United States cannot solve its financial woes without a bipartisan strategy that increases revenue and reduces the growth in expenses. It is time for bipartisan leadership, and not partisan politics.

Instead of hungering for power and party control, U.S. politicians should be hungering for solutions to the economic problems that vex the United States.

The country’s future depends on getting its economic house in order – the House and Senate must play their part. Short-term solutions that do not address the revenue and spending imbalance are simply a bandage on a wound that exposes Americans, and the world, to greater harm.