The federal debt is as old as the nation, and adding to it sometimes makes sense. For governments facing “existential crises” like wars or pandemics, borrowing makes sense as a way to mobilize national resources, as economist Barry Eichengreen wrote in the 2021 book, “In Defense of Public Debt.” Government borrowing and spending is necessary to stimulate the economy during recessions. And Treasuries, safe and liquid, play a critical role in the global financial system – so much so that in the late 1990s, when a period of economic growth and reduced military spending allowed the government to dramatically reduce borrowing, economists and bankers warned of the consequences of too little federal debt.
The US, however, now borrows heavily during periods of economic growth to meet basic and long-term obligations. It is increasingly unsustainable. Over the next decade, the Congressional Budget Office projects that annual federal budget deficits will average approximately 2 trillion USD per yearadding to the $25.4 trillion in debt the government already owes investors.
Borrowing is expensive. An increasing portion of federal revenues, money that could be used for the benefit of the American people, immediately goes back in the form of interest payments to investors who buy government bonds. Rather than collecting taxes from the rich, the government pays the rich to borrow their money.
By 2029, the government is going to spend more each year on interest than on national defense, according to the Congressional Budget Office. By 2033, interest payments will consume an amount equal to 3.6 percent of the nation’s economic output.
Before the pandemic, a decade of very low interest rates meant that even as the federal debt ballooned, interest payments remained relatively modest. Measured as a share of the national economy, the federal debt was roughly twice as large at the beginning of 2020 as at the beginning of 1990, but the burden of interest payments was barely half as big.
However, the era of low interest rates is over. The cost of living with borrowed money is rising. It is imperative that the nation’s leaders chart a new direction.
Although you wouldn’t know it from the celebrations in Washington last month, the agreement reached to raise the debt ceiling does not amount to a meaningful start. Democrats agreed to modest spending cuts; Republicans refused to consider any initiatives to increase revenue. The result? Before the deal, the CBO projected that the debt would reach about $46.7 trillion in 2033. After the deal, it projected the total would be only marginally smaller, at $45.2 trillion. That would equal 115 percent of the nation’s annual economic output, the highest level on record.
Both parties say they understand the need for bigger changes.
“We will do even more to reduce the deficit,” President Biden stated in an Oval Office speech after Congress voted to raise the debt ceiling.
House Speaker Kevin McCarthy, acknowledging that the legislation didn’t amount to much, said after the vote that he intends to form a bipartisan committee “so that we can find the waste and we can make the real decisions to really take care of this debt.”
The speech, however, is hard to take seriously. Republicans obviously don’t care about the debt. Every time they’ve had the chance in recent decades, they’ve passed tax cuts that force the government to borrow more money. They already have new tax cut package in their eyes. Democrats, for their part, have grown wary of calls to limit spending because predictions of dire consequences have not materialized, and because they have learned the bitter lesson that agreeing to spending cuts simply creates room for Republicans to justify another round of tax cuts. .
The debt ceiling is part of the problem. Never intended to limit the federal debt. It was actually created to make borrowing easier. During World War I, Congress grew tired of authorizing each new round of bonds, so it gave the Treasury permission to borrow up to a specific limit. Its current use, as a means for Republicans to extort spending cuts from Democrats by threatening to push the nation into default, is even less productive. Bigger changes will only happen if both political parties are willing to participate.
A first step to restoring the conversation is to remove the debt ceiling before its next scheduled appearance in 2025. President Biden rejected calls for his administration to address a legal ruling that the ceiling is unconstitutional. In doing so, he is repeating the mistake he made last fall when he failed to push for legislation to repeal the cap. A case pending in federal court in Boston, brought by federal workers worried that a default would come at the expense of their pensions, offers a possible vehicle. Other legal avenues should also be explored. It makes sense to follow a decision as long as there is no imminent danger of hitting the ceiling. If courts reject the legal challenges, that would also be telling.
Any substantive agreement will eventually require a combination of increased revenue and reduced spending, not least because any politically viable agreement will require a combination of those options. Both parties will have to compromise: Republicans must accept the need to collect what the government owes and impose taxes on the rich. Democrats must recognize that changes to Social Security and Medicare, the main drivers of federal spending growth going forward, should be on the table. Anything less will prove fiscally sustainable.
That will require painful choices. But the failure to make those choices also comes at a price — and the price tag is mounting fast.