The Debt Curve From Hell
The Congressional Budget Office’s (CBO) newly issued long-term budget outlook ought to be required reading for members of Congress. Why? Because Congress is rushing to pass yet another big government spending and tax package, it’s obvious few have read it.
CBO does not say it in so many words, but the report brings to mind former New Jersey Gov. Richard Codey’s quip: “The good news is, we’re not bankrupt. The bad news is, we’re close.”
But how close is close?
A Little History
From 1957 to 2008, the publicly-held federal debt never exceeded 47.9% of gross domestic product (GDP). Analysts anticipated a large and sustained increase in the debt relative to GDP, but lawmakers were comforted by the knowledge that the day of reckoning wouldn’t occur for years. Then came the Great Recession.
The recession brutalized the economy, and with a decade’s worth of debt compressed into a few years, the publicly-held federal debt jumped to 60% of GDP in 2010 from 35% just 3 years earlier. One saving grace of the Great Recession was that the run-up in the federal debt occurred as interest rates collapsed. This allowed the government to finance its debt at little cost.
Despite the depth and lengthy duration of the Great Recession, the economic recovery that followed was the weakest on record. Then came the pandemic. Within a year, as the federal government spent trillions of dollars to combat the pandemic and keep the economy afloat, the publicly-held debt jumped more than 20 percentage points to over 100% of GDP — the largest one-year increase since 1943 — before dipping slightly this year.
CBO now projects the debt will grow from this already elevated level to an unprecedented 185% of GDP over the next 30 years. And unlike recent experience, the coming increase will be extremely costly.
The Situation Today
The publicly-held debt has exploded, but we are only beginning to pay the extra cost of carrying that debt. CBO expects net interest costs will grow at an average annual rate of 11.6% over the decade, soaring to $1.194 trillion in 2032 from $399 billion today.
Factor in the projected increase in federal outlays for health care and other mandatory programs, and the federal budget increasingly spirals out of control. Deficits grow the debt, and that growth exacerbates the deficit. It’s a vicious cycle.
The Biden administration may choose to ignore it, but the federal government does not have a revenue problem; it has a spending problem. Raising taxes is not a feasible solution to the federal spending problem. As Milton Friedman, the famed Nobel laureate in economics, so rightly observed: “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.”
Deficit reduction must come from restraining federal spending growth. Spending restraint and the deficit reduction that results will produce additional savings in the form of smaller interest payments, further reducing the deficit. A virtuous cycle!
Accelerating economic growth is the other key to preventing the debt curve from Hell. Following a decade of stunted economic growth, the U.S. economy responded positively to the Trump administration’s policy cocktail of regulatory relief and pro-growth tax reform. Before the pandemic, the U.S. economy grew steadily (+2.9% in 2018 and +2.3% in 2019), inflation was minimal, unemployment was low and American workers enjoyed considerable real wage growth.
Unfortunately, the reconciliation bill will discourage economic growth and worsen the debt curve from Hell.
Accelerating economic growth will require new policies to encourage labor force participation and enhance productivity by better training and equipping workers. The reconciliation bill under consideration does none of that.
In short, America is on the verge of the debt curve from Hell. CBO says this move into uncharted territory will dampen economic output, lower household incomes, and potentially provoke a fiscal crisis.
How close are we to bankruptcy? Too close for comfort.
James Carter is Director of the America First Policy Institute’s Center for American Prosperity. Previously, he served as Deputy Undersecretary of Labor under President George W. Bush and as Chief Minority Economist on the U.S. Senate Budget Committee staff.
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