Guitar virtuoso and social satirist the late Frank Zappa once labelled American politics “the entertainment division of the military industrial complex”.
If there was ever any doubt about his observation, it has been put to rest by the contest for control of the White House that is now approaching a finale.
There’s the incredible hoopla of the conventions, the rock star speakers and Hollywood A-listers.
Add in the bitchy comments and mudslinging from the protagonists and the legions of fans, chanting and singing at every prompt, all fired up by an increasingly sophisticated campaign machine across traditional and social media platforms.
For all the animosity and talk of a potential conflict in a deeply divided nation, however, there’s surprisingly little that divides the two main combatants when it comes to policy on how America’s economy should be managed.
While the main battleground remains household finances — the cost of living blowout that resulted from the first bout of global inflation in more than 30 years — both are advocating quick fixes that ultimately could further drive prices higher.
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Strangely, there’s an eerie quiet about what potentially is looming as a future crisis point for America’s economy.
Neither party is addressing America’s burgeoning debt levels and the yawning gap between its income and its outlays.
That’s not surprising. Tough economic decisions involve hardship — and offering that up as an election strategy is a sure-fire blueprint for defeat.
The problem has been a long time in the making. Since 2001, America has not once delivered a budget surplus.
Each year, it has financed those deficits with increasing amounts of debt. And during that time, its economy has not grown anywhere near enough to keep that debt in check.
For the moment, ordinary Americans — and certainly its politicians — are deftly avoiding the issue.
It only ever raises its head outside the election cycle, when Republicans routinely hold Democrat-led governments to ransom by threatening to not allow a lift in the debt ceiling.
That can’t go on forever.
Don’t mention the D-word
Deregulation, deflation and debt. They’re three words that sum up the incredible growth era since the last great recession in the 1990s.
As interest rates declined, it became easier to service ever-larger amounts of debt. With that era at an end, the reckoning has begun and that debt has become an expensive problem.
Here, in Australia, households took the plunge, stampeding over one another to push real estate prices higher with eye-watering mortgages.
Elsewhere, it was governments that took on huge debt levels. As a result, Japan, parts of Europe, China and the US are now sailing into dangerous territory.
Given the US dollar is the globe’s reserve currency, its finances directly impact every other nation and the risks of a global financial destabilisation increase each year the gap between income and spending widens.
This is a graph of America’s national debt over the past century, adjusted for inflation.
A graph shows American national debt increasing over the past century, adjusted for inflation. (Supplied: US Treasury)
Total debt now stands at more than $US33 trillion (more than $48.7 trillion), a three-fold increase since the turn of the century.
Even if you exclude the COVID-19 aberration, which added substantially to the problem, the trend for larger deficits each year is clearly visible in this graph below.
A bar graph showing US debt levels, which have been rising since 2001. (Supplied: US Treasury)
After six years of declining deficits following the global financial crisis, the rot started around 2016 when Donald Trump first became president.
His 2017 tax reforms delivered cuts to the wealthiest 1 per cent of Americans and cut the corporate tax rate from 35 per cent to 21 per cent, costing the US budget almost $US2 trillion over a decade, according to the Congressional Budget Office.
Since then, Joe Biden’s big-spending Inflation Reduction Act and other fiscal programs have boosted spending.
Worryingly, Trump has suggested cutting the corporate tax rate further, to 15 per cent.
While it is a hit with Wall Street, such a move would put America’s finances under huge pressure, particularly given neither side of politics has outlined plans to cut spending.
The Biden administration pencilled in a corporate tax increase to 28 per cent but never acted upon it, and while the Harris campaign has endorsed the hike, it would be a hard sell.
Doing so, however, could reduce the deficit by up to $US1 trillion over a decade.
Taking an interest
While the deficit blowout largely went unnoticed as interest rates dropped, it’s very much on the radar now.
That’s because the interest bill on America’s huge debt has become the second-biggest expenditure outlay.
In the year to June 30, America forked out $US763 billion on interest payments, outstripping spending on health, medicare and even defence, which alone amounted to $US715 billion.
The only outlay bigger than interest payments was social security which totalled $US1.2 trillion for the financial year.
Interest now accounts for more than half the deficit payments and so Federal Reserve chair Jerome Powell’s confirmation on Friday night that it now was time to begin cutting rates would have been welcome news in the White House.
Still, the cuts will come too late to affect the 2024 financial year budget, with the deficit forecast to jump to $US1.9 trillion.
Our attitudes towards debt have changed
Remember Greece?
Back in the post-global-financial-crisis haze, the southern European nation became the flashpoint for a secondary outbreak of the crisis.
During Greece’s financial crisis, its debt to GDP level was flashing red at 140 per cent. (Reuters: John Kolesidis)
Its debt to GDP level was flashing red at 140 per cent, sparking what many believed would be the onset of an economic collapse that would take a large portion of European banks with it.
How attitudes change with time.
America’s debt to GDP now sits at 123 per cent, which wouldn’t be such an issue if its deficits were shrinking or its growth was expanding.
But even that pales in comparison with Japan, which is sailing along with government debt at about 263 per cent of national output.
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There are several ways through the mess for America’s next generation of leaders. But none are easy.
Raising taxes is political death. Cutting spending isn’t particularly easy either.
Interestingly, both Trump and Harris have all but ruled out cuts, pledging no change to government-funded health care and pensions, and promising expansions of child tax credits.
The Harris campaign, however, is talking about tax credit handouts to homebuyers, which almost always end up boosting prices.
As for Trump, he’s campaigning on a massive lift in tariffs (10 per cent on all imports and 60 per cent on imports from China) that would fuel inflation, potentially causing a rise in interest rates and risking a global trade war that would weaken growth.
Then there’s his plan to deport more than a million immigrants, which would cause labour shortages, boost wages and fuel inflation.
It might be entertaining, but it certainly isn’t funny.
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Publish date : 2024-08-26 07:45:00
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