This week, I made four public appearances. Ordinarily, I would say presentations; however, one was a webinar and another was a roundtable discussion. Regardless, I had ample ability to bloviate about the economy and have an opinion on something. The latter is something I don’t often get to have at the house, at least not really.
Interestingly, or so I thought, there seemed to be a lot of interest in the debt ceiling debate in Washington. Perhaps I am a bit too cavalier on the subject, but Congress has little choice but to continually raise the thing. To be sure, it gives ultra-conservative politicians an opportunity to grandstand about runaway spending. But when the dust settles and the smoke clears, nobody truly wants Washington to slash spending.
No? You think I am in error with that contention? Well, we might just have to agree to disagree, but let me explain my thought process. Unfortunately, that means we are going to take the express train to Nerdsville.
It is all there in black and white for everyone to see. The current administration’s proposed budget for the upcoming year and even the next decade. All you have to do is click this link. If you are so inclined, you are welcome to struggle through 100+ pages of claptrap before getting to the summary tables. The meat of the matter, if you will.
On page 121, you will find “Table S-3. Baseline by Category.” This is a 35K-foot breakdown of the budget into its larger line items. Let me cut to the chase and tell you the White House is currently forecasting massive annual deficits for the next decade. In 2023, it is forecasting a $1.176 trillion shortfall.
Certainly, we must do something to stop the madness, and it is madness! But what? Therein lies the problem. What to cut, because something has an interest in every dollar in the thing?
In broad terms, this is what the administration assumes federal outlays will be in 2023:
| Discretionary Programs | $ 1.639 trillion |
| Defense | $ 766 billion |
| Non-Defense | $ 873 billion |
| Mandatory Programs | $ 3.650 trillion |
| Social Security | $ 1.313 trillion |
| Medicare | $ 847 billion |
| Medicaid | $ 536 billion |
| Other Mandatory Programs | $ 954 billion |
| Net Interest | $ 396 billion |
| Project Deficit | $ 1.175 trillion |
There you have it. In case you were wondering just what “other mandatory programs” are, Table S-6 starts on page 126. While some of the line items may seem somewhat foolish to some, they are all a promise the government has made in some form or fashion. That is what makes them mandatory.
But what sticks out at you on the table? Apart from the projected deficit? For my part, it is that mandatory programs make up 69% of the total. What’s more, I might argue defense spending isn’t really discretionary. That leaves the actual functioning of the government, the non-defense, non-discretionary line item, at $873 billion. That is about 16.5% of the total. Now, if you want a breakdown of the 2023 discretionary request by every major federal agency, please go to Table S-8 on page 138. Individually, nothing in the list is shocking or surprising.
So, let’s think about this for a second. We can eliminate all of Washington’s non-defense, discretionary expenditures AND still run a $302 billion deficit. Put another way, we can shut much of the day-to-day functioning of the federal government and still be awash in red ink. What’s more, the net interest will probably be a sight more than $396 billion this year. Obviously, that will make these deficits worse.
This means if we are really serious about cutting the deficit and paying down debt, we are going to have to make some tough choices. What to cut? Raise your hand if you want to slash defense spending at this time, what with all the turmoil in the world today. Fair enough, now what politician is going to have the nerve to make drastic reductions in either Social Security or Medicare? I suspect someone who wants to serve one term. Also, who has the heart to gut Medicaid? Finally, we have to service our debt or really bad things will happen to our financial system.
These five line items, which are almost politically sacrosanct, comprise about 68% of the budget. So if you are serious about cutting the deficit, these bad boys are on the chopping block to some degree. Who gets the first whack? Understanding not paying the net interest is NOT an option, as a U.S. Treasury default would crush the global economy.
Obviously, I am being a bit of a wiseacre about this. It is no secret Washington is foolish with our money. Or that government agencies overspend on stuff to ensure their budgets don’t get the ax. Heck, it is impossible to audit the Department of Defense due to it being such a massive organization and money pit. Make no bones about it. The federal government is a horrible fiscal steward.
Regardless, again, what do you want to cut? Remember, someone “out there” will have a personal interest in your decision. Further, you could likely have one with whatever they want to cut. Defense? Social Security? Medicare? Medicaid? Or some other promise the government has made to us?
It isn’t easy is it, this business of balancing budgets by cutting expenditures?
So, where does that leave us? Clearly, we can’t keep spending money like the proverbial drunken sailor, can we? Fortunately, there is a solution. That is to grow the U.S. economy as rapidly as we possibly can. I mean unshackle private enterprise and let her rip. After all, the best way, the only sure fire way, to increase government receipts is to increase economic activity. Period and end of discussion. It is go time, boys.
Of course, this means we will have to get rid of a lot of regulations and regulators — a lot. We might even have to look the other way every now again. It also means getting rid of things like capital gains and estate taxes, which are nothing more than capital controls. These inhibit the free flow of money throughout the economy, which inhibits economic growth. I could go on and on.
The obvious knee-jerk reaction would be: but getting rid of those taxes, et al, would make the deficit even worse. An honest rebuttal is it probably would, but we were going to run a ridiculous deficit anyhow. Don’t you want to at least have a chance to meaningfully work it down over time? With the upshot being YOU have more money in your pocket and your portfolio?
In the end, if we are serious about cutting the deficit and paying down our debt, we have options. The first is to make drastic cuts to sacred cows, which no one really wants to do. The second is to get serious about growing the economy. I mean, let’s unleash and unshackle our productive forces, and let’s be fanatics about it. Giddy up.
Doesn’t that sound a lot more fun and a lot more profitable than cutting things like Social Security? I think it does, and it might even come with an added benefit: no more grandstanding about the debt ceiling in the future.
A middle-aged man (if I live to be 108) can dream, can’t he? Leave Nerdsville eventually, maybe?
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist & Conspiracy Theorist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.