The Ever-Upward Irresponsible Trend

Am I missing something?  Nobody seems to be paying any attention to federal spending and deficits anymore.

The Republicans, who used to be the preachers of deficit reduction, balanced budgets, and fiscal discipline, are much too busy trying to distance themselves from President Trump to do much of anything about anything, much less something detail-oriented and difficult, like tackling federal spending.  And the Democrats never seemed to have much appetite for actually considering whether legacy federal programs make sense in the current world, or are performing as they were intended, or are actually having a positive impact from a cost-benefit standpoint.  Expecting Congress to actually pass a budget seems to be hopelessly passe, and continuing to spend more, more, more seems to be the default approach.  And, given the kinds of deficits we’re racking up, and the experience of Puerto Rico, and Illinois, and other states that haven’t paid attention to basic economic realities, “default” seems like an apt word.

In case you’re interested, June 2017 was the first month in history where the American federal government spent more than $400 billion.  You can see the number — $428.8 billion — on page 2, in the “outlays” column, of this dry document called the monthly report of revenues and outlays, issued by the Treasury Department.   And here’s an interesting statistic, for comparison’s sake:  according to this report from the Congressional Budget Office, the amount of federal government outlays for the entire year of 1976 did not even reach $400 billion.  But ever since that time, it’s been an ever upward trend, and now we’ve reach the point where the federal government spends more in a single month than it spent in an entire year only 40 years ago.

You’d think that somewhere, someone in Congress would be up in arms about what is obviously an alarming and unsustainable trend.  You’d think someone, somewhere would be waving that dry Treasury report around and asking why the spending by the list of the government agencies set forth in small type later in the report needs to be ever increasing, and demanding that those agencies tighten their belts or justify their existence.  You’d think that someone, somewhere, would be glancing uneasily at Puerto Rico and Illinois, looking at the federal trends, and deciding that we need to do something to curb our profligate ways before we’re irretrievably on the road to economic perdition and financial ruin.

Of course, you’d be wrong on that.  It’s much easier to just react to the latest Trump Administration dust-up and let things slide.  The only worrying seems to be done by those of us out in the real world whose practical experiences with household budgets and controlling family spending makes us grind our teeth at the amazing irresponsibility of our elected representatives.

A federal government that spends more than $400 billion in a single month!  And nobody is talking about it.

Puerto Rico’s Impending “Bankruptcy”

Puerto Rico has been struggling financially for years.  Yesterday the U.S. territory  decided to invoke a new federal statute that will allow the island to go through a process something like bankruptcy, in hopes that it will be able to shed its crushing debt load and get a “fresh start.”  Puerto Rico owes $74 billion to bondholders and has another $49 billion in unfunded pension obligations and has been unsuccessful in convincing Congress to bail it out or cajoling creditors into making concessions.  Making timely principal and interest payments on its debt requires $3.5 billion in payments a year, but Puerto Rico has only $800 million to spare.  The inexorable results of that math made the quasi-bankruptcy inevitable, triggering what will be the largest government “bankruptcy” process in U.S. history.

The process will be something like a bankruptcy because Puerto Rico — like every U.S. state and territory — technically cannot go through the traditional federal bankruptcy process.  Instead, Puerto Rico has invoked the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), enacted during the Obama Administration, which contains some elements of the bankruptcy laws but also includes special provisions providing that, in some ways, Puerto Rico must be treated as a sovereign.  Under the PROMESA law, the process of dealing with Puerto Rico’s debt will be supervised by a federal bankruptcy judge.  Chief Justice John Roberts will appoint the judge, who will then start deciding what to do with Puerto Rico’s appalling financial problems.

Puerto Rico invoked PROMESA because a stay that had prevented creditors from suing ended and a series of creditors immediately filed suit, hoping to be first in line to be paid.  The PROMESA law stops those lawsuits and, Puerto Rico hopes, will give it substantial leverage to negotiate with creditors and try to convince them to take pennies on the dollar for the debt — with the threat that, if creditors don’t agree, the federal judge could impose an even more draconian result.  Creditors are furious.  Republicans in Congress aren’t willing to go with a bailout option, arguing that Puerto Rico has already received big federal subsidies and should explain why it got into this predicament.

It’s an entirely reasonable request that, frankly, could also be made to many U.S. cities and states that face similar debt issues.  Puerto Rico’s economy has struggled for years, and Puerto Rico officials decided, year after year, to borrow to pay their operating expenses rather than doing the responsible thing:  cutting costs, pruning government employee pensions, trimming payrolls, and forsaking pet projects in favor of fiscal prudence.  Now creditors and employees who have pension obligations will have to take pennies on the dollar, and according to a federal board Puerto Rico is “unable to provide its citizens effective services” — all because Puerto Rico’s politicians were unable to make the tough decisions and kept borrowing to put off doing so until some point in the future.  Now that time has come.

Investors who may have bought Puerto Rico bonds at a discount, after the difficulties became obvious, might not be sympathetic characters, but many of its bonds likely are held by individuals who viewed bonds issued by a U.S. territory to be a pretty safe investment that would help fund their retirement years.  And employees who have earned pensions will receive less than they were promised, meaning they’ll have to tighten their belts even though Puerto Rico’s successive governments didn’t do so.  And a default of sorts on Puerto Rico’s governmental debt isn’t going to be helpful for other governmental entities that want to borrow through issuance of bonds, either.

Interesting, isn’t it, that the federal statute that allows Puerto Rico to go through the quasi-bankruptcy process — PROMESA — sounds a lot like “promise”?  Thanks to its governmental mismanagement, for Puerto Rico the PROMESA process it will be more like promises broken.  I only hope that the successive administrations who put their heads in the sand and borrowed, borrowed, and borrowed are in some way held accountable for their gross irresponsibility.