Government Budget On Unsustainable Trajectory

Niall Ferguson describes the condition of the U.S. budget very clearly.

"U.S. fiscal policy has long been on an unsustainable trajectory--for more than 20 years, in fact. But under President Joe Biden it has jumped the shark. The federal deficit looks like it will exceed 7.0 percent of GDP in fiscal 2023, after the Congressional Budget Office adjusts for the vagaries of policy on student debt forgiveness. That is a truly shocking number for an economy that is running at close to full employment. And, there is no scenario the CBO can devise in which the total debt relative to GDP does not keep growing, with spending driven up partly by the rising burden of interest payments."

Here is the picture of U.S. fiscal policy since the middle of 2000.

Remember, the Clinton Administration balanced the federal budget at the end of its term in office.

Since then there has been no effort at all on the part of the government to bring the budget back into some kind of balance.

Certainly, the presence of the Covid-19 pandemic did not help the government's budget position. As can be seen, the "worst" years of budget deficits came during this particular period of time.

Mr. Ferguson argues the budget, invariably, gets "out of hand" over time as various governments attempt to do the best thing they can for people.

The problem is that all these "best things" lead to unintended consequences that produce results that are "not-so-good."

Then, the "not-so-good" results lead to other actions that have unintended consequences that produce results that just add to the earlier problems.

Mr. Ferguson worries about people "underestimating the tendency for one unintended consequence to lead to another in a veritable cascade of unintendedness."

And, then those in authority exhibit difficulties in dealing with the cascade after cascade.

As we have just experienced, policymakers avoid what they really have to do.

They "kick the can down the road."

We'll deal with this another day.

Good intentions, backed by the creation of debt, so very often lead to situations where another set of good intentions generate more debt, and so on and so on.

And, you finally get into something too big to handle.

You get into an "unsustainable trajectory."

Unfortunately, in my mind, debt is one of those issues in life that lead to unfortunate circumstances where people keep thinking that adding a little bit more here and a little bit more there can help you, but the doing of a little bit more here and then doing a little bit more there just leads you further down the path to "dependence"... a dependence that cannot be overcome.

To me, the only real way to deal with the use of debt is to minimize its usage. Debt cannot be allowed to dominate your life. Debt must be attacked soon after it is issued and must be constantly guarded against.

One must do everything one can... and early on... to keep debt expansion from getting out of control.

And, what is it that tends to force us to lose our control over debt?

In my mind, "radical uncertainty" results in us losing control.

We think that we can predict the future.

Well, we can predict the future sometimes and we can predict the future partially.

But, we cannot predict the future perfectly.

We don't have perfect information.

As a consequence, the future never turns out to be what we expected it to be.

There are unknown knowns where we have an idea about something that might occur, but we cannot really place a probability on its possible occurrence and we have unknown unknowns that we have no idea that they exist or what probability exists that they might occur.

And, the amount of these "unknowns" is anybody's guess.

This is a world of "radical uncertainty."

Because of this, I believe, debt must be used with caution and must be managed with great constraint.

Unfortunately, people, in general, don't act in this way.

People act as if they have complete information and complete control over the debt situation and then, all of a sudden, they are falling behind, overseeing an unconstrained increase in the amount of debt they have outstanding.

And, this is where we find ourselves today.

Our national debt is not helping us.

The interest cost of this debt is rising dramatically.

And, as Mr. Ferguson describes, the interest cost is becoming a real burden.

This is not a good picture.

There will be a cost.

But, in a world of radical uncertainty, what the cost may be and when the cost may be assessed is unknown.

I see the chart on the history of the government's budget and I shudder.

Just how much worse can this get?

The answer that keeps coming back into my mind is... the budget situation of the U.S. government can get a lot worse.

Until....

But, this is what radical uncertainty is all about.