You know a problem is looming when even Congress starts paying attention. That problem at the moment is the ever-metastasizing national debt and the endless federal budget deficits which feed its growth. Of course, acknowledging the danger posed by a problem isn’t the same as doing something constructive to address the issue.
Agreement On a Problem, But Not a Solution
“The national debt has reemerged as a paramount economic issue for the first time in nearly a decade, raising alarms from Congress to Wall Street. But even with all the outward drama, there’s little evidence that Washington is ready to stem the tide of red ink,” Politico‘s Eleanor Mueller and Victoria Guida wrote this week. “In interviews with a dozen members of both parties on Capitol Hill, even GOP lawmakers acknowledged an inability to reach consensus within their own ranks on the path forward. Democrats want to focus on raising taxes, not spending reductions — and some don’t agree that deficits are an urgent issue at all.”
National debt now stands at $33.7 trillion. “Over the past 100 years, the U.S. federal debt has increased from $404 B in 1923 to $33.17 T in 2023,” the U.S. Treasury Department helpfully offers in an explainer that’s already out of date. That’s in constant 2023 dollars—yes, adjusted for inflation. That $33.7 trillion represents 123 percent of gross domestic product, a measure of the size of the entire U.S. economy.
“Comparing a country’s debt to its gross domestic product (GDP) reveals the country’s ability to pay down its debt,” adds Treasury.
That’s because the national debt is borrowed money on which interest must be paid. The more money borrowed, the more lenders are needed. If those lenders fear that borrowers —governments included—are accumulating so much debt that they may not be able to make good on their obligations, they demand higher interest rates to offset the risk. That’s what’s happening.
Borrowing Gets More Expensive
“Americans aren’t the only ones feeling the pinch of higher interest rates,” CNN reported last week. “The US government is shelling out way more money to cover interest payments on the national debt these days.”
In fact, the federal government is now spending more on gross interest payments on debt than on national defense. In October, the first month of the current fiscal year, the Treasury paid $88.9 billion in interest to service debt, while military programs cost $83.4 billion.
Eventually, lenders may walk away if the market becomes oversaturated and/or if the perception of risk exceeds people’s comfort levels.
“Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately,” warn The Wall Street Journal‘s Chelsey Dulaney and Megumi Fujikawa. “Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020.”
To lure lenders back, the U.S. government may have to pay even higher interest rates. That means debt payments will take up an ever-bigger chunk of the budget and start squeezing out everything else on which money might be used beyond footing the bill for past expenditures. Eventually, though, you run out of the ability to pay and people’s willingness to lend. Then, even a seemingly solid institution (in some eyes, anyway) such as the United States federal government can find itself on very shaky ground.
20 Years To Fix the Problem (If We’re Lucky)
“Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation),” Jagadeesh Gokhale and Kent Smetters of the University of Pennsylvania’s Penn Wharton Budget Model forecast in October.
That’s the model’s “best case” scenario. The authors caution that if market participants lose faith that the U.S. government will get its financial affairs in order, the time frame will be much shorter. And that brings us back to Politico‘s warning that there’s “there’s little evidence that Washington is ready to stem the tide of red ink.”
With federal lawmakers at odds over whether to address deficits and debt with tax hikes, spending cuts, or just to let it ride in hopes they’ll die before it becomes an issue, the current genius-level idea is to off-load responsibility to a commission. The commission can propose fixes and take the blame for imposing some degree of discipline, legislators hope.
“Today, U.S. Senators Joe Manchin (D-WV) and Mitt Romney (R-UT) introduced the bipartisan Fiscal Stability Act to strengthen America’s fiscal health and stabilize the nation’s finances for future generations,” the two senators announced November 9. “The legislation would create a bicameral fiscal commission tasked with finding legislative solutions to stabilize and decrease the national debt.”
Both Manchin and Romney plan to retire from Congress next year, which amply demonstrates just what sort of future lawmakers anticipate for anybody who tries to rein in the spending spree. The White House is already suggesting the commission proposal is a scheme for cutting Social Security and Medicare. It certainly should be that, among other things, given the huge portion of the federal budget, and its financial woes, those programs represent. But there’s lots of political gain to be found in promising people the gravy train can continue forever, and not much reward in pointing to reality.
Higher Taxes May Not Be an Option
Another limiting factor for lawmakers who like to buy goodwill and votes with goodies is that there’s only so much you can squeeze from the public in taxes. In 2011, Nick Gillespie and Veronique de Rugy pointed out for Reason that “since 1950 annual federal revenue has averaged 17.8 percent of GDP, fluctuating within a relatively narrow range. Despite endlessly creative attempts to squeeze more dollars out of taxpayers, the feds haven’t been able to pull in much more than that on a regular basis.” Federal Reserve Bank of St. Louis data says that hasn’t changed since, topping out last year at 19 percent.
That constrains lawmakers’ options even as the deadline for getting finances under control comes ever closer.
“Frankly, unless we have truly extraordinary economic growth, we’re headed for a pretty bad outcome,” Rep. Brad Sherman (D–Calif.) told Politico. “You need revenue, you need to deal with spending, you need to deal with entitlements — and you need to wonder whether democracy is capable of doing any of that.”
It’s good that Congress is finally acknowledging that decades of deficits (every year since 2001) and spiraling debt is a looming problem. Whether anything will be done to fix the problem is another matter.
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