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The Red Line

There’s Nothing Slow-Motion About Uncle Sam’s Financial Train Wreck

Casey Jones might as well be at the throttle. Certainly, there’s nothing slow-motion about Uncle Sam’s financial train wreck. The crisis is broadly consequential. In the eleven months through August, net interest on the national debt has hit $630 billion, with $69 billion paid last month. It will end the full year at double the $351 billion paid just two years ago in fiscal 2021.

The increase is stunning, but predictable. So too is next year’s increase. With the Federal Reserve keeping rates “higher for longer,” net interest will hit almost $850 billion next year and top $1 trillion in fiscal 2025, if the current interest rate environment persists.

The environment may not persist, since debt throughout the economy is repricing at interest rates that are multiples higher than those prevailing in the easy-money decade of the 2010s. Businesses and consumers may buckle under the burden. That would bring recession and lower rates, despite current economic commentary to the contrary that sees, instead, a “soft landing” ahead.

The skyrocketing rise in interest costs has some of the fascination of a runaway freight train, transfixing observers. Yet, we should ignore the spectacle to focus instead upon the damage being wrought

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America Is Headed Toward Annual Interest Outlays of $1 Trillion a Year

After the downgrade of America’s debt by Fitch Ratings, a drumbeat of negative assessments has followed in respect of how deep in the hole our country has plunged. That’s a good thing, since net interest on the debt is escalating rapidly on a track to hit an unsustainable and crippling $1 trillion in fiscal 2025. 

This fiscal year net interest is headed toward $700 billion, having already hit $561 billion in ten months, with $67 billion paid in July. Interest rates are at the highest levels in decades and likely to stay there, with the Federal Reserve saying it will hold rates “higher for longer.” Rates may climb further, as they have in recent days.

Most economic forecasters now see uninterrupted economic growth rather than a recession that might bring rates down. Monetary experts are considering whether current rates are a new normal and whether the neutral rate of interest and the real rate of return may be higher than previously thought. 

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Connecticut By the Numbers

Six months ago, I authored a column about the fiscal condition of Connecticut, focusing on a table of statistics which The Wall Street Journal had used to compare New York and Florida.

In this updated edition, the table compares Connecticut to its two big neighbors, New York and Massachusetts, and to the entire nation. In addition, the table is reorganized into sections covering demographics, the economy, taxation and factors important to businesses in choosing operating locations. These are the most important dimensions to measure the vitality of a state.

Demographics: The populations of Connecticut and New York are barely growing. While Connecticut enjoyed a short burst of net in-migration – mainly from New York driven by the pandemic, that appears to have reversed in data from CT Data. The decline is confirmed by the fall in Connecticut’s U-Haul ranking (ratio of incoming vs outgoing moving vans). Massachusetts seems an anomaly likely based upon college students coming and going.

Economy: Connecticut’s economy is small and barely growing, and the labor force is shrinking.

Taxation: Relative to neighbors, Connecticut is a haven for high income individual taxpayers, about equivalent insofar as sales tax is concerned and an onerous place to own a home.

Business (Re)location:  On business location decisions, Connecticut is uncompetitive, even regionally. Electricity costs are twice the national average, and the highest in the region. Traffic congestion is widespread in the entire Western (populous) half of the state. The corporate tax rate (at least for large companies) is high, including the always-extended 10% surcharge. Though progress has been made on unfunded obligations, courtesy of massive federal COVID assistance and a long boom in the stock market, the state employee pension fund remains among the lowest funded in the nation.

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So, What to Do About “Rats”

Two so-called “rats” were inserted at the last minute into two massive must-pass pieces of legislation introduced and passed just hours before Connecticut’s constitutionally-mandated end of legislative session on June 7th this year. 

Only days later did legislators, with a few key exceptions, discover what was hidden in the 836-page budget bill and the 300-page “bond bill” on which they had voted. The rats overrode local decision-making on land use and zoning in two towns, Stamford and Middlebury. One rat was requested by a Republican, the other by a Democrat. Rats are a bipartisan problem, but a problem that only all-powerful Democrats can clean up.

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Supreme Court Decision on Harvard Misses Most Consequential Problem on Campus

July 2, 2023

The Supreme Court late-June decision striking down affirmative action in college admissions is a triumph for fairness and the quintessentially American belief that the best man or woman should win. Yet, it is largely an empty victory, and it misses the most consequential issue concerning diversity on college campuses today — political diversity.

July 3, 2023

Within a few hours of the court’s decision, Harvard announced its defiance, saying in Delphic words that the “principle” that Harvard follows “is as true and important today as it was yesterday.”

July 27, 2023

If Harvard thinks that its “principle” is diversity, then Harvard suffers from clinical self-unawareness. For it is anything but diverse. It is exceedingly liberal. The student newspaper, the Crimson, in its most recent annual survey found that “More Than 80 Percent of Surveyed Harvard Faculty Identify as Liberal.” Just 1.5 percent of the faculty identifies as “conservative.”

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Slow-Motion Train Wrecks… By the Numbers.

The silver lining, if there is one, in a proverbial slow motion train wreck is that the engineer may be able to recognize the disaster in its midst if it is unfolding so slowly, and then, do something to keep the train on the rails and apply the brake and prevent a total calamity.

At the national level, deficit spending is producing mountainous debt, skyrocketing interest cost and corrosive inflation. In Connecticut, plummeting tax revenue, a declining labor force and outmigration spell a return of the permanent fiscal crisis that Governor Lamont has claimed to have ended.

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Another Debt Ceiling Impasse Will Challenge the Next President Upon Inauguration

The Fiscal Responsibility Act that finally resolved the debt ceiling standoff might have solved a crisis in the short term — but it sets up a momentous challenge for whoever is elected president in 2024. The Act suspends the ceiling until January 2, 2025, at which time the new ceiling becomes whatever is the then-outstanding amount of national debt.

That means we will hit the new ceiling on the very day it is established. And whoever is elected president next year will start his term in the middle of a new debt crisis. Just two years after hitting the “old” ceiling last January, we will be right back into another standoff.

The only upside is that the new law could set the terms of debate in the 2024 presidential and congressional elections. It could force the presidential — and, for that matter, congressional — candidates to address what they will do on Inauguration Day in 2025, when the nation will be 18 days into a new suspension of borrowing.

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CT Budget Bulletin: Revenue is Still Falling

Here’s a budget update you won’t get from Hartford. Tax revenue this fiscal year will be down from the already drastically reduced projections issued just a month ago.

May 31, 2023

Back on May 1st, state budget masters reduced projected Connecticut state individual income tax revenue in two key categories by $2.0 billion over four years, including a half billion-dollar reduction for this fiscal year with only two months to go at that time.

A half billion-dollar annual reduction is a big reduction when total general fund tax revenue will average about $23 billion per year over the four years. For the current fiscal year, this represents not only a big reduction, but a big miss if you already have 9 to 10 months of actual data in hand. The tea leaves could and should have been read months earlier.

Even so, the big miss this year is actually going to be much bigger. The revised projections were for gross tax receipts. Yet, refunds have skyrocketed this fiscal year. As a result, net individual income tax receipts for Estimates & Finals (E&F) and the Pass-through Entity Tax (PET) are down much more than a half billion dollars.

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With No Time and No Deal, Yellen Should Have a Plan B

President Biden and Treasury Secretary Yellen seem to be playing a reckless game of chicken on the debt ceiling. Yellen has repeatedly said June 1 is the X date, while also saying she is not making other plans in case a deal is not reached. Yet, Uncle Sam has already reached the functional X Date - an unworkably low cash balance.

Wednesday, there was just $49 billion in the Treasury General Account (TGA), after $25 billion came out to pay regular weekly Social Security benefits, as it does every Wednesday. A year ago, there was $817 billion in the TGA.

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