The further to the left or the right you move, the more your lens on life distorts.

Wednesday, April 12, 2017

A Mess

For years, many of us who believe is fiscal responsibility have condemned the Democrats for promoting profligate spending and the GOP for quietly acquiescing to it. The Dems have no problem with debt, thinking that kicking the can down the road is a viable policy. They also have become experts at demogoguing any attempt at spending cuts—wailing about starving children, sick seniors, and uneducated inner city students, while never considering that it just might be possible to feed, treat, and educate those constituencies for far less money that we currently spend. Their trained hamsters in the media like nothing more than to reinforce the Dem meme.

The GOP, for its part, doesn't want to get into a budgetary fight where it will surely be characterized as the party that wants to starve children, allow oldsters to wither away from sickness, and produce inner city kids who can't read or write. So they do little to control debt.

The editors of The Wall Street Journal comment on the debt bomb that is ticking:
While Mr. Obama was doubling the national debt over eight years, the Fed’s monetary policies spared him from the fiscal consequences. The Fed’s near-zero policy kept interest rates at historic lows that reduced net interest payments even as the overall debt increased. The Fed’s bond-buying programs also earned money that the Fed turned over to Treasury each year, reducing the size of the federal budget deficit by tens of billions of dollars.

This not-so-free Fed lunch is starting to end. CBO estimates that $160 billion more spending will be required each year over the next decade if interest rates are merely one percentage point higher than in its current projections. As interest rates rise, the Fed will also have to pay banks more to keep excess reserves parked at the central bank. After its latest rate increase in March, the Fed now pays banks 1% on reserve balances or about $20 billion a year, and that will go up.

Fed officials are also now hinting that this year they may finally stop buying new securities when the current bonds on its balance sheet come due. This is necessary and long overdue, but it will mean smaller Fed contributions to the federal budget than the more than $90 billion the Fed has turned over in recent years. (See the nearby chart.)

All of this is set to explode on President Trump’s watch, and it will complicate the task for Republicans as they try to reform the tax code within tighter budget constraints.

Mr. Obama didn’t expect a Republican to succeed him but we doubt he regrets this result. He was able to live off the eight years of accommodative Fed policy while seeding the federal fisc with ever-higher spending from interest payments and the Affordable Care Act after he leaves office. Mr. Trump is stuck with the bar tab. It’s one more mess Mr. Obama left others to clean up.
And what a mess it is.