Goring the Ox.

            The Democrats created a “brand” based on Tax–Spend–Elect.  Eventually, the Republicans created their own “brand” based on Tax-cut—Spend—Elect.  That is one of the dynamic forces at work on American public finance.  A second dynamic force is the movement of the Baby Boom from the work force into retirement age.  That movement increases the number of people using Social Security and Medicare.[1] 

            In 2000, when Bill Clinton left the White House, these factors had not gotten out of hand.  At that point, government debt amounted to 32.7 percent of Gross Domestic Product (GDP).  It stayed pretty much at this level until the onset of the financial crisis and the “Great Recession.”  By late 2009, the debt amounted to 52.3 percent of GDP.[2]  Ten years on, after the Obama Administration and the first half of the first Trump Administration, the ratio of debt to GDP reached 79.2 percent in 2019.  Then, during 2020, 2021, and 2022, the response to Covid, drove the debt up to 97 percent of GDP. 

            Further movement along this trajectory is anticipated by the Congressional Budget Office (CBO) in its projections for 2022-2033.  This appears int three different ways.  First, the CBO projects that the debt itself will rise from $24.3 trillion to $46.4 trillion.  That is, the debt will almost double in ten years.  Second, the debt-to-GDP ratio will rise from 97 percent to 118 percent.  Third, annual interest payments on the debt will rise from $475 billion to $1.4 trillion. 

            On the one hand, the United States has entered what looks to be a period of higher interest rates.  Partly, this stems from the fight against inflation.  The duration of that period is uncertain.  On the other hand, sustaining a large debt will require the government to make sure that there are buyers for its bonds.  This means offering higher interest rates.  Higher rates, in turn, tend to slow down the economy. 

“There’s evidence that the U.S. government has reached” [the point at which] “debt restricts [its] choices and threatens [its] solvency.”[3]  What is to be done?  Recommended solutions abound.  Among them is the following. 

The parties need to agree to hold the debt-to-GDP ratio to the current level (97 percent) instead of allowing it to rise to 118 percent.  This will save about a third of the projected increase in the debt.  But what to cut to hit this target? 

Asked why he robbed banks, Willy Sutton said “That’s where the money is.”  Social Security, Medicare and Medicaid, and Defense amount to about two-thirds of federal spending.  That’s where the money is.  Again, the parties would need to agree.  But the proposed solution says nothing about Defense or Medicare and Medicaid.  It focuses on Social Security. 

Ideally, until it’s your ox or my ox that is getting gored, the cuts should not be distributed symmetrically between all income.  Pretty much leave the lower income groups alone while laying more of the burden on the upper income groups.  Again, the parties would have to agree. 

The proposal illustrates the complexity—and the political risks–of the task before us. 

[1] Eventually, all the geezers will croak and be succeeded by a series of numerically smaller generations.  Being among the Baby Boomers myself, I tend to forget the exact labels and definitions of those generations. 

[2] This wasn’t especially threatening.  The debt-to-GDP ratio had been at 46.8 percent.  It was then pushed down to 32 percent by four successive years of budget surpluses. 

[3] William Galston, “How the U.S. Can Prevent a Debt Spiral,” WSJ, 22 February 2023.