Yes, the National Debt Is Still a Problem. Always Was.
By: Ryan Bourne
In context of the attempt now to pass a $3.5 trillion spending bill:
The budget framework includes instructions to committees that include specific spending targets. Major elements include:
- $726 billion for the Health, Labor, Education and Pensions Committee with expansive instructions to address some of Democrats' top priorities. Those areas include universal pre-K for 3- and 4-year-olds, child care for working families, tuition-free community college, funding for historically black colleges and universities and an expansion of the Pell Grant for higher education.
- $107 billion for the Judiciary Committee, including instructions to address "lawful permanent status for qualified immigrants."
- $135 billion for the Committee on Agriculture Nutrition and Forestry, including instructions to address forest fires, reduce carbon emissions and address drought concerns.
- $332 billion for the Banking Committee, including instructions to invest in public housing, the Housing Trust Fund, housing affordability and equity and community land trusts.
- $198 billion for the Energy and Natural Resources Committee, including instructions largely related to clean energy development.
S E E D E D C O N T E N T
Cato adjunct scholar John Cochrane has written a great piece on “national debt denial,” which I recommend reading in full. In it, he punctures the intellectual leap that many commentators make from saying “borrowing is currently cheap” to implying “the national debt doesn’t matter.”
Few are suggesting drastic changes in policy to reduce borrowing while in the middle of a pandemic. But two recent reports highlight the longer‐term debt pressures we were sailing into even before this crisis hit.
First, my colleague Jeff Miron has updated his work on the U.S. long‐term fiscal imbalance, re‐iterating that the federal public finances are on an unsustainable path absent major reform to entitlement programs, such as Social Security and Medicare. Historically, many governments have inflated away high debt burdens, but that is much more difficult when the promises driving the debt are inflation‐proofed or else real demands for services, such as healthcare. The COVID-19 crisis, of course, worsens the debt level from which all this projected borrowing will be added.
The CBO’s most recent report, meanwhile, puts its own projection into a useful historical context (my emphasis):
The Congress faces an array of policy choices as it confronts a daunting budgetary situation. At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic … CBO projects that if current laws governing taxes and spending generally remained unchanged, federal debt held by the public would first exceed 100 percent of gross domestic product (GDP) in 2021 and would reach 107 percent of GDP, its highest level in the nation’s history, by 2023. Debt would continue to increase in most years thereafter, reaching 195 percent of GDP by 2050. High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.
In other words, even after our emergency COVID-19 borrowing drops away, the current trajectory is for federal debt to near‐double relative to the size of the economy in the next 30 years because of existing laws and promises. For context: that projected 195 percent debt‐to‐GDP ratio in 2050 would be a debt level 84 percent higher than at the height of World War II, with not even the prospects of drastic expenditure cutbacks associated with demobilization to come.
As Cochrane writes, it is some gamble to just expect you can go on racking up debt like this, year on year, as well as doing vast bailouts every time a recession hits, without interest rates rising significantly, some eventual debt crisis, or a burst of damaging inflation. And that means deficit reduction will likely one day come anyway: whether in the form of more modest adjustments to the entitlement programs to reduce the debt trajectory or else the sudden necessity of sharp austerity once a crisis materializes.
One person who understands this appears to be Joe Biden’s Treasury Secretary pick Janet Yellen . She is reported to have told a Bipartisan Policy Center meeting earlier this year that “The U.S. debt path is completely unsustainable under current tax and spending plans,” and that it is “something that most people don’t understand and I see very little evidence of concern about it.”
We are concerned, Secretary‐Designate Yellen. Our recent Cato book, A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis , sets out the scale of the challenge and what might be done about it. Chris Edwards is a font of ideas on what federal spending could be cut to at least get closer to balancing the books, while Jeff’s work shows that, ultimately, it’s entitlement programs that require reform. I’ve written about how well‐designed fiscal rules could help frame public spending decisions too.
Politicians will only act on the debt, however, when there is a public demand to do so. The national debt is still a problem. Spread the word.
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There seems to be little concern over the hardships we are imposing upon our near future generations. Those unborn do not yet know why they have crushing interest and inflation and a precarious position of the USD. I suspect the sentiment: 'those (expletive) irresponsible baby boomers' will be common.
Politicians are drunk on spending right now. The only way it stops is if the drunkards are voted out and we keep voting spending drunks like them out, until we can find some politicians with a modicum of tax and spending logic in their platforms.
We've had our differences here but great seed!
Very timely!
Crushing debt on top of fucked up weather systems? Perhaps that's why the uber rich are racing to space?
Thing is, the uber wealthy are not the ones who are affected by high interest rates and high inflation. They are affected by the credibility of the USD but have plenty of options to hold their wealth outside of the USD.
It is the average citizen (especially those living paycheck to paycheck) who will suffer the most.
Slowly, but surely the US and other G6 countries are closing loopholes on how mega rich and corporations can hide from taxes. The recently proposed G6 base tax rate and a push to tax crypto currencies is evidence this may eventually get somewhere. I don't expect anything solid soon, but it's trending in that direction.
Right now, "Eat the rich" is a meme. The average citizen will only suffer so much before they lash out. Historically we've seen both the poor and the rich get pasted by the middle-class when squeezed too much.
One can invest in areas that are outside of the USD. Tangible assets like foreign resources and, of course, stocks are plentiful. One thing I have learned over the years is that the financial firms have an enormous set of options to offer their clients.
The average citizen has historically had little control over the economy. I do not see the lashing out taking place. It is the average citizen who continues to vote the same people back into office and, in so doing, NOT hold them accountable for fiscal policies. Given the continued support of Trump in spite of all he did, I have almost completely lost faith in the group intelligence of our electorate (and thus average people in general as a group).
What social programs do you want to cut?
Cut? You mean which of these programs should be taken out of the bill?
Too complicated a question John. I would have to go through the details of the bill to answer that; I would end up writing a different bill.
My position, however, is that we need to make better use of the resources we have. So for those programs in the context of this bill that I would wish to pursue, I would seek to first redirect funding from other areas that are ineffective or are of a lesser priority. In addition, all of this should be predicated on first making government operations more cost effective.
Obviously if money was no object then we would do everything. Those who see no consequences to the spending will naturally want all proposed spending to go forward.
That is not how I view fiscal policy.
Are you unconcerned about our national debt?
We were talking about future generations. I doubt either of us will see it. I'm just speaking historically people have always adapted - sometimes violently. Sometimes politically. Sometimes both. The world is getting smaller and while today investment firms are still creative they can only do so by the will of the people. IF squeezed too much the people will squeeze back. They always do - the French Revolution - Independence from the monarchy - the inception and rise of labor unions...
Stupid is as stupid votes. I point this out every time some one brings up "term limits".
I am rowing that same boat next to you. I'm not arguing we have a problem. I'm only saying there will be a solution when one is needed. I'm not even saying it will be a good solution or a just solution, only that life goes on. I'm also saying long term trend of humanity is better than a dystopian novel though. We don't have witch trials or public executions any more. We aren't subjected to forced labor or arranged marriages to further our status. Things do improve over time. Long periods of time, but they do seem to improve despite our individual short term stupidity.
Yes, but it has not happened yet and I see no indications of it happening. Why would it happen in the future? Things would have to get miserably bad for that to occur and, really, that is the point of this seed. We are setting the unborn on a course of potential misery.
Understood, but we both would prefer a graceful, positive solution rather than an abrupt, painful one.
This always seems to be the hardest part. Government wastes so much money...
Politicians do not care about an effective running government since it does not give them political advantage. In result, the efficacy of government continues to decline and we wind up throwing more $$$$ into the machine.
Creating jobs and increasing wages automatically reduces the need for social programs.
The government creates jobs with trade policy, tax policy on investments, and tax policy on businesses.
A minimum wage increase automatically reduces the need for social programs. Government policy that promotes private investment in job creation reduces the need for increasing minimum wages and reduces the need for social programs.
Democrats' social program spending promotes consumption without increasing earned income. The government money may pass through the hands of those at the bottom but the money will ultimately trickle up to the top. Those who sell make profit at the expense of those who consume. Democrats know that. Social program spending is really a backhanded way to make the rich richer without the rich having to do much to support the country. It's not an accident or coincidence that increased government spending on social programs has occurred while income and wealth disparities increased. The money the government has pumped into the economy has trickled up to the top.
Nonsense.
Right now Federal, state, and local government spending is 46 pct of GDP. Can you explain how increased government spending can be sustained?
While normally I'm pretty conservative fiscally, with interest rates at near zero, it's certainly a good time to borrow money.
That's one of the main reasons the Stock market keeps going up...
(Low interest rates make it easier for companies to borrow money...also make it easier for people to but new hones with lower mortgage rates).
Also, low interest rates means there are few safe investments (e.g. no safe CDs of old which earn 5%). If one wants to put one's money to work, the stock and bond market is almost unavoidable.
Taxes are unsustainably low. Economics is just math.
Economic and fiscal policy has tangible consequences. It is not simply operating in the abstract.
Spending is unsustainably high. Economics is just math. See what i did there?
This isn't only about spending being high or taxes being low it's about fiscal responsibility.
One can debate that taxes are too low or that spending is too high but one can not justify uncontrolled spending that is not paid for.
That is the real problem being discussed in this seed .... full stop.
Actually, IMO, taxes are both too high..as well as too low at the same time!
How can that be?
Simple....taxes are too high on both the lower and middle classes...while much, much too low on the very wealthy.
Like i said, it can be debated. That's how it can be.
Poor fiscal responsibility can not be justified. Not logically anyway.
Yes-- its blatantly obvious!
What you did is make an over-generalization....an overly simplistic argument that is not accurate!
All spending is not too high.
Rather, its too high on some things...and too low on others!
To cite but one example...spending on infra-structure has been much too low. From a strictly economic POV, decaynig infra-structure hurts the economy. It makes many things more expensive, thereby increasing the debt.
But more importantly, spending more (on infra-structure) creates many jobs. Workers then have more money, some of which they spend...and therefore government income-- from increased worker taxes-- helps reduce the debt!
That way increased spending (on infra-structure) helps decrease government debt by bringing in more in workers' taxes.
But it also helps businesses-- as better indrastructure helps their business-- and they too will be paying more taxes that help reduce debt.
Of course it is, that's why i said it.
Nah, just stated a fact. It matters not what you think it is or isn't
And as you were clear about earlier, not all taxes are too low. The points being made were crystal clear no matter how hard you try to spin and rationalize them away.
See there you go, now you're arguing with yourself.
No one is debating "true" infrastructure however one can wonder what happened to all the money collected in taxes and fee's that is suppose to fund upkeep and repair of traditional infrastructure like roads and bridges. Those of us who like to run a tight fiscal ship wonder about things like this. It's important for our future but more importantly for our children and grandchildrens futures.
National debt affects the credibility of the USD and that has ripple effects that affect everyone.
John, are you trying to imply that there are no serious consequences to a national debt that continues to exceed the GDP of our nation? (Currently 127.6%.) That the “full faith and credit” of the USA is not at risk by our endless borrowing in excess of our GDP?
I am trying to imply that it is not known what the national debt will bring.
There are economists who think the US could borrow endlessly because we are the world's currency standard. Were that to change then there could be problems.
I do think we should lower the debt , but a "sky is falling" approach to the national debt is not accurate.
US public debt is owed in United States dollar s.
The United States dollar is the reserve currency of the world so the United States can always print more. This fear of bankruptcy is irrational.
Again creditors are owed USDs and the USA is the only entity in the world that can create USDs.
Well managed and credible sovereign debt never has to be paid off or even paid down.
What has to happen is the budget deficit needs managed and the national economy grown in size.
Maintaining a sustainable and controlled Debt-to-GDP ratio is all that matters in the end.
You do not see any problem with a national debt that continues to grow past 100% of our GDP?? You see no reason to stop piling on this debt?? And we do have good ideas on where this ends. But if we truly did not know then that would be a reason to mitigate mounting this debt because we do not know what kind of crappy situation we are imposing on future generations.
So now read what I wrote: "That the “full faith and credit” of the USA is not at risk by our endless borrowing in excess of our GDP?". My point is that this endless borrowing does indeed put our position as the standard currency at risk. And that has serious consequences. This is not something to dismiss as 'meh'.
Who mentioned bankruptcy?
Again? Who is arguing otherwise?
You consider 127.6% of GDP t4and growing to be well-managed?
Yes!! And a great way to help address deficit spending is to make government more effective. Not gonna happen with the current crop of politicians who only care about themselves. And yes, growing the economy is THE key way to get us out of this mess. Just saying that, however, does not mean we will accomplish it.
Correct. And we are, IMO, well past that point. We continue to borrow and I see no interest in making effective use of extant resources. We spend (and waste) and never try to correct the waste (and corruption). We just spend and spend. To wit, how much of this new $3.5T do you think will be put to effective use as described? See, it is one thing if the federal government could effectively manage its spending. That would make more of this spending palatable. But that is not what we see.
Who is "we"?
In fact,there are many people who don't know that!
Or at least don't think about it...and continue to spend "like drunken sailors".
I'm thinking mainl of the so-called "economically disadvantaged". Some are frugal-- but other sblindly continue to spend via "Conspicuous Consumption"...trying to impress people.
Cato Institute is an Ayn Rand whacko libertarian outfit
Oh come on JBB are you going to simply dismiss the liability of a rising national dept (127.5% of GDP and growing) because you have issues with the Cato Institute? The facts I just stated are true regardless of the institute's opinion.
Cato Institute is disreputable for economics.
The national debt is only one factor. Growth is what we need most and that is only achieved by increasing government spending or cutting taxes. Since cutting taxes is impossible below our current minimal rates deficit spending is our only option to stimulate our economy. Economically the worst thing we could do right now is to start paying down the debt without first achieving growth.
This seed is not about the Cato institute. Dispute the facts rather than simply dismiss the source.
Yes, the national dept as a percentage of the GDP is the concern. I have been stating this. National debt of $25T would not be of such a concern, for example, if the GDP were $25T or more.
Where do you get the idea that simply by increasing government spending (unqualified, just spending) is going to increase the GDP sufficiently to cover the ever-increasing debt? For example, I am quite in favor of sensible true infrastructure spending since it enables smoother operations. I am in favor of making it easier and cheaper to get from A to B. I am in favor of economies of scale that can lower costs of production. I am in favor of energy independence — especially that which enables the USA to operate with lower energy costs. On and on, one can give examples.
But the hard part is taking these mere ideas and making them a reality. Government spending, in and of itself, is bad. Only when that spending actually does result in net effective benefits is it good. On what basis do you have confidence that our government effectively spends money borrowed from the unborn?
I agree that we should be focusing on growth. We should also be focusing on effectiveness. And that means making better use of the resources we have. Instead of just throwing borrowed money into the machine we should be rerouting spending from ineffective / wasteful programs, cutting overhead, etc.
And I am not stating that borrowing is out of the question. Rather I am saying that simply borrowing and spending is irresponsible and harmful to the nation. Yes, let's build up our infrastructure sensibly, let's take measures to allow our ambitious, hard-working students the opportunity to gain marketable skills and contribute to our growth, etc. But let's spend our unborn citizens' money wisely and ensure that these initiatives are properly managed and actually do accomplish what they promise.
Historically, that has not been how government initiatives have operated.
Looks like our government recently decided to increase the debt-- but only by a small amount!
Yep-- increasing it by "only" by a Trillion Dollars-- no big deal actually!
Once again, the debt increases!
Former President Donald Trump's calls to thwart the centerpiece of President Joe Biden's agenda went unheeded by 19 Senate Republicans, who joined all 50 Democratic-voting senators Tuesday to pass a $550 billion infrastructure package.
And that has to do with crippling national debt in what specific way?
Just skimming what you highlighted above, it is just asinine spending.
Spending to set up committees .. spending to address fires...
Instead of spending money on people talking about fires, how about money for more firefighters..
Imo they could get the same results spending half of what they do.
The problem with the debt is the public's general lack of understanding. Most people think the government is printing money (greenbacks) and they are to some extent, but what is really being printed is dollar based debt instruments. Most people think that is okay due to low interest rates, but ignore the Federal Reserve actions to maintain those low rates, or even how they became lower while defying the laws of supply and demand.
Is any of that sustainable? The answer is no, but the when is still up for debate, imo.
I never understood the negative interest rates...
The U.S. has not had negative interest rates. Their are primary dealers and secondary dealers. In Europe their were negative interest rates on the secondary side, due to penalties in the ECB system associated with excess reserves. The result being banks would charge interest on bank deposits, etc. Basically the ECB charges member banks -0.5% on excess reserves, where the Federal Reserve pays its member banks 0.15% on excess reserves.
I never understood the negative interest rates...
Neither do most Americans (which is probably why we don't have them...and probably never will!