Monday, April 16, 2018

Debt, an imminent threat to US National Security


The ability to field and maintain a robust US military, and all other aspects of our national security apparatus, will depend in the long-term on our capacity for sustained responsible investments. The current US national debt and an acceleration of debt accumulation projected with the most recent federal budget expenditures and simultaneous reduced revenue from the 2017 tax reform bill unquestionably diminish US capacity to sustain national security investments. US debt will dictate diminished national security investments and American military capacity in the future.
The following was the Congressional Budget Office’s (CBO) response to the ranking member on the Senate Finance Committee, Senator Ron Wyden’s request for an assessment of the net budgetary and deficit effects of the “Tax Cuts and Jobs Act of 2017” Public Law 115-97

Dear Senator:

This letter responds to your request for information about the estimated deficits and debt under the Conference Agreement of H.R. 1 as filed by the Conferees on December 15, 2017. The Congressional Budget Office and the staff of the Joint Committee on Taxation determined that provisions in the Conference Agreement would increase deficits over the 2018-2027 period by $1.5 trillion (not including any macroeconomic effects). By CBO’s estimate, additional debt service would boost the 10-year increase in deficits to $1.8 trillion. As a result of those higher deficits, debt held by the public would increase from the 91.2 percent of gross domestic product in CBO’s June 2017 baseline to 97.5 percent. (1)

I will avoid debating the professed macroeconomic merits of the 2017 tax reform, i.e. the job creation and increased economic growth promised by its proponents (and discounted almost entirely by the majority of economists). It suffices to say that I am highly skeptical. Who knows, I could be wrong. Maybe this time the zealots of supply-side, aka as trickle-down economics, are right and will not be responsible for additional trillions in federal red ink and widening economic inequity as has been the case with each prior iteration of these budget busting tax cuts over the past three and a half decades.
What do deficits and debt have to do with national security? Simply this; as deficits again spiral, the cost of servicing existing and future US debt is going to climb, and at a more precipitously rate specifically because of the counter-Keynesian increased deficit spending amidst a growing economy at or near full employment. Interest rates will necessarily rise in order to prevent the unwarranted deficit fueled stimulus of the current budget and tax law from overheating an already growing US economy. This will have the effect of increasing the cost of financing the growing deficits and the ballooning long -term federal debt. As the cost of servicing U.S. debt takes an ever-larger slice of revenue, our capacity to fund needed defense and broader national investments core to enduring U.S. economic and military strength will be increasingly squeezed.
The danger of an all-consuming burden of servicing this debt at the expense of national security and other investments is dire and near-term. In 2008, the federal government made $253 billion in net interest payments on a national debt of $5 trillion at a 5 percent average interest rate on the debt. In 2016, the cost was only $240 billion in interest payments, although the debt had more than doubled to $13.1 trillion, because the interest on this larger overall debt averaged only 1.8 percent. (2). The cost for financing the FY18 Federal Debt (1 OCT 2017-30 SEP 2018) is budgeted at $310B. (3) This is already larger than the combined annual military expenditures of China and Russia, and near half of the US Department of Defense current annual budget, but still much lower than the future cost of servicing just our existing debt. Once the current artificially low interest rates return to historic norms, rather than the low rates created by unsustainable quantitative easing implemented to sustain the economy through the tenuous recovery from the great recession of 2008, the cost of servicing the currently held US federal debt is going to double or triple. The cost of servicing existing debt, let alone the new trillions in deficits forecast by the CBO, has the potential to become the single largest federal outlay- exceeding Defense, Social security and Medicare, and severely restricting future discretionary federal investments and limiting federal options during future economic downturns.
No, entitlement cost are not the current root of US debt and deficits.  The first response for many is that “entitlement” programs are primarily responsible for our federal red ink. This is a real concern, but not the current driver. The big “entitlements” (a somewhat derogatory term belying the earned and paid for nature of these benefits) expenditures are Medicare and Social Security.  Neither of these non-discretionary federal disbursements influence current annual federal deficits or our mounting cumulative national debt. Both programs, Medicare (which was roughly equal to Department of Defense (DoD) outlays in 2016) and Social Security (at about 4.9% of GDP) (4) are currently pre-funded through the Federal Insurance Contributions Act (FICA) tax on wages. The FICA tax created trust funds are currently running surplus over expenditures (when trust fund interest earnings are included). Medicaid is financed by current federal and state revenues and therefore produces current impacts on federal (and state) budget balances. Medicaid comes in at approximately 2.0% of GDP (compared to 4.5% of GDP for defense in the current budget), not insignificant and cost containment while still meeting healthcare requirements of Americans with limited means need are necessary.
While projections of funding verses obligations place both Social Security and Medicare at risk as surpluses transition to net depletion of the funds and eventual deficits in the not distant future, both can be made solvent well into the future with practical tweaks and modifications of funding streams and benefits. (5)  Additionally, these programs would benefit from more welcoming and pragmatic legal immigration policies to counter America’s 1.8 fertility rate and the resulting aging demographics bubble straining sustainability (6), but immigration and other US policy predispositions against our best interests could easily fill a blog post of their own. The bottom line, while both Social Security and Medicare underfunded obligations threaten to become major future budget busters if not addressed in advance, neither program currently adds a penny to the federal deficits or debt.
The current and growing debt and annual deficits threatening US national security are unprecedented, unnecessary and irresponsible.  The current expenditures for national defense, even with growth in the defense spending within the current budget, remain small as a percent of GDP relative to Cold-War averages. The US federal budget overall is not historically large as a percent of GDP when compared to post WWII federal spending norms.  So, what is going on? Why the perpetual red ink?   What has changed is the fact that the US government, and specifically the US Congress, is no longer willing to pay for defense or the non-discretionary obligations of the US federal government. What is worse, and potentially exacerbating the habitual irresponsibility, is that for greater than a generation the US has run deficits that have not yet culminated in a crisis, leading lawmakers erroneously to discount the need for fiscal accountability.  The difficult and responsible choices – combination of tough but necessary revenue and spending decisions towards a sustainable debt- have not been made in Washington, and for longer than is normal for most nations, there has been no penalty for the US.
The era of “deficits don’t matter”(7) is ending, and the delayed penalty for the United States is only going to make the impending crises more severe. As detailed above, the period of cheap debt is ending and the end will come quicker and more harshly secondary to rebounding deficits and the need for interest rate increases to respond to the counter-Keynesian stimulus being applied to a near full employment and already growing economy.  Further complicating and driving potential for a debt crisis, if not a disastrous default, is the shrinking market for US debt.   “Foreign investors have slowed the growth in their lending from over 20 percent per year in the early 2000s to less than 3 percent per year today. Foreign investors are no longer interested in loaning our government seemingly limitless amounts of money. And there is every indication that their willingness to lend will continue to wane.” (8) Consider also the fact that for decades the Social Security, Medicare and various federal pension trust funds have been at the top of the list of lenders to the federal government. This was possible when the trust funds had trillions of dollars in surpluses, less so as funds begin diminishing in the near term without legislative fixes, and impossible if fixes are not forthcoming and the trust funds are exhausted. (9)
While future unfunded obligations, revenue streams, and all government expenditures and investments must be on the table as part of the solution, part of the deliberation and choices we must make as a nation through our elected representatives in congress is US defense spending. While current US defense expenditures approaching 4.5% of GDP are not unprecedented and fall far short of the 6.5 % of GDP Cold War average, it is still reasonable to ask if this is necessary for US security objectives and ask at what point does each additional dollar spent on defense go beyond diminishing returns and become an absolute detriment to sustainable security. Defense spending, while absolutely necessary, has a smaller Keynesian economic multiplier effect, or return on investment (ROI), than other competing investments such as research and development, infrastructure, or education. Current US national security and defense expenditures equal approximately 41 percent of global total defense spending despite the US GDP representing only 25 percent of world GDP. Furthermore, US defense spending combined with our NATO allies reaches around 70%, and when combined with our non-NATO allies reaches about 80% of all global defense spending.(10)  The U.S. and our friends together account for four out of every five dollars spent worldwide on defense. Yes, the United States has a stated desire spelled out in national strategic strategy of maintaining defense and security preeminence, but can we do so sustainably without fiscal discipline? Will growing federal deficits, for which defense spending is not an insignificant contributor, ultimately compromise US national security?  Options (outside of DoD Healthcare) to reduce defense spending ranging from curtailment or elimination of major defense weapons systems and platforms to caps of force size are discussed in CBO budget options.  Considerations within DoD healthcare cost containment must be evaluated closely as well – to include a potentially diminished role of the VA, the federal government’s second largest bureaucracy, as the primary deliverer of veteran health care IF delivery quality, efficiency and cost advantages can be objectively delivered within the broader healthcare system. The US military should go tobacco free within ten years, which can deliver billions in savings within the active force, many billions more over the following decades within military retiree medical care, and would likely have spillover benefits to national US healthcare system expenditures.
As medical expenditures continue to drive growing costs for the federal government generally and as an outsized percent of the nation’s GPD overall compared to other OECD nations, we must consider real reforms within our convoluted and costly US healthcare system. Our current system places the United States at a comparative disadvantage, at a premium cost (roughly 2-times percentage of GDP compared to near-peer nations) while delivering mediocre outcomes. It is arguable that the cost and state of the US healthcare system is itself a national security concern– see:
Sustainability of America’s national security requires an objective and honest conversation about US debt, with responsible and enduring solutions. We must make the hard decisions necessary to put our fiscal house in order now – which includes cost containment government wide as well as responsible revenue decisions. Alternatively, we face a difficult and painful fiscal reckoning, one that will greatly diminish US world standing and decimate America’s national security. 
I am a proud veteran.  My wife and I are both US Army retirees.  My daughter is an Army Reserve Combat Medic. My family and I respect and value the US Military and all components of our National Security.  However, we need to be honest: ever-increasing National Security expenditures without clear focus and long term planning – and while refusing to pay for these expenditures in a sustainable manner - does not maximize the return on investment of our limited resources and may make us less secure if adding significantly to U.S. deficits and debt.
Real and sustained National Security relies on full integration of all aspects of our national investments decisions here and abroad. Choices must consider non-direct National Security expenditures such as diplomacy, STEM education, energy diversity and sustainability, climate change, environmental sustainability, infrastructure, R&D, Health Care, Federal Debt, Justice, US economic competiveness and opportunity. We must be willing to responsibly and sustainable pay for these investments.

“The human and material resources that make a great society are produced at home, not abroad. An ambitious foreign policy built on a deteriorating domestic base is possible only for a limited time; like the light cast by an extinct star, it is predestined to come to an end.”   Senator J William Fulbright, 1966 The Arrogance of Power

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