The Biden administration is requesting another federal agency-sized supplemental. This time, it’s $56 billion in new emergency spending for natural disasters, childcare, and high-speed internet. With deficits in the trillions and interest rates at historic highs, Congress should stop adding fuel to the deficit fire.

The administration’s latest emergency supplemental would spend more than the Agency for International Development, the Small Business Administration, or the National Aeronautics and Space Administration (NASA) received in individual funding this year. This request also comes on top of the $106 billion in emergency aid for Israel, Ukraine, and other foreign policy issues the administration recently requested. And don’t forget the $16 billion in emergency disaster aid Congress already approved in a short-term spending extension in late September.

If Congress passes the $162 billion in combined emergency spending, legislators will erase any theoretical savings that could have been achieved for fiscal year 2024 under the May Fiscal Responsibility Act, which set caps on discretionary spending. Congress should reject phony emergency spending and consider Biden’s “critical needs” request as part of the regular appropriations process, subject to existing spending caps.

Emergency spending should be reserved for priorities that are necessary, sudden, urgent, unforeseen, and not permanent—few of the line items included in Biden’s latest supplemental meet these criteria. Moreover, Congress should adopt emergency spending offsets to curtail abuse of this budget category for the primary purpose of evading current spending caps in the future.

Disaster Relief

About half ($24 billion) of the new domestic supplemental would address disaster-related issues. From that amount, $9 billion would cover a preexisting Federal Emergency Management Agency (FEMA) Disaster Relief Fund budget shortfall that legislators have been aware of for months.

The remaining $15 billion in disaster funding includes support for crop insurance, housing, transportation infrastructure, education, small business disaster loans, and more. Many of the line items the administration claims require emergency spending are barely disaster-related and do not meet the essential criteria that justify emergency deficit spending.

Take $600 million for purchasing two new aircraft for “hurricane and extreme weather forecasting efforts.” These funds would replace existing aircraft expected to be decommissioned in 2030. Likewise, the National Aeronautics and Space Administration (NASA) requests $180 million to “begin efforts to safely dispose of the International Space Station.” According to NASA, the International Space Station should be operable “through 2030.” These issues do not qualify as urgent or unforeseen and certainly do not represent vital emergency needs.

Then there is $68 million in general funding for the Centers for Disease Control and Prevention (CDC) and $63 million in base pay increase for the Department of Interior wildland firefighting workforce. Neither of these issues arose suddenly, nor are they non-permanent expenditures. Salary increases and agency-wide funding belong in a base budget request, not an emergency supplemental.

Some of the spending the administration asks for should not be happening at all. Take the $3 billion in “support to farmers and ranchers with crop losses from natural disasters.” As Cato’s Chris Edwards points out, federal crop insurance subsidies lack transparency, crowd out private risk management solutions, primarily benefit extremely wealthy producers, and harm the environment—all at taxpayers’ expense.

Rather than responsibly plan for natural disasters, the federal government uses a separate deficit funding stream to plus-up agency and program accounts. Congress should stop abusing emergency spending to fund reoccurring issues and make room in the regular budget for essential disaster relief.

Childcare

The administration requests $16 billion for “child care stabilization funding…mitigating the likelihood that providers will close or raise costs for families.” The new funding is supposed to replace previous childcare emergency funding passed in the American Rescue Plan of 2021 and would be provided through the Child Care and Development Block Grant.

This is not an issue that suddenly arose. Moreover, federal funding that comes with strings attached also carries unintended consequences. As Cato’s Ryan Bourne explains,

“[F]ederal subsidies entrench onerous state childcare regulations. The Childcare Development Block Grant authorizes and governs the federal childcare subsidy program known as the Child Care and Development Fund (CCDF), which provides financial assistance to low-income families. The Child Care and Development Block Grant (CCDBG) Act of 2014 requires that providers receiving grant funds meet group size limits, age-specific child‐​to‐​provider ratios, and staff qualification requirements, as determined by the state—regulations that, as noted above, reduce supply and increase prices.”

Pet Projects

The remaining $16 billion in emergency funding is spread across several pet projects.

The administration requests $6 billion for high-speed internet subsidies and $3 billion for communications providers to remove “insecure equipment and software from US communications infrastructure.” Continuing broadband subsidies and reimbursing communications companies for “ongoing” efforts to secure communications infrastructure responds to neither an unforeseen nor a sudden emergency.

Another $3 billion would go to the Department of Energy, including $2.2 billion to improve long-term domestic uranium enrichment and $278 million to speed up the construction of the Isotope Production & Research Center at the Oak Ridge National Laboratory. Neither issue qualifies as sudden or non-permanent.

Another $4 billion would be spread across opioid harm reduction, low-income home energy assistance, international food assistance, and non-profit grants related to counterterrorism. Some of these programs, like the Low Income Home Energy Assistance Program (LIHEAP) and US Department of Agriculture Food for Peace grants, are regularly funded either fully or partially through emergency spending. These are all issues that should be discussed within base budgets that are subject to spending limits.

Reject Deficit Spending for ‘Emergencies’

Congress should reject unnecessary and unjustified emergency spending. If some of the issues the administration highlights necessitate funding, Congress should consider it as part of annual appropriations. We must get Congress out of the habit of myopically passing supplemental emergency funding requests.

Congress should further offset new emergency spending by requiring future cuts to pay for expenditures that violate agreed-to budget caps. Emergency spending offsets would promote forward-thinking fiscal planning and deter the irresponsible use of deficit-fueling emergency spending for recurring, predictable issues.

Overreliance on emergency spending for issues that should be part of basic budget discussions erodes trust in the government’s capacity to budget responsibly and directly contributes to the long-run fiscal challenge. With deficits in the trillions and interest rates at historic highs, taxpayers cannot afford more mindless emergency spending.

Shortly after the violence erupted in Israel on October 7, an article in the Wall Street Journal pinned part of the blame for terrorist financing on cryptocurrency. That was all that was needed for Senator Elizabeth Warren (D‑MA) to get over 100 members of Congress to sign a letter calling for a crackdown on cryptocurrency in the wake of this tragedy.

Yet it now seems the initial reporting was exaggerated as the Wall Street Journal issued a correction and amplification on October 27 to address some of the issues. However, this incident is not the first time one of Senator Warren’s anti-cryptocurrency letters has been based on questionable data.

What Happened

Originally, the Wall Street Journal piece in question said that the Palestinian Islamic Jihad received “as much as $93 million in crypto between August 2021 and June this year,” and that Hamas received “about $41 million over a similar time period.” The piece credited the estimates to the companies Elliptic and BitOK, but no reports from the companies were linked.

A week later, over 100 members of Congress signed a letter led by Senator Warren that cited the Wall Street Journal’s reporting nearly a dozen times as the only source to claim that the Palestinian Islamic Jihad and Hamas collectively raised over $130 million in cryptocurrency.

A day later, Chainalysis published their findings to correct the record. Simply put, Chainalysis warned that the number reported in the Wall Street Journal article was likely wrong because the difference between the total transaction volume at a service provider (e.g., an exchange) and transactions at a known terror-affiliated wallet can be vast.

In the example Chainalysis provided, one service provider was identified as having $82 million in total transactions, but only $450,000 of that amount went to a known terror-affiliated wallet. Turning back to the source for one of the figures in the Wall Street Journal piece, this type of issue is likely why Elliptic immediately cautioned readers that “it is not clear exactly how much of these funds belong directly to the [Palestinian Islamic Jihad]”—a warning the original Wall Street Journal article partially addressed several paragraphs later.

Another week later, Elliptic published its own correction stating, “there is no evidence to suggest that crypto fundraising has raised anything close to [the amount cited in the Wall Street Journal], and data provided by Elliptic and others has been misinterpreted.” In fact, Elliptic said that its team reached out to both Senator Warren and the Wall Street Journal to clarify this point.

To be fair, mistakes happen—especially in the fog of war. And that is why it is good to see the Wall Street Journal issued a correction and amplification on October 27. However, what is especially unfortunate about this incident is how similar it is to another time Senator Warren wrote a letter about the supposed illicit use of cryptocurrency.

An Unfortunate Trend

Back in August, Senator Warren led a different group of senators in a letter calling for the Internal Revenue Service (IRS) to “act swiftly to implement strong tax reporting rules for cryptocurrency brokers” to close a “$50 billion crypto tax gap.” The press release accompanying the letter claimed that multiple “studies” substantiated this number, but a closer look reveals the sources were just two 2022 articles from CNBC and Bloomberg that pointed to the same research note from Barclays.

Although it’s unclear if this research note is publicly available, both articles cite Joseph Abate, a managing director at Barclays, as having said that unpaid taxes on cryptocurrency may be as much as “$50 billion per year.” CNBC quoted him further as having said, “Without any supporting IRS data, our sense is that the $50 billion estimate for the crypto tax gap is probably too small.” And in Bloomberg, it was clarified that Abate had “extrapolated from a 2017 IRS calculation to find the current tax gap would be around $50 billion per year” because the “U.S. tax agency hasn’t released any recent estimate of its own.”

If nothing else, judging an emerging industry in 2023 off IRS data from 2017 should be a red flag. However, what’s perhaps more concerning is that the Joint Committee on Taxation estimated that taxing cryptocurrency would only yield $28 billion over ten years. In fact, the Biden administration later revised that estimate down to just $2 billion over ten years.

So again, it seems an anti-cryptocurrency narrative is being built in Congress based on questionable evidence, to say the least.

Conclusion

The good news is that the tide is already starting to turn: more and more people are taking notice of this issue. On October 26, Senator Bill Hagerty (R‑TN) spoke up during a Senate Banking Committee hearing to clarify the record. However, whether the more than 100 members of Congress that signed Senator Warren’s letter will soon make similar clarifications is still to be seen.

Update: On November 14, 2023, this blog was updated to reflect that the “correction” issued by the Wall Street Journal was referred to as a “correction and amplification.” Furthermore, this blog originally said the Wall Street Journal article did not include Elliptic’s warning about the difficulty in identifying ownership. The blog has been updated to note that the original article did include a different warning later in the piece. 

Chase Eskelsen’s career path has included lots of twists and turns. But each of those experiences benefit him in his latest endeavor: founding Fersken Education, a consulting firm that helps education entrepreneurs.

After a stint in the business world, Chase became an administrator at an online charter school in Texas. His focus there was growing enrollment and creating a standard operating procedure manual since it was a relatively new venture, and they were figuring things out as they went. Chase moved into a national role dealing with policy at online schools, which allowed him to travel the country working with state policymakers to help them understand important considerations and differences in the virtual realm versus brick-and-mortar school policy.

In 2019, Chase joined a non-profit that wanted to create hybrid learning sites, which gave him the chance to be involved in creating schools from the ground up. After a few years there, he decided to build on his varied experiences to create FerskenEd. “I’ve touched school administration, government and public affairs, policy, board and partner relations, leading a nonprofit,” he says. “So now when people come and ask, ‘What do you guys do?’ I say, ‘What do you need?’ Because we can either do it or we can put them in touch with the right people.”

Education entrepreneurs, or edupreneurs, can become members of Fersken’s Edupreneur Mastermind, a group that provides networking, webinars on relevant topics, and access to resources to help grow and sustain their businesses. It’s aimed at young entrepreneurial endeavors in their first three years of operation.

There’s a diverse group of edupreneurs currently involved with Fersken, and the team works hard to help each one with what they need. “We wrote the manual for one client on how to launch pod schools. We do advocacy and government affairs for another client—it’s parent advocacy for school choice and we do the policy work for five states,” says Chase. He helped another edupreneur who created a successful course that she sold directly to consumers. She approached Chase for help structuring the course in a way that would work for high schools, which Fersken was able to do.

Most of the education entrepreneurs Chase encounters were teachers or administrators who realized there had to be a better way to do what they were doing in the classroom. “So, they go and figure out a better way to do it,” he says. “They leave their school and launch this business. And then the businesses way too often were failing—not because the idea is not great, not because it’s not helping students, but because they’re educators, not business people. And they were failing on the business side.”

The realization that these edupreneurs often needed specific business-related help inspired Chase to start bringing in experts to discuss key issues. Recent webinar guests include a bookkeeper who explained the importance of good record keeping and a lawyer who gave tips on what they could do before hiring a lawyer to save on billable hours. Other times the members just share their own experiences with each other so they don’t all make the same mistakes or jump through the same unnecessary hoops.

Membership with Fersken is currently free as it gets up and running, but Chase says there will eventually be different levels. Entry level will be very inexpensive and similar to what’s currently available. The next level will include consultations—with Chase and outside experts. For example, he has an agreement in place with a legal firm that specializes in education, especially charter schools, private schools, and education savings accounts (ESAs), which allow parents to use a portion of state education funding for a variety of educational options. One of the membership tiers will include access to the legal firm.

He’s making similar arrangements with an education marketing firm and an education human resources firm. “We’re really trying to take all the business side off so you can really focus on your reason for starting your company,” he explains.

Fersken Education was recently awarded a VELA Education Fund microgrant, which will help them “expand their reach, develop new initiatives, and continue fostering a culture of innovation in education.”

It’s a great time to become an education entrepreneur. Parents are increasingly expressing interest in educational options beyond their district schools. More states are adopting or expanding education choice programs, including ESAs. And organizations like Fersken are sprouting up to help edupreneurs navigate the complexities of the changing education landscape.

Introduction 

As discussed in previous work, “youth online safety” bills, however well-intentioned, raise significant constitutional concerns. These laws are likely to violate the First Amendment due to their impact on the speech rights of users of all ages, and there are additional concerns about their impact on privacy. The emergence of legal challenges against the implementation of these laws has substantiated these concerns. 

The US district courts in both Arkansas and California issued preliminary injunctions stopping the enforcement of the Arkansas Social Media Safety Act and the California Age-Appropriate Design Code Act (CAADCA). These laws, intended to implement age verification and restrictions for children accessing the internet, are likely to limit speech for adults without necessarily providing enhanced protections for young internet users. However, a court has allowed a Utah law related only to age verification for pornographic content to proceed, denying the challenge to the law. 

What the Courts Decided in Arkansas and California 

The US District Court in California granted a preliminary injunction against enforcing CAADCA, holding that the act “likely violates the First Amendment” based on NetChoice’s claim that the law imposes “speech restrictions” that “fail strict scrutiny and also would fail a lesser standard of scrutiny.”

The court notes that California fell short in identifying case law that would support the kind of restrictions on the collection and sharing of information as imposed by CAADCA. The court also notes that given Supreme Court case law that the “creation and dissemination of information are speech within the meaning of the First Amendment,” CAADCA’s restriction on usage and access to information is likely to fail constitutional muster. Even if CAADCA were to dictate usage and access of commercial speech, the court, relying on Sorrell v. IMS Health Inc., notes that such speech is entitled to at least intermediate scrutiny under the First Amendment. 

The US District Court in Arkansas went a step further, noting that the Social Media Safety Act would not only restrict speech under a strict scrutiny standard but also prove ineffective in protecting youth, as it is “littered with” exemptions. For example, companies in the business of interactive online games are exempt from the law. This means that the Arkansas law does not extend protections beyond COPPA because gaming companies will not be prevented from collecting data from children above 13 years old and then selling it to advertisers. 

Both Arkansas and California sided with NetChoice’s concerns about the burdens that the laws impose on adult speech. Noting the difficulty of estimating children’s age without figuring out the age of everyone else, the California court ruling noted that businesses opting not to estimate age will end up shielding content for both children and adults, thereby reducing the adult population to “only what is fit for children.”

The CAADCA restrictions, according to the California court, would fail intermediate scrutiny, let alone strict scrutiny. The Arkansas court ruling expresses concern over the law’s requirement to forego anonymity on the internet, a mandate that would in turn deter users from accessing certain websites and chill speech. 

While Arkansas and California took different paths in their legal analysis, they reached the same conclusion: both the CAADCA and the Social Media Safety Act are likely to violate the First Amendment.

Given that California’s CAADCA restrictions are unlikely to meet either strict or intermediate scrutiny standards, and since Arkansas’s law has been enjoined due to its ineffectiveness and limitations on speech, other states contemplating similar laws should reconsider their approach to protecting young people online, which is a matter of serious concern. The laws designed after the Arkansas or California model are likely to fail in protecting young internet users, while inadvertently suppressing speech for everyone. 

Key Takeaways from These Early Cases 

While both the underlying laws and the cases themselves are distinct, there are a few general takeaways from these cases that policymakers, internet users, and innovators should be aware of. 

These cases illustrate that youth online safety laws will undergo strict scrutiny by the courts due to their impact on First Amendment rights. This means that for such laws to be upheld, states must demonstrate that the laws are narrowly tailored to serve a compelling government interest. For example, questioning will likely arise regarding the laws’ impact on users over the age of 18, scrutinizing whether the laws are narrowly tailored to affect only underage users. Additionally, proving that safeguarding online youth is a state’s interest—rather than that of individual households—will also pose challenges. Defenders of broader social media regulation may also face an uphill battle given the abundance of tools presently available to parents, suggesting the existence of less restrictive means without consequences for speech and innovation. 

As mentioned, another key takeaway from these cases was the courts’ recognition of the impact these laws have on adult users of the internet. It is not surprising that, in such cases, courts relied on precedent from prior online safety battles in Ashcroft v. ACLU, which struck down COPPA, and the debates over video games and free speech in Brown v. Entertainment Merchants Association, which struck down a California law restricting the sale of “violent” video games to minors.

Youth online safety regulations still impact those over the age of 18 and their speech rights, as the only way to ensure compliance is to either treat everyone like they are under 18 or to require age verification for all users. While much of the speech analysis has been focused on the impact of adult users, it should not be forgotten that such regulations also impact the speech rights of young people, including the positive and entrepreneurial opportunities the internet has provided them. 

Notably, there are distinctions in the courts’ reasoning due to the difference in the laws, but policymakers should be aware that these cases show it will be difficult to craft general-purpose age verification or age-appropriate design codes that can pass strict scrutiny. 

Conclusion 

While proponents of government regulation of social media and the internet in the name of protecting the next generation may find the passage of the United Kingdom’s Online Safety Bill noteworthy, recent court decisions in the United States should prompt reflection on the broader impact of such proposals on the free expression of users of all ages. The court decisions issuing the injunctions demonstrate that these proposals would affect not only the speech and access to information of those under 18 but also of all internet users.

As parents and policymakers continue to debate the impact of technology and social media on young people, perhaps these recent court rulings should encourage reconsideration of how these technologies have enabled speech and highlight the necessity for nuanced safety solutions that do not need to arise from a government-dictated approach. 

Link taxes are a flawed policy idea under even the best of conditions, as I recently wrote in a policy analysis. Legislation like the Journalism Competition and Preservation Act (JCPA) would bail out struggling news outlets by compelling online platforms such as Google and Meta to pay whenever they surface links to news articles for consumers. It doesn’t take an economist to realize that raising the costs of linking to the news will ultimately mean fewer articles from fewer news outlets reaching fewer consumers. And doing so just might break the internet.

But these are not the best of conditions. 

Last week the New York Times ran an insightful article about the slow motion break up between the news industry and online distributors (Google, Meta, etc.). Google has laid off dozens from its Google News team, Facebook News is extinct, and Twitter (now X) is increasingly hostile to allowing any users off- platform.

This is bad news for news outlets given that these platforms have provided a valuable distribution service. Bear in mind that in the pre-digital era, distribution costs were the largest single item in a newspaper’s budget, more even than the cost of the actual journalism. While Craigslist tanked classified ad revenue for newspapers, at least Google et al provided a superior (and costless!) substitute for the old network of newsstands, newsies, and other distribution functions. But with a quarter of Gen Z already getting their news and search from TikTok, the mutual value of that complementary relationship is in decline.

Which means that this is the worst possible time for the reintroduction of the JCPA or any other link tax. It will force tech executives to ask hard, practical questions about the precise value of the news to their online ecosystems. The fact that both Google and Meta were willing to pay $200 million to Australian news companies after the country passed a link tax in 2021 was a sign that these links are worth quite a lot. But the willingness of Google to pull out of Spain after its snippet tax in 2015 and out of Canada this summer is a reminder that the value of the news organizations to tech companies is not infinite. Raise the functional price of links too high, and news aggregators will stop sharing links altogether.

Even in the link tax optimal scenario, in which news aggregators don’t pull out of news entirely and instead strike deals with news producers for access, it’s inevitable that fewer news articles from fewer newspapers will reach fewer consumers. What tends to happen is that the companies limit bargaining costs by making deals with only a few, larger conglomerates—maybe placing them behind a paywall a la Apple News—and then no longer provide links from smaller, independent news outlets with niche audiences. It’s “there ain’t no such thing as a free lunch,” journalism edition. 

Regardless of how you feel about these tradeoffs, the reality is that the price point for traditional online news from legacy news outlets is falling. Which means that imposing a link tax now would have an even larger, negative effect on total online news distribution as well as greater informational deadweight losses for consumers than it would have even a year or two ago. Policymakers should respond accordingly. 

As a final thought, I’d like to highlight the insight that the NYT article closes with. It notes that newspapers are rapidly expanding into “branded newsletters,” which has apparently boosted the subscriber base for outlets like The Atlantic substantially. As The Atlantic’s executive editor Adrienne LaFrance put it, “In a way, this decline of the social web—it’s extraordinarily liberating.”

Legacy news outlets are responding to the decline of the Internet 2.0 by experimenting and innovating with new products and new business structures. We’re transitioning into a “new news” media landscape in which professional journalists surf the web and act as guides to user-generated news and expertise. But a link tax, even to the limited extent it works as a cross-subsidy from Big Tech to Big Ink, will only delay that transition and discourage experimentation.

The House Budget Committee held a hearing on October 19 titled “Sounding the Alarm: Examining the Need for a Fiscal Commission.” Among the witnesses was former House Budget Committee chair, John Yarmuth (D‑KY), who resigned from Congress in January of this year. In both his remarks and answers, Yarmuth put debt threat denial on full display while suggesting that Congress need not worry about rising borrowing costs because “we can print all the money we want.” Were Congress to follow Yarmuth’s advice, this would most likely lead to rapidly rising inflation and spell economic doom.

The hearing, co-chaired by the HBC chair Jody Arrington (R‑TX) and ranking member Brendan Boyle (D‑PA), called upon four witnesses to discuss whether and how a fiscal commission might help put the US budget on a better fiscal path. Each witness was a former member of Congress and had been involved with a fiscal or budget process commission effort in the past. The witnesses were former Senator Rob Portman of Ohio, former Senator Kent Conrad of North Dakota, former Budget Chair Steve Womack of Arkansas, and former Budget Chair John Yarmuth of Kentucky.

Three of the four witnesses supported the idea of a fiscal commission to help Congress address the rapidly deteriorating fiscal situation. With total deficits projected to exceed $110 trillion over the next 30 years as the federal debt doubles to more than 200 percent of GDP, it’s necessary that Congress consider more effective options for reining in deficits and debt than the current, broken budget process. The only dissenting voice came from Yarmuth.

Beyond disagreeing with the need for a fiscal commission, Yarmuth questioned the unsustainability of the federal debt by espousing a widely debunked economic doctrine, without explicitly mentioning it by name: so-called modern monetary theory (MMT). As economist Jeffrey Rogers Hummels has argued, “[MMT] is neither new nor modern. It simply justifies funding government expenditures by issuing fiat money, which, of course, all economists have long been aware is possible. MMT then attempts to downplay the potential inflationary impact of such financing with manipulations of the government and central-bank balance sheets.” According to Yarmuth:

“Of course, every one of these efforts [to establish a fiscal commission] stems from the presumption that our debt and deficits are unsustainable. […] maybe this committee can actually analyze the national debt issue to determine whether the debt we have, and will have, is really unsustainable or not and how can we judge that moving forward? It can’t be just looking at a graph with a constantly rising line and getting scared. […] So that’s why I suggest before we start talking about the debt and deficit problems, we ought to try and get a really good look at what’s sustainable and what’s not. We are a sovereign currency, we can print all the money we want to serve the people whom we serve. … [W]hy are we paying interest on the money we borrow? And why do we borrow money anyway? We can print it and put it in the Treasury.”

Yarmuth’s advice to Congress amounts to, “Just have the Federal Reserve print more money. What could possibly go wrong?” Rapid inflation is what will go wrong.

The recent round of inflation, the highest in 40 years, followed a massive Fed-fueled deficit-spending spree during the COVID-19 pandemic. Inflation is fortunately falling (meaning prices are still rising, just more slowly), and the Covid-19 experiment in MMT-style policy should have dampened enthusiasm for MMT. Apparently, Yarmuth is undeterred.

The invocation of the magic words “sovereign currency” won’t insulate the United States from the inflationary effects of printing money to fund excessive government expenditures, any more than the sacrifice of animals in Ancient Rome protected that empire from natural catastrophes. With the 2023 deficit clocking in at a peace-time, and non-emergency-period high of $2 trillion, as President Biden is asking Congress for more than $100 billion in emergency aid, the US federal government has no plans to stop massive deficit spending anytime soon.

Yarmuth isn’t the only legislator who has fallen for the alluring bait of modern monetary theory (it should be called “Magic Money Theory”). According to Peter Coy with the New York Times, quite a few Democrats have jumped on the MMT bandwagon:

Representative Alexandria Ocasio-Cortez, Democrat of New York, has spoken positively about M.M.T., as have several of her fellow House progressives. Senator Brian Schatz, Democrat of Hawaii, has also expressed sympathy with Modern Monetary Theory and its cousin, the Green New Deal. The Times has reported that Kelton [author of the MMT bible: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy] has been a regular participant in conference calls on pandemic relief organized by Senate majority leader Charles Schumer, Democrat of New York.

Yarmuth says M.M.T.’s visibility in Congress is less than its influence. “There aren’t many people who are willing to be out front about it because it doesn’t resonate with what the average person thinks,” he said. He told The Louisville Courier-Journal in August that many members of Congress are more open to deficit spending than you would guess from their anti-deficit public statements: “Ultimately I think that’s for home base consumption and not necessarily for the vote at the end of the day.”

MMT is alluring because it promises to eliminate tradeoffs and constraints on government expenditures with the empty promise of creating unlimited dollars to finance such expenditures without the need to raise taxes or suffer rising interest costs. If politicians raise taxes too much, they’ll kill the golden goose that fills the Treasury’s coffers while taking a political risk. From politicians’ standpoint, it appears that much easier to finance government expansions with deficits. Deficits allow legislators to meet current constituent demands without imposing the associated costs on them. Yet, when excessive deficit spending on an already enormous federal debt pushes up interest rates, as we’re witnessing right now, using the Fed’s money-issuance powers starts looking even more appealing. That’s where MMT comes in. Who doesn’t love a magical money theory that promises Congress that they can eat their cake and have it too?

Against this backdrop, and given congressional reluctance to reform entitlement programs that are the major drivers of increased spending and debt, it would be wise for Congress to empower a fiscal commission with real authority to stabilize the growth in debt and rein in exploding interest costs. Moreover, the Federal Reserve should close off an avenue for monetizing the debt via fiscal QE. The temptation to use the central bank balance sheet to fund federal government spending without having to resort to taxation or borrowing will only rise as the federal debt grows ever larger.

If Congress waits long enough to address the US fiscal crisis, the MMT crowd might just get their way. Governments throughout history have resorted to the printing press or other forms of currency devaluations to fund their expenditures with the same result again and again. We’ll all end up paying the price for higher inflation and implicit default on the federal debt should stable monetary policy give way to the temptations to apply the hidden tax of money devaluation. If the federal government doesn’t get the budget under control and instead embraces MMT to fund its operation, we’ll learn that lesson the hard way.

Is the federal government’s debt too large?

• Federal debt held by the public of $26 trillion amounts to almost $200,000 for every household in the nation.
• At 98 percent and rising, federal debt as a percentage of gross domestic product (GDP) will soon hit a record high.
• Debt-to-GDP ratios above 90 percent slow economic growth,
• High and rising debt could trigger a major economic crisis.

So, yes, federal debt is far too large.

More evidence comes from comparing federal debt to state government debt. Out-of-control federal debt contrasts with stable and legally constrained state debt. This article looks at the rules and metrics used by the states to control debt. Federal debt is vastly higher than what state policymakers would think is prudent. 

Nearly all the states have balanced budget requirements for their operating budgets, but most borrow to fund some of their capital expenditures. All states recognize that debt is costly and risky, and so they impose constitutional, statutory, and procedural restrictions on it. State finance agencies and credit rating firms routinely examine state finances to ensure that debt is held to affordable levels.

A Federal Reserve study said that debt affordability means “a state’s ability to repay all of its obligations without negatively impacting the provision of ongoing public services or raising taxes to anticompetitive levels.” The study pointed to two metrics: “debt service to revenues and debt to personal income can serve as reasonable gauges of near-term and longer-term burden.”

Let’s compare federal debt to state debt using these two metrics—debt to personal income and debt service to revenues.

Debt to Personal Income

Figure 1 shows measures of government debt to personal income. The higher the ratio, the more burdensome debt will be on future taxpayers. Federal debt will rise from about 116 percent of U.S. personal income in 2023 to 140 percent by 2033, based on Congressional Budget Office projections.

By contrast, total U.S. state and local government debt—as measured by the Census Bureau—was just 16 percent of U.S. personal income in 2021. But even that relatively modest figure overstates the burden of state-local debt on taxpayers because much of it will be repaid by non-tax revenues, such as charges for utilities, colleges, and stadiums.

A better comparison with federal debt is “tax-supported” state debt, which is estimated by Moody’s Investors Service (linked here). Moody’s found that tax-supported debt in the 50 states totaled just 2.8 percent of personal income in 2022. Thus, American taxpayers are on the hook for 40 times more federal debt than state debt (116 percent vs. 2.8 percent).

Federal debt can also be compared to personal-income limits on debt that some states impose. NASBO identifies five states that have legal or advisory limits on (typically) debt as a percentage of state personal income: Georgia, Maryland, Minnesota, New York, and Rhode Island. The average limit is 3.8 percent. These states believe that issuing debt above about 3.8 percent of personal income is too risky, yet the federal government has exploded its debt to 116 percent.

Debt Service to Revenues

Figure 2 shows debt service costs relative to revenues supporting the debt. For the federal government, I simply included annual interest payments. For the states, debt servicing estimates typically include interest and principal payments because states generally repay debt when it matures.

More debt means higher costs and higher taxes down the road. States have learned from history that debt is costly and risky, which is why many states have laws or long-standing procedures that limit debt issuance based on measures of debt servicing costs.

Federal interest payments were 16.0 percent of revenues in 2023. In June, CBO projected that interest payments would rise to 20 percent by 2033, but the recent interest rate spike suggests that the outlook is even worse now.

Compare these federal interest costs to interest costs on state debt. Interest costs were 3.8 percent of state own-source general revenues in 2021, based on Census Bureau data. Alternately, we can look at state tax-supported debt. Moody’s calculates that servicing costs on this debt were 2.6 percent of own-source state revenues in 2022. State interest costs will likely rise in coming years as interest rates rise, but that will likely prompt reduced debt usage in state budget plans.

We can also examine state limits on debt service. By my count, 22 states (listed below) have legal or procedural limits on debt service as a percentage of revenues. The limits range from Montana at 1.5 percent to Hawaii at 18.5 percent. The average is 7.2 percent. Thus, federal interest costs are twice as high as the typical legal maximum debt service costs in the states.

Note that actual state debt service costs are often less than legal limits. For example, Georgia’s constitution limits debt service to 10 percent of revenues, but the state has been recently keeping the ratio to 5 percent or less.

Final Thoughts

State debt is very constrained compared to federal debt. In addition to the metrics examined here, some states impose limits based on debt as a percentage of tax revenues and debt as a percentage of statewide property values. Some states impose fixed dollar limits on general obligation debt, and nearly all the states require voter approval for issuing general obligation debt. Also, many states impose legal limits on taxes and spending.

The states sometimes cheat on their fiscal rules, but the generally modest levels of state debt sharply contrasts with the massive river of federal red ink. Debt and debt service costs are vastly greater in the federal government than state governments. Both federal and state politicians are biased toward deficit-spending, but state experience shows that this impulse can be restrained and stabilized.

Background Notes:

• My tallies of states with state debt and debt service limits are based on NASBO and Pew reports. Another useful resource is this Federal Reserve study. State debt limits are variously constitutional, statutory, or guidelines in official debt management plans.
• As the Federal Reserve study discusses, definitions and coverage of debt and debt service ratios vary by state, as do the ways that the limits affect state budget processes.
• The 22 states that have limits on debt service to revenues are Alaska, Delaware, Florida, Georgia, Hawaii, Maine, Maryland, Massachusetts, Montana, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia, and Washington. This list may not be fully up to date as I relied on NASBO (2021) and Pew (2017).
• The Moody’s report on state debt is titled, “Ability to service long-term liabilities and fixed costs improves,” September 26, 2023. You may need to email the company to get a copy.
• In 2022, U.S. personal income was 85 percent of U.S. GDP.