Is the era of free money over?

There is something about the essential nature of man which is always looking for a free lunch.  Alchemy was very popular back in the day that tried to transform base metals into silver or gold rather than do it the old-fashioned way by stealing and pillaging.  Rumpelstiltskin was an imp in an old fairy tale who figured out how to spin straw into gold.  Recently (within the last 40 years), the government has been trying its hand at alchemy by spinning paper into gold…by printing it.  The political parties of yore were described as the “tax and spend” Democrats vs. the “fiscally conservative” Republicans.  For some time now, it has been the tax and spend, spend, spend, Democrats against the spend, spend Republicans. 

Who can pin an exact date on when it all began?  We might see the beginning of our national debt woes from that inflection point of the deal that was made in the early 1980s between Ronald Reagan and Tip O’Neil.  Reagan wanted to increase defense spending dramatically to beat the commies, and Tip agreed to allow it as long as he could spend whatever he wanted on domestic programs.  Guns or butter became guns and butter.

A little national debt history

The national debt in 1980 was $1 trillion which after the fall of the Soviet Union, the decade of greed, the S&L crisis and the computer revolution expanded to $5.8 trillion in 2001. Then came 9-11 and our wars in Afghanistan and Iraq.  When asked what Americans could do to help the war effort, instead of being told to buy war bonds or expect increased taxes, we were urged to buy things and not worry. We ended up buying houses that we could not afford, leading to the Great Recession. By 2007, the national debt had increased to $9 trillion.

Having previously expanded the debt (free money) without any apparent adverse consequences, when the 2008 recession came, we bailed out the banks and General Motors, created stimulus programs (more free money), and in 2009 created the $831 billion for the American Recovery and Reinvestment Act (ARRA) for all those shovel ready infrastructure projects.  In addition, more money was pumped into the economy by Quantitative Easing 1, 2, 3 and 4 where the government bought government bonds to keep the price of bonds high and interest rates low.

Then some academics thinking they recognized a good deal pushed a new financial scheme called Modern Monetary Theory where the Fed would simply buy government bonds from itself at low interest rates and create the money to pay for the bonds by itself and push that money out into the economy and to the government for more spending. All would be well, said the academics, unless there was inflation, which they believed was a thing of the past. The national debt in 2016 at the end of the Obama years was now $19.6 trillion.

Then came the pandemic and the closure of the economy.  In this crisis in 2020, we all thought it reasonable, that if the government was going to keep us from working and earning a living, the least it could do was to kick us a few trillion ($2 trillion to be more exact) to cover the gap until we were released from quarantine to return to work. This was the Coronavirus Aid, Relief and Economic Security (CARES) Act.  (Side note…I would love to know who makes up these names and how much they get paid to do it.)  The debt at the end of the Trump years was $26.9 trillion in January 2021 but even though the government stimulated the hell out of the economy and having paid for the vaccine, test kits, PPE and ventilators etc, the spending did not end there.

Shortly after Biden took office in March of 2021, running on the popularity of free money, he passed the American Rescue Plan Act (ARPA) ($1.9 trillion) as if the country currently needed more rescuing and instead gave us inflation as there was more money chasing fewer things to buy.

Not stopping, Biden added more free money with the Inflation Reduction Act. (further side note:  seriously, now, I really want to know who is making up these names.)  The Brooking Institute pegged the cost for this at $780 billion while Goldman Sachs estimated the cost at $1.2 trillion, but why quibble.

On deck are the Biden Student Loan Forgiveness programs estimated to cost between $870 billion and $1.4 trillion and then the CHIPS Act for another $174 billion.

The debt as of this writing is $35.3 trillion (give or take a couple billion here or there) and soaring another trillion every 100 days.

Why should we care?

The country is divided politically and uneasy.  We don’t understand why our housing is unaffordable, why grocery prices have increased so much and why Taylor Swift concert tickets cost over $500.  The following is a suggestion as to what happened and more particularly a warning of what is coming so we can try to get out of the way.

So, what is the big deal?  Well, for the last 45 years, Americans have been living in a low inflation, borrowing for whatever we want society funded by government, banks and credit cards.  We want it, and we want it now.  As others want things as well, we are inclined to support their aspirations so as not to be hypocritical particularly if they/we can “just” borrow it (and never have to pay it back).

 As governmental debt has increased, there has been little concern except for the occasional “putting debt on our children and grandchildren” soon to be replaced by the joy of the latest bike trail or homeless program.  While we were congratulating ourselves that we live in the richest country ever, the reality is that over the last 45 years, we have been spending and consuming more than we have earned through work and productivity increases, the only way that wealth is created in a society.  Let’s face it, we have taken more than our fair share out of the economy.

While debt increased steadily, there wasn’t a spike of inflation, and the interest payments on the debt that we incurred, while slowly increasing, was viewed as merely an annoyance as finger waving scolds kept claiming that someday interest would capture more of the federal government revenues than it should.  It looks like that day will be next year as the cost to pay interest will for the first time be more than what is spent on national defense at a time when the world is rapidly becoming a more dangerous place.

The other fact that is different this time is that over the past 20 years, at least, the party was funded without any pain to the partiers (taxpayers) because there was always some new non-tax increase scheme to fund whatever spending anyone thought might be worthwhile or even not worthwhile,   ARRA, Quantitative Easing, Modern Monetary Theory, CARES act, American Rescue Plan (ARPA), Inflation Reduction Act (IRA), Student loan forgiveness, CHIPS,  etc.

During this period, Governmental entities, federal, state, local, public transit, were spending like drunken sailors (with apologies to any drunken sailor who may be offended).  The Federal Government was always there to backfill the “needs” of the subsidiary governmental agencies with grants which flowed through a complicated series of grants, tax credits, direct expenditures and intergovernmental agreements.

But now the party may be over for state and local governments.  In particular, the Biden American Rescue Plan (ARPA) that allocated billions of dollars to state and local governments will turn into a pumpkin on December 31, 2024 when all the free money from ARPA has to be allocated. On January 1st, no more.

When the ARPA money came in, (not to be confused with ARRA, the Obama shovel ready program,) state and local governments went into a feeding frenzy to find projects and programs to spend the free money on whether it was a good idea, sustainable or not.  Promises were made to end homelessness, to create affordable housing, to feed the poor, build high speed rail, eliminate carbon dioxide and grocery bags.  Bureaucracies and non-profits were created to spend the money. People were hired.  Offices were opened. Lobbyists were retained.  

In Colorado, the number of State employees increased from 52077 in 2014 to 66189 in 2023.  Nationally, over the last year, of all jobs created only 60% went to the private sector, which makes things and provides services that we want and need, while 40% were government jobs which, well, generally do not.

The dirty trick though is that the expansion of governmental employment was not limited just to the number of employees paid by governmental agencies as these new projects came with the usual camp followers of consultants, contractors, attorneys, media and particularly new to this cycle of spending, nonprofits.  Even with the expansion in governmental employment, it wasn’t enough to launder all the new federal and state money.   While in the past, state or municipal employees would pass out all of the money, now a new contingent of non-profit entities and their employees were retained to essentially do the work of governments. 

As of December 31, when the spigot will be turned off, these governmental entities and non-profits will be left with rotten pumpkins and a lot of social programs with not only promises to recipients but which also funded the salaries of state and non-profit employees who have kids in college and mortgages to pay.

To solve this crisis (if I may borrow an overused term), governments can either reduce spending which will result in cancelled social programs and terminated state and nonprofit employees or find more money.  So far it looks like governments have chosen the latter, and this is where you fit in. 

Things aren’t so great right now

An additional problem is that the folks right now aren’t particularly flush with cash, and we don’t know how amenable society will be to reaching deep into their pockets to give governments more money to continue their spendthrift ways.  

In Colorado, homeowners were shocked in 2023 by property taxes that increased 20%-50% as a result of inflated property values.  As voters screamed for relief, the legislature giving an indication as to what side they were on, did nothing. Recently as a result of a special session, they came up with a plan not to screw the homeowner as much in the future as they had in the past, but no relief was given on the substantial property tax burdens that were already in place.

Also, as a result of inflation, the folks were going to the grocery stores seeing the cost of hamburger and about everything else shoot up.  The public began switching from brand name to generic foods to save money or eating less at the end of the month.  Fast food in some places became an occasional night out for a good time. Despite free wind and sunshine, utility prices increased as the public began paying the cost for building solar and wind farms and the transmission lines to bring that power from nowhere to the major metropolitan areas. 

Rent increases began pushing people out of their homes.  Insurance for cars and homes skyrocketed and health care costs which were supposed to be fixed by Obamacare weren’t, as rural hospitals began to close or were in danger of going under.  As the people have cut back, they have begun to have those real discussions at that kitchen table, that the politicians always talk about, to figure out how they were going to make it.  Claims by the administration that Bidenomics is working, inflation is going down and therefore all is well, is not selling with the public. There is a general sense of unease of whether a recession is coming or is not. Wages have not caught up and those who no longer receive wages, like the baby boomers, who vote, have received nothing at all to offset the spike in the daily cost of living in our purported golden years of blissful retirement.

What is coming our way

One would think that our elected representatives, hearing the people cry out, would do whatever they could to lighten the tax load at this critical stage, but one would be wrong.  Governments in Colorado appear to be tone deaf to those who are struggling and are going to be struggling by going in the opposite direction to try to raise taxes as quickly and as much as possible to save their precious programs.  And we are not talking about a little more, we are talking about a lot more.

Denver, having invited asylum seekers to settle in the mile high city, found out that they use Denver Health as their current free health care provider which has caused massive shortages in Denver Health which the City Council chose to remedy by putting a 0.35% sales tax request on the ballot.  This is in addition to the 0.5% sales tax increase for “affordable housing initiatives” giving Denver the title of having the highest sales tax rate in the front range, 9.65%. But the potential financial burden to the people of Denver is not yet done.  To add insult to injury, the Denver Public Schools, which is noted more for its dysfunctional school board than academic achievement, is going for an additional $1 billion. Further the Denver City Council recently voted to send to the ballot a new Downtown Development Authority for “only” $580 million. 

If the taxing entities were contained to Denver, it would be bad enough, but front range Douglas, Arapahoe and Jefferson Counties will all have ballot measures allowing them to keep more tax dollars than they have been allowed to in the past. In Jefferson County’s case, it will be the third time in the last 4 years having gone down to defeat by the voters in its prior two attempts.  Maybe the third time will be a charm or the voters being exhausted, or distracted by the federal election, will let this one slide by.

The Cherry Creek School Board is asking for an increase in property taxes and a billion-dollar bond issue deciding now is the time to build new schools, including building a new swimming pool and the usual pleas to increase teacher salaries and have smaller class sizes without explaining what they have done with all the money that we have given them in the past. 

Meanwhile, the local railroad and bus company, the Regional Transportation District (RTD), will ask the citizens for more money in taxes to fund its operations that riders can’t or don’t want to use.

These are just the highlights as counties, water districts, municipalities, and transit authorities, instead of searching for ways to cut expenses, are shaking the tree for more money for their special projects.

What will happen?  I really don’t know.  The populace in Denver, which should have known better in prior years, recently voted for sales tax increases for “climate protection”, “college tuition scholarships”, “trails and open space” and to “feed the kids”.

Have we reached a point after two generations where the people will realize that they are the ones paying for other people’s programs?  Will they realize that there is no free money, and that the government is emptying their pockets before they get a chance to spend what they have earned on things that they want and need?  Don’t know.

What I do know is that the straw which we have been spinning to make gold is running out.  Will the economic wizards currently governing our nation, state and local treasuries find new pots of gold?  I don’t know that either, but I think it will be ugly and ultimately, we will be left with the tab.