Patrick McHenryChairman

 

President Obama has raised the national debt by nearly $6.2 trillion, the equivalent of $78,385 per family of four. It is true that projected deficits recently have been reduced. April tax filings increased 28% from 2012, but much of this was thanks to a one-time rush at the end of 2012 to report income before rates rose in January. The second largest reduction in the deficit came from Fannie Mae taking a one-time accounting adjustment. 

But unless the economy soars, or a significant budget agreement is reached, the most lasting legacy of the Obama presidency will be a $10 trillion increase in the national debt—a burden that bodes ill for the nation's future. 

Once the Federal Reserve's easy-money policy comes to an end and interest rates return to their post-World War II norms, the cost of servicing this debt will explode. The cost will increase further as the Fed sells down its $1.85 trillion holding of government bonds, and the Social Security system runs deeper and deeper into the red. The Treasury will then have to pay interest on an ever-growing percentage of the debt. 

Since the World War II era, the average maturity of outstanding federal debt has been about five years, and the average interest cost on a five-year Treasury note has been 5.9%. At this interest rate, the expected cost of the Obama debt burden will eventually approach some $590 billion per year in perpetuity, exceeding the current annual cost of any federal program except Social Security.

An America forever burdened by massive government debt would have been unthinkable for much of the nation's history. Beginning with the Revolutionary War, the pattern has been that federal debt increased to help finance the nation's armed conflicts. But government spending after the wars dropped and debt was paid down, or even paid off, as under President Andrew Jackson in 1835. 

Federal borrowing during the Civil War reached nearly $2.8 billion, about 30% of GDP. Thereafter the government ran surpluses and redeemed U.S. bonds that served as the reserve base of national banks and literally burned U.S. paper currency—greenbacks—in the furnace of the Treasury building. The money supply fell and federal spending plummeted to $352 million in 1896 from $1.3 billion in 1865.

These are policies that horrify modern Keynesian economists. Yet over that late 19th-century period real GDP and employment doubled, average annual real earnings rose by over 60%, and wholesale prices fell by 75%, thanks to marked improvements in productivity. 

With the onset of the Great Depression, the national debt increased dramatically for the first time in the peacetime history of America, reaching 43% of GDP in 1938. World War II meant more borrowing. Since 1930, there has been no concerted effort to pay down the national debt. Any reductions in the national debt relative to the GDP have been almost solely the result of economic growth and inflation.

As the debt burden rises, so too does the cost of servicing the debt increase as a share of the growth the economy is capable of generating. When the debt on which interest is paid equals the GDP level of a nation, the economy must grow faster than the interest rate to avoid debt-servicing costs consuming all the benefit of economic growth. A nation then begins to lose its ability to grow its way out of a mounting debt crisis. Its options start to narrow down to forced austerity, inflation or default. 

Today the total U.S. federal debt is 103% of GDP. Since interest paid to the Fed, the Social Security system and other government pension funds is effectively rebated to the Treasury, taxpayers currently bear only the burden of interest on 60% of this debt. But the size of the debt and the percentage of the debt on which interest will have to be paid are rising.

Some seek solace in the fact that at the end of World War II, the national debt exceeded GDP and still the economy prospered. But when the war ended, federal spending dropped to $29.8 billion in 1948 from $92.7 billion in 1945. Spending as a percentage of GDP fell to 12% from 44%. The U.S. emerged from the war as the world's dominant producer of goods and services. The demand for dollars around the world was insatiable, and a long period of record prosperity ensued. High GDP growth and inflation eventually brought down the debt-to-GDP ratio.

Americans today face a totally different situation. Spending and huge deficits continue unabated, and growth rates have declined since the recovery began four years ago. The reduction in government spending that occurred following World War II would be politically impossible today short of a cataclysmic crisis. Under Mr. Obama, the government has run trillion-dollar deficits for four consecutive years, and the top marginal tax rate today is already higher than it was when the budget was balanced in fiscal year 2001.

The president and many in Washington are complacent because, thanks to the Fed's unprecedented near-zero interest rate policy, the burden of servicing the debt today is just 0.9% of GDP, the lowest level in over five decades. But this cannot last, and the Fed is already looking for an exit plan. 

Sadly, nations generally discover the truth of Albert Einstein's dictum that compound interest is the most powerful force in the universe—not through the happy accumulation of wealth but through the agonizing enslavement of debt.

Mr. Gramm, a former Republican senator from Texas, is senior partner of U.S. Policy Metrics, where Mr. McMillin, a former deputy director of the White House Office of Management and Budget, is a partner.

A version of this article appeared May 22, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: The Debt Problem Hasn't Vanished.

Dodd-Frank does not end the threat of taxpayer bailouts. A reform to the bankruptcy code will do the trick.

The Hill: Implementing the vision of financial reform

There are three distinct phases of leadership when attempting to implement change: vision, structure and implementation. This same process can be applied to congressional leadership regarding U.S. financial reform.

Bloomberg: The Question the Fed Should Be Asking

Ed Koch, the late mayor of New York City, used to stop residents on the street and ask, “How am I doing?”

With next month marking the four-year anniversary of the end of the 2007-2009 recession, the longest and deepest since the Great Depression, it seemed like a good time to ask the same question -- of the Federal Reserve.

New York Times: Why Fund Managers May Be Right About the Fed

The economics world has been having a lot of fun with hedge fund managers.

After several such managers at a recent conference denounced the aggressive money-printing policies of Ben S. Bernanke, the Federal Reserve chairman, the economic blogosphere rose up to mock them.

AEI: The dangers of substituting foreign compliance for US supervision of financial derivatives activity

As a response to the recent crisis, the DFA and G20 have created a new class of too-big-to-fail institutions. Constraining the risks these firms take must be an explicit goal of CFTC, SEC, and foreign rulemaking. On the other hand, finding ways to curtail the extent to which emerging rules actually constrain private firms' pursuit of profits is the goal of lobbying and other avoidance activities. Within and across borders, regulatory competition and the ability to persuade elected politicians to pressure regulators on their behalf helps the industry to bend the rules in their direction.

Representative Jeb Hensarling, the Texas Republican who leads the Financial Services Committee, sought to tie the issue to the furor surrounding the Internal Revenue Service’s selective screening of nonprofit groups with ties to the Tea Party movement, which caused the resignation yesterday of the IRS’s acting commissioner.

“This rulemaking is well-known to be part of a partisan political agenda of labor union bosses, George Soros and assorted leftist groups who conveniently would not have to abide by the rule,” Hensarling said.

 The SEC has three statutory purposes -- protecting investors; maintaining fair, orderly and efficient markets, and facilitating capital formation, Hensarling said.

“That is why it is most disturbing to many of us to realize that while the SEC has missed numerous mandatory rulemaking deadlines, it is devoting time and resources to a discretionary rulemaking and more specifically, a highly controversial discretionary rule,” he said.

Republican lawmakers on Thursday cited the recent Internal Revenue Service scandal as they urged the chief of the nation’s securities watchdog not to require publicly-traded corporations disclose how all their money is spent on politics.

“It is most disturbing to many of us to realize that … [the Securities and Exchange Commission] is devoting time and resources to a discretionary rulemaking and more specifically, a highly controversial discretionary rule to force public companies to report all perceived facets of political involvement,” said Rep. Jeb Hensarling, the top Republican on the House Financial Services Committee at a hearing on the agency’s budget.

Financial Services Committee chairman Jeb Hensarling said the IRS’ apparent targeting of conservative groups raises questions about how pervasive “tactics of harassment” have become within the Obama administration, saying the scandal is “right out of the Watergate playbook.”

The Texas Republican, during a budget hearing, warned new SEC chairman Mary Jo White that her agency could similarly be viewed as acting in a partisan manner if it pursues a rule requiring public firms to report their political spending to shareholders.

Hensarling said the proposal “is well known to be part of a partisan political agenda of labor union bosses.”

The burgeoning IRS scandal also provided lawmakers with ammunition to question the agency's independence and agenda-setting. Chairman Rep. Jeb Hensarling (R., Texas) said it is "disturbing" that the SEC might propose a "discretionary" measure like political-spending disclosures when it has missed deadlines for other mandatory rules and asked Ms. White if the White House's Office of Management and Budget had contacted the agency about its rule-setting agenda. 

Problem:

As an independent agency, the Securities and Exchange Commission (SEC) is not currently subject to President Obama’s Executive Order No. 13563. The order directs non-independent executive branch agencies to perform a cost-benefit analysis on proposed regulations, tailor those regulations to impose the least burden on society, and retrospectively analyze old rules to identify those ripe for repeal.

Example:

Last year, the U.S. Court of Appeals for the DC Circuit unanimously concluded that in promulgating a rule related to corporate board elections, the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed to adequately quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”

Solution:

H.R. 1062 would essentially codify President Obama’s E.O. No. 13563 with regard to the SEC.  It would require the SEC to: 

• Perform a cost-benefit analysis of proposed regulations
• Identify and assess alternatives to those regulations
• Tailor regulations to impose the least burden on society
• Choose the regulatory approach that maximizes net benefits
• Review existing regulations within one year of enactment