Last week, Congress cleared a bill to raise the federal debt limit by $2.5 trillion, increasing the new statutory limit to more than $31 trillion. Treasury Secretary Janet Yellen had warned that without a debt limit increase, the federal government could default on its payments.
All of Alabama’s Republican Congressional delegation voted against the bill.
The latest government-created “debt crisis” and subsequent debt limit increase represents another failure by Congress to rein in out-of-control spending. That failure is hurting Alabamians.
What is the debt limit, you may ask? It is the total amount of money that the federal government is authorized to borrow to meet its existing obligations. Things like Social Security and healthcare benefits, salaries for federal employees, and tax refunds owed to Americans.
The question is, who is paying for the new spending that Congress has paved the way for, and why should the average citizen care?
First, a bit of perspective. While federal spending has been increasing for years, it really took off during the COVID-19 pandemic.
In 2019, the Congressional Budget Office reported a federal deficit (annual revenue vs. annual spending) of $984 billion. Cumulative debt totaled $22.7 trillion. In 2020, the federal deficit surpassed $3 trillion, a record high, and remained near that level in 2021. Today, total debt is more than $29 trillion, a 28% increase in just two years. It was less than $10 trillion when President George W. Bush left office.
The growth of deficit spending is not caused by a lack of revenue. Too much spending is the problem. Since 2000, federal revenue growth has averaged over 3% annually, but spending growth has exceeded 7%.
Growing federal debt has consequences for Alabamians. We are seeing some of the impacts now through high inflation.
Inflation rose by 6.8% over the past year, nearly a 40 year high. The prices on most day-to-day items have increased significantly.
According to the Bureau of Labor Statistics, gas prices rose by 58% this year. The cost of groceries increased by nearly 7%. The price of gas services (i.e., heating and appliances) is up 25% this year. A used car will cost you 31% more than it did a year ago.
The list goes on and on, but the point is that inflation is having a very real impact on the pocketbooks of Alabamians. It’s real money for families on a monthly budget.
How did inflation get out of hand so quickly? Part of the answer is supply and demand. With many Americans forced to spend more time at home during the pandemic, the demand for household goods, construction materials, etc., increased sharply.
But supply and demand issues alone are not enough to cause such a dramatic increase in inflation. The federal government, and more specifically who owns much of this newly created debt, is a significant factor.
About 20% of the total debt is essentially money that the federal government owes itself.
The remaining amount, about $23 trillion, is held by the public. Debt held by the public includes debt purchased by individuals, banks, state and local governments, foreign governments, and the U.S. Federal Reserve, among others.
It may surprise you to find out the Federal Reserve is financing most of the federal government’s new debt.
Since 2019 the Federal Reserve’s assets have more than doubled, totaling $8.7 trillion earlier this month. Beginning in June of 2020, the Federal Reserve began buying $80 billion per month in Treasury Securities as well as $40 billion per month in mortgage-backed securities. It began slowing these purchases last month, but they are expected to continue through mid-2022.
Because the Federal Reserve has dramatically increased its assets, the money supply has increased and played a part in making inflation and everyday costs go up.
The Congressional Budget Office projects that debt will be double the size of the U.S. economy in 30 years. Wednesday, Congressman Gary Palmer warned that high debt will ensure long-term inflation and urged action to reduce it. He said, “We can start by eliminating wasteful spending, eliminating obsolete and unnecessary federal programs, reopening federal lands for oil and natural gas production and [increasing] our exports, eliminating improper payments, and simplifying the federal tax code.”
While Congressman Palmer is exactly right, it will take a strong coalition of like-minded leaders in Congress to achieve those goals. One thing is clear though, the country, and Alabamians as citizens of this country, cannot afford to continue on this path.
Justin Bogie serves as Senior Director of Fiscal Policy at the Alabama Policy Institute. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to: Commentary@1819News.com
