Government deficits are covered by borrowing. The government issues I.O.U.s in the form of Treasury bonds and other paper. The borrowing gets added to the existing government debt. The interest paid on that debt then becomes a current government expenditure. It’s the same as paying for the Department of Defense or Social Security or air-traffic control. For may decades, the “Big Three” of US government outlays has been Social Security, Medicare and Medicaid, and Defense. (Together they accounted for about two-thirds of all federal spending.)
Then came Covid and shut-downs that threatened the economy. Government, under both the Trump and Biden administrations, stepped up to the plate (or trough, if you’re a Paleo-Finance person). Vast sums were paid out to “stimulate” the economy. The total national debt now stands at more than $36 trillion.
Inflation followed during the Biden administration. Administration spokespeople down-played the price rises as long as they could. Eventually, an election loomed. The enraging effect on consumers and borrowers became too great to ignore. The Federal Reserve Bank raised interest rates to choke off the inflation before it became really serious.
One effect (but not the only one) came in the borrowing costs paid by the government to entice lenders. In 2024, interest payments by the federal government reached $881 billion. Interest on the debt rudely shouldered its way past Defense as the third largest government expenditure.[1] “But Wait! There’s More!” President Trump’s “Bigly Beautiful [Budget] Bill” has been projected to add $3 trillion to the debt by 2035. Then the effect of tariffs on the economy is uncertain. Economists expect the levies on imports to push up prices and slow the economy. That would generate less revenue, perhaps less than the income from the tariffs.
Panicky warnings appeared in the media. At some point, there could be a flight from US Treasuries by investors (including foreign governments that hold dollars) who doubt the value of promises to pay at least the interest. The Federal Reserve Bank would have to raise interest rates much higher to rent the money to cover the interest on the debt or to finance current deficits. Furthermore, government borrowing could crowd-out private sector borrowers who want the money to invest in productive activities. That would drag on the economy, to put it mildly.
Is there a way out of this dilemma? Yes. It will require acting on both sides of the problem. On the one hand, it means tax increases. On the other hand, it means spending cuts.
Tax who and by how much? The net worth (assets, not income) of the five richest Americans comes to about $1 trillion.[2] The net worth of the next ten comes to about $1.1 trillion. But income is what the government mostly taxes. That’s much less than net worth.
Cut what and by how much? To go where the money is, it means cutting Social Security, Medicare and Medicaid, Defense, and Interest on the debt.
Both taxation and spending cuts will have to reach pretty far down into the ranks of the American middle class. It will be hard to find politicians to vote for that. The alternative is for ordinary American to suddenly abandon their “put it on the credit card” approach to citizenship. Won’t happen. Default looms. After that, the International Monetary Fund will impose reforms.
[1] “National debt: Why Congress no longer cares,” The Week, 6 June 2025, p. 17.
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