Tag Archives: Debt

Ruthless.

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            Here’s the rot at the heart of the Republic: American voters of both parties have come to love “free stuff.”[1]  In a Democracy, politicians and political parties see the road to their own success running through giving voters what they want.  For Democrats, it means Tax-Spend-Elect; for Republicans it means Tax Cut-Spend-Elect. 

            As a result, in 2023, federal spending hit $6.75 trillion, with the federal deficit (not debt, just one year’s worth of spending above revenue) hitting $1.8 trillion.[2]  That deficit is 6.4 percent of Gross Domestic Product (GDP).  That isn’t a record.  It has been surpassed before.  However, those other peaks occurred during some kind of emergency: wars, recessions, etc.  Those conditions don’t apply at the moment. 

“Goo-goos” hate this trait.[3]  In the present day, all sorts of experts and commissions offer warnings of coming catastrophe and plans to avoid same.  The trouble is that this is like trying to talk a drunk into giving sobriety a spin.  It isn’t going to happen until they “hit bottom” or have a “moment of clarity.”[4]  What might bring on such a change? 

            Can you cut federal spending by shrinking the federal government?  YES!  And this idea is supported by a majority of Americans.[5]  Can you cut a LOT of federal spending simply by shrinking the number of civil service employees?  NO! 

First, the cost of salaries for all civil servants runs in the area of $200-$250 billion a year.  You will recall (from just above) that this year’s deficit is $1.8 trillion.  So, $200-$250 billion is about one-eighth of the deficit. 

Second, there’s interest on the debt at $882 billion.  An actual default, not just cuts to existing spending, may be coming.  We’re not there yet and we may be able to fend it off. 

Then there’s “discretionary” spending.  This includes the defense budget and everything else.  This comes in at around $2 trillion.  You can cut the defense budget a bunch.  You just have to believe that we are entering an era of peace and tranquility in which no other country will seek to challenge American interests. 

            Third, there’s the elephant in the room: “mandatory” spending on Social Security, Medicare/Medicaid, and related programs.  This amounts to $4.1 trillion, more than double “discretionary” spending.  “So taming mandatory spending means reining in benefits.”  Ouch! 

            It seems impossible for either Congress or the American people in their present state of desiring “free stuff” from the government to address this issue.  Nor will they raise taxes. 

However, there is scope for executive action.  For example, one “Goo-goo” estimate suggests that as much as $1.4 trillion could be saved by reversing Biden administration executive actions.  All we need is a ruthless lame-duck president who doesn’t care about established traditions or Beltway verities or even what he may have promised to get elected. 

[1] This has become a cultural force.  How and why this has happened is worth exploring. 

[2] Greg Ip, “Cutting Deficits Is Easy—Just Unpopular,” WSJ, 27 December 2024. 

[3] See: Goo-goos – Wikipedia 

[4] You might think that the recent unpleasantness with inflation fueled by deficits would have awakened ordinary Americans to this issue.  It doesn’t seem to have done the trick.  Or perhaps the pre-existing interest groups and political habits were just too strong for a not-yet-crystalized change of attitude.   

[5] According to an Ipsos poll, 57 percent of Americans favor downsizing the federal government.  “Poll Watch,” The Week, 6 December 2024, p. 17. 

“The System Is Blinking Red” 1.

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            The Congressional Budget Office (CBO) is required to report on the state of public finances.[1]  The CBO offers credible long-term projections.  They project an average annual growth of 2 percent.[2] 

            In 2001, U.S. government debt held by the public was $3.3 trillion dollars, amounting to 33 percent of Gross Domestic Product (GDP).  Adjusted for inflation, that would be $5.93 trillion in 2024 dollars.

            In 2024, U.S. government debt held by the public is $28 trillion, amounting to 99 percent of GDP.  So the debt has multiplied almost five-fold in real terms, while it has tripled as a share of GDP.  The national debt is growing faster than is the American economy.   

            In 2035, U.S. government debt held by the public is projected to surpass $50 trillion, amounting to 122 percent of GDP.  By 2054, U.S. government debt held by the public is projected to surpass $50 trillion, amounting to 166 percent of GDP.  To further complicate matters, the “reserves” of Social Security are forecast to run out by 2033; the “reserves” of Medicare are forecast to run out by 2036.  Then the federal government will assume responsibility for making up any difference between assets and obligations. 

            From the mid-Seventies to today, interest payments on the national debt averaged 2.1 percent of GDP.  In 2024 it is 3.1 percent of GDP.  In 2033 it will hit 4.1 percent of GDP.  This latter figure is highly optimistic because it assumes that the Trump administration tax cuts of 2017 will expire in 2025.  There is virtually no chance that this will happen.  The interest payment on the debt is growing as a share of GDP. 

            Why does this ballooning debt matter?  The United States government has been cutting taxes and increasing spending for a long time now.  Nothing bad has happened.  Yet.  Many people may assume that creditors will go on lending the government of the United States whatever it needs to fill the deficit.  This is not necessarily so.  While vast, the pool of global savings available to be borrowed by the United States is not infinite.  As the debt grows in tandem with America’s unwillingness to accept fiscal discipline, lenders may conclude that there is a mounting risk of at least partial default.  Rather than stopping lending at all, they may demand a “risk premium” in the form of higher interest rates.[3]  The point of the higher interest rates is for the investor to recover as much of his/her capital as possible before anything goes wrong.  Higher interest payments will crowd-out other spending categories from the budget. 

            This began as problem-solving or vote-buying in an earlier time.  People in both parties now are used to the government giving them things without any immediate cost.  Politicians who argue for austerity—lower spending, higher taxes—will lose elections.  Many people think that this is pathological.  Hard to be puritanical when Puritanism is culturally discredited. 

[1] William A. Galston, “A U.S. National Debt Crisis Is Coming,” WSJ, 18 September 2024.  Sources: Part 1 of Answers to Questions for the Record Following a Hearing on An Update to the Budget and Economic Outlook: 2024 to 2034 (cbo.gov) and Part 2 of Answers to Questions for the Record Following a Hearing on An Update to the Budget and Economic Outlook: 2024 to 2034 (cbo.gov)

[2] By my own calculation, the American GDP grew by 58 percent between 2001 and 2023.  That averages at 2.5 percent per year.  However, the turn against globalization could slow growth everywhere.  GDP (constant 2015 US$) – United States | Data (worldbank.org) 

[3] See: Risk premium – Wikipedia 

The Tao of George Best.

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The great—and highly-paid–soccer-player George Best explained his post-career bankruptcy: “I spent a lot of money on booze, birds and fast cars. The rest I just squandered.” 

The final years to the 1990s were good years for American public finance: four consecutive annual budget surpluses and a total debt of about $5.7 trillion.  Over the course of the next two decades, the debt rose above the $25 trillion mark.  The Congressional Budget Office (CBO) projects that the debt will rise by more than $20 trillion in the next decade.  The longer-run projections show things getting much worse.[1] 

One of the drivers in debt expansion in the first decades of this century came in low interest rates.  Keeping rates low formed a response to repeated major economic problems.  It also meant that the interest that the government has to pay to much of the debt is cheap.  That policy came to an end when the Federal Reserve Bank began raising interest rates to fight inflation.  The smart money once expected low interest rates to go on forever; now the smart money seems to think that high interest rates are here to stay for the foreseeable future. 

More troubling is the change in the ability of the United States to pay the debt, which consists of both principal and interest).  During the expansion so far, from c. 2000 to c. 2020, the ratio of debt to Gross Domestic Product (GDP) tripled to 98 percent.  Over the next decade that ratio is projected to rise to 118 percent.  That is, the debt will expand at a faster rate than will the economy.  “The longer-term projections show a near-complete loss of control over fiscal policy [i.e. taxing and spending choices].” 

Americans and foreigners will go on buying American government debt (Treasury bonds, IOUs) so long as they think that they will get paid back.  If people start to think that they will not get paid back, then they will become reluctant to buy debt.  The price offered by the government will have to rise.  Other forms of spending will have to be sacrificed to stave off even the shadow of bankruptcy. 

The obvious solution is to stop the problem from getting worse immediately while we figure out a long-run solution.  That would suggest both tax increases and spending cuts. 

The Republican Party has made a fetish out of tax cuts.  It turns out that Democrats aren’t willing to roll-back most of those tax cuts when they get in office.  Democrats have built their “brand” on new and expanded-old government programs to address social problems.  In many cases, the benefits promised by the exponents of both sides have failed to materialize.  Reversing course is going to be painful—if it happens.  Democracy has been pretty good at distributing benefits.  It has seldom been good at distributing sacrifice.[2]  The Constitution may not be a “suicide pact,” but our current politics may well be such a pact. 

Obviously, the debt resembles climate change.  They are “primary” problems without painless solutions.  Transgender athletes, Donald Trump, and even guns are “secondary” issues. 

The questions are:

  1. Can we focus on the essentials? 
  2. Can we solve these problems without breaking democracy itself? 

[1] William Galston, “Ballooning National Debt Is a Rotten Legacy,” WSJ, 12 April 2023.  On Galston, see: William Galston – Wikipedia  It’s not like he is some kind of no-account. 

[2] The experiences of Britain and the United States during the Second World War are notable exceptions.