Joe Biden’s basic economic philosophy is that the Federal Government issues new currency and can always issue new currency to pay its debt and other obligations. As such, the Federal Government can never go bankrupt.

This lesson is one of the premises of Joe Biden’s economic philosophy, and technically the lesson is accurate – the Federal Government cannot go bankrupt. People, myself included, sometimes say that the government is bankrupt, but strictly speaking that is impossible. Our Federal Government can always pay its bills by simply printing more money as the bills become due.

This leads us to a second economics lesson, almost as simple as the first:

While it is true that a Federal Government that issues its own currency can never go bankrupt, what it can do is bankrupt all of the people living under it.

You are bankrupt. I am bankrupt. Your neighbor is bankrupt. Your friends and family – unless they are a part of the privileged elite representing 0.1% of the public, they are bankrupt.

When I say that the Federal Government is bankrupt, what I really mean is that the Federal Government has put itself into a position where it cannot pay its long term obligations without bankrupting ‘we the people.’

Anyone paid in US dollars who is not rich enough to survive the complete collapse of the US dollar and the complete collapse of the US economy is bankrupt.

Allow me to illustrate my point with a true historic event.

There was an old shopkeeper in the Weimar Republic of Germany (between the end of WWI  and the rise of Hitler). This shopkeeper spent his entire career living and running his shop frugally so that he could have a nice retirement and could leave a nice nest egg to his children.

The shopkeeper, over time, ended up with a fortune in the bank, and his retirement felt secure.

We all know how inflation became a crippling problem for the Weimar Republic but only rarely do we hear how it impacted specific people. In this case, the shopkeeper got a call one day from the bank asking him to come in and collect his money, as it was no longer enough to hold an account open. “We would mail a check,” the bank said, “but the entirety of your holdings are no longer enough to pay for a postage stamp.”

It did not take months or years for inflation to wipe out the savings of the German people. It only took days.

This was not an extreme example, either. This exact thing happened to millions upon millions of people in the Weimar Republic, when it found that it could only pay its bills by printing more money.

The Weimar Republic did not go bankrupt, but it did bankrupt the people of Germany.

Similarly, our government is not bankrupting itself, but it is bankrupting the people of the United States.

Here is the Federal Budget of the United States in 2007. The largest item was the combination of Medicare and Medicaid, at 22.18% of the Federal Budget. The next highest item was Social Security, at 21.41% of the Federal Budget. Interest on the National Debt ran at 9.10% of the Federal Budget – an amount that, at the time, we viewed as potentially problematic, but times seemed good, so for the most part, we did not worry.

 

 

In this year, Federal Receipts (all revenues collected) came in at $2.568 Trillion, and expenses came in at $2.8 Trillion – a shortfall of over $200 Billion Dollars.

George W. Bush, we were told, was running reckless deficits which hurt him with Republican voters and helped Barack Obama win the next year’s Presidential Election.

Here is Joe Biden’s proposed spending proposal for this year:

 

 

This graph assumes a lower rate of inflation than we are seeing. The cost of paying interest on the National Debt will not be $789 Billion, but $870 Billion (according to the CBO), bringing total Federal expenditures to just over $7 Trillion dollars. Revenues will come out at $4.9 Trillion.

If I count all mandatory spending (this does NOT include ANY defense spending), I get a little over $5 trillion. In other words, if we pay all mandatory spending, no revenues are left for national defense, for schools, for infrastructure, or for anything else.

Now consider the next graph.

 

 

This graph is dated. Feel free to Google other more recent graphs (the search is ‘tax revenues as a percent of GDP over time’) and you will see the same trend continuing: total revenues remain just under 20% overall average 18%) – this does not change if we include more recent data.

I wanted to use this graph because it superimposes the top tax rate on top of tax revenues and shows that no matter what the top tax rates are, we can never keep tax revenues at or over 20% of GDP.

Note that the graph covers the first 80 years of the Federal Income Tax and includes ALL FORMS of Federal revenues. Over those 80 years, the government experimented with all kinds of different variations in order to raise more revenues but was never able to take more than an average of 18%. That’s still true, and the reason is that if the government takes too much it causes a recession and revenues drop.

One more graph I want to show covers how the Reagan and Bush tax cuts INCREASED rather than decreased the percent of all tax revenues coming from the top 1% of income earners. Why? Because with lower tax rates, these high income earners suddenly had less incentive to hide their income in low-performing tax shelters and paid taxes on that income instead.

 

Joe Biden has said he will raise taxes on everyone making more than $400,000 per year if re-elected, and will not raise taxes on anyone making less than $400,000 per year, but this is a lie. Biden will raise RATES on those making more than $400,000 a year (and this will reduce tax REVENUES from this group as they move some of their income into tax havens to avoid the higher tax), but Biden is also halving the child tax credit, the standard exemption, and other exemptions used by everyday Americans. Total tax REVENUES will remain at about 18% of GDP, but the mix showing where tax revenues come from will show that the rich pay less overall whereas the poor and middle classes, whose credits and exemptions were radically reduced, will pay more.

So many people talk about tax rates and tax revenues as if they are the same thing, but they are not. It is entirely possible for tax rates to go up and revenues to go down, and for tax revenues to go up even as tax rates go down.

If both parties were really interested in raising tax revenues, we would see a tax policy designed to take in 18% (on average) of US GDP while maximizing the growth of the US economy such that the size of the economy we are taxing is growing as quickly as possible.

The gap between total revenues and total expenditures is going to be 15% this year as another two trillion dollars gets added to the Federal Debt. If Biden is re-elected, next year it’ll be 20% as all forms of government spending continue to grow faster than the economy, and as the interest payments on the debt continue to climb.

We owe $34 Trillion today, and in one year it’ll be $36 or $37 Trillion. Current bond rates are paying out over 5%, so as old bonds mature and are replaced by new bonds, the cost of carrying $34 Trillion will rise from $870 Billion to $1.7 Trillion a year. Carrying $37 Trillion at 5% will cost $1.85 Trillion.

The more debt we carry (relative to GDP), the higher bond rates will get. $40 Trillion in debt at 6% is $2.4 Trillion a year.

At some point, the 18% of GDP we tax won’t even cover the interest payments on the National Debt anymore.

Biden’s answer is that the Federal Government cannot go bankrupt, and technically, he’s right.

We are bankrupt, and we are bankrupt because of radical spend-and-burn administrations like the one currently in the White House.

Joe Biden says Republicans want to gut Social Security and Medicare. That’s not true – not a single Republican is saying we should do either of those things. What IS true is that if we don’t fix our budget by doing other things, then Joe Biden will finish his second term, passing a law ‘protecting’ Social Security by allowing raises in Social Security to come at a rate much lower than the rate of inflation.

If we re-elect Joe Biden, our seniors will still get paid. They’ll just be paid with money that isn’t worth the paper it’s printed on.