National debt big, getting bigger; that’s bad
Fiscally speaking, the U.S. is in deep doo-doo. Federal spending has soared well above tax revenues, leaving us with enormous deficits.
Every year the federal government runs a deficit, the national debt grows. A large national debt imposes a burden on the economy in two ways. First, the larger the debt, the greater the interest payments on the debt and the less money the federal government can spend on other things. Second, the more the U.S. Treasury borrows in capital markets to fund the debt, the less funding is left for people borrowing to buy houses or firms borrowing to finance expansion and research and development.
Economists measure the burden of the national debt by its size relative to gross domestic product. A debt that might be onerous for a country with a small GDP can be shrugged off by a country with a large GDP.
In 2023, the U.S. national debt will be 98% of GDP, a record apart from a couple of years at the end of World War II. That’s big, but not calamitously so … yet.
We never paid off the debt from World War II. We just let it grow slowly in the following decades while the economy grew rapidly. As a result, in 1973, the debt had dwindled to 23% of GDP.
As economic growth slowed, the debt gradually increased relative to GDP until the Great Recession, when it jumped. Then COVID arrived and the Trump and Biden administrations began spending like drunken sailors on steroids who have just won the lottery and been told the world ends at midnight. That’s how we got to World War II levels of debt.
But, it gets worse. According to the Congressional Budget Office’s latest forecast, the debt will grow to 118% of GDP in 2033 before reaching 198% in 2053 — twice the World War II debt. At those levels, interest payments will soak up a large fraction of the federal budget and the Treasury’s
borrowing will crowd households and firms out of capital markets.
But, wait, it gets even worse. The CBO’s forecast is probably too optimistic.
The CBO uses current law as the basis for its forecasts. The CBO assumes that defense spending will not increase beyond what Congress has already authorized. But it seems more likely that Congress will substantially increase defense spending to meet the threats from Russia and China. The CBO forecast also assumes that the U.S. economy won’t experience a recession between 2023 and ’33, which is possible but very unlikely. Finally, the CBO assumes that the interest rate on the 10-year Treasury note will be less than 4% and the federal funds rate will be less than 3%. Interest rates are likely
to be higher than these forecasts, adding to the debt by increasing the payments the Treasury makes to bond holders.
We’re facing this dismal situation because spending is forecast to increase to historically high levels. From 1973-2022, federal spending averaged 21% of GDP. By 2033, the CBO forecasts spending to rise to 25% of GDP. Despite the Trump administration’s 2017 tax cuts, revenues will also rise, but only from 17% of GDP to 18%.
So to keep the debt from rising to unsustainable levels we have to close a gap equal to 7% of GDP. Relying on taxes alone would require a one-third increase in federal taxes, which would be a crippling burden on the economy.
The explosion in spending is driven by increases in Social
Security, Medicare, Medicaid, veterans’ benefits and interest payments on the debt.
Can we close the gaps in Social Security and Medicare funding by eliminating the current income cap on the payroll tax? That won’t work. First, since 1994, there’s been no income cap on the Medicare part of the payroll tax. Second, the CBO estimates that eliminating the income cap on the Social Security part of the payroll tax would raise only enough revenue to extend the solvency of Social Security from 2033 to ’46.
Either we rein in entitlement spending or we enact by far the largest tax increases in the history of the country. President Joe Biden’s proposed $2 trillion tax increase would only be a start. Should we raise trillions in taxes and hand nearly all of it over to retirees? Apart from reducing the living standards of taxpayers, including millions of working families, doing so would leave little money left in the federal budget for additional spending on defense, childhood nutrition, pandemic preparedness or anything else.
I like retirees. Some of my best friends are retirees. I hope that the president becomes a retiree very soon. But redistributing trillions more dollars from taxpayers to retirees is morally and economically suspect. Unfortunately, it may well happen because no Democratic or Republican politician dares get crosswise of retirees.