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Families manage their budgets. Why can’t the federal government do the same?

June 6, 2023

Editor’s note: This piece was co-authored by Andrew Reder, a student from Northwood University. It originally was published on TownHall.

As we have been discussing for months, the United States ended its “job recovery” from the COVID-19 recession in December 2022, when it finally surpassed the December 2019 level (158.8 million Americans employed) reaching 159.24 million Americans employed. Job creation above the U.S. pre-pandemic high is now at 160.9 million Americans employed or roughly 2.1 million jobs “created” above the pre-pandemic high as of March 2023.

We are concerned about the world economy as it seems to be returning to trading blocs and other forms of fragmentation while simultaneously looking to replace globalization and free trade.  

Brazil, Russia, India, China, and South Africa (BRICS) have been meeting to discuss the possibility of growing the membership in their bloc while potentially abandoning trade in the U.S. dollar. If that comes to fruition, and/or additional fragmentation emerges in world trade, the potential for the U.S. dollar to lose its standing as the world’s reserve currency correlates directly with increasing fragmentation. A world economy with something other than the U.S. dollar as its reserve currency would dramatically reduce America’s influence on foreign trade and foreign policy and make the financing of our ever-growing national debt more difficult and costly.

A host of negative economic data for March and early April — ranging from the monthly leading economic indicators, the yield curve, trucking orders six months out and industrial production to housing starts, higher interest rates, retail sales and automobile sales — continue to lead us to believe a recession in 2023 is highly probable and likely to happen in the second half of this year.  

With the current concern over increasing government debt at all levels here in the United States and in many countries, politicians both Democrat and Republican alike, would be wise to consider the wisdom of our 30th President Calvin Coolidge when he said, “there is no dignity quite so impressive and no independence quite so important, as living within your means.” In today’s challenging times, individuals, business, non-profits and certainly governments at all levels would be wise to set their economic and financial true north to President Coolidge’s advice.

The wisdom of President Coolidge would be helpful if it were echoing through the halls of Congress and 1600 Pennsylvania Avenue, as Washington is currently not nor has it for decades been living “within its means.” The current U.S. national debt is roughly $31.7 trillion or $94,657 per every man, woman, and child and almost $247,000 per U.S. taxpayer.  

Our current federal budget of $6.32 trillion is already $170 billion above budget, a budget that had a $1.419 trillion budget deficit built into it and is currently running at a $1.589 trillion annualized deficit pace. It is also important to note, the U.S. national debt in 1980 was 34.56% of U.S. GDP and today stands at more than 120% of GDP. What makes matters worse regarding deficit financing is the effective federal funds rate in early April was 4.83%, well above its level of 0.33% a year ago. The upward pressure on the federal funds rate is clearly inflationary at root. The recent rise in the U.S. federal funds rate is quite alarming, as indicated by a report from the U. S. Congressional Budget Office, which predicted annual interest cost on our national debt could be as high as $1 trillion by 2030 or before due to higher interest costs, dramatically limiting federal government activities and/or causing even greater national debt escalation in the months and years ahead.  

In addition to higher federal, state, and local government debt, many corporations have found it difficult over the past year to finance business activity and debt at today’s dramatically higher interest rates. A declining U.S. savings rate as well as record-high credit card debt is not boding well for future consumer spending either.

We continue to believe that the root cause of America’s current economic problems rest with excessive government spending and expansionary U.S. monetary policy. Until recently, the U.S. federal budget was roughly 20% of U.S. GDP. It increased to 25% during the COVID-19 pandemic, yet still remains at 25% of U.S. GDP, as measured by President Biden’s current budget proposal to the U.S. Congress. The pandemic is over: Washington needs to reduce the federal budget to 20% of U.S. GDP.

Renowned Harvard economist and former U.S. Treasury Secretary Larry Summers noted recently on Bloomberg that he is still concerned about stagflation and is not convinced inflation is moving steadily downward to the Federal Reserve Bank’s 2% goal, any time soon.

We don’t always agree with Dr. Summers but find him to be an eminent scholar and one of the few economists who joined us in stating that inflation was not transitory back in March 2021. The fact that Dr. Summers is also worried about a stagflation-style recession in 2023 or 2024, is additional validation for our prediction of a recession in the second half of this year.  

Growing up, our parents always talked about living within our means, relative to our household budget, and they tried as often as possible to teach their children to be financially proficient and independent as soon as possible. Today, parents make “family decisions” to cut costs and live without during difficult times. Families manage their budgets and live within their means as do most businesses: Why not the government?

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