Lots of sound and fury on US debt, but not a crisis — yet
PROTECTED CONTENT
If you’re a current subscriber, log in below. If you would like to subscribe, please click the subscribe tab above.
Username and Password Help
Please enter your email and we will send your username and password to you.
JOSH BOAK
ASSOCIATED PRESS
WASHINGTON (AP) — For all the sound and fury about raising the nation’s debt limit, most economists say federal borrowing is not at a crisis point … at least not yet.
The national debt is at the core of a dispute about how to raise the government’s legal borrowing authority, a mostly political argument that could turn into genuine financial trouble this summer if the U.S. runs out of accounting maneuvers to keep paying its bills.
House Speaker Kevin McCarthy insists that the debt, so huge it defies most people’s grasp, is already breaking the economy. President Joe Biden counters that the government spending cuts sought by Republicans in return for a debt limit increase would break the middle class.
The political jousting masks contrasting realities: Today’s $31.4 trillion national debt does not appear to be a weight on the U.S. economy, but the debt’s path in the decades to come might put at risk national security and major programs including Social Security and Medicare.
The national debt is not the yearly deficit, the amount the government outspends its tax revenues. If the government cuts spending or raises taxes, it can trim the deficit and run a surplus, something that last happened in 2001 Less borrowing over time can contain and even reduce the cumulative debt.
However, at a time when high inflation already has the U.S. teetering near a recession, it’s a potentially dangerous game to force more deficit reduction, says Megan Greene, global chief economist at the Kroll Institute.
“Spending cuts and tax hikes would kill off growth in a year when we’re more likely than not to go into recession,” Greene said. “It’s not clear that it would put us onto a more sustainable fiscal footing at all.”
But the debt challenge will keep unfolding over time, meaning that choices may become more severe as the costs of Social Security, Medicare and Medicaid increasingly outstrip tax revenues.
Publicly held debt is roughly equal now to the U.S. gross domestic product, a measure of yearly economic output. It’s on track to be 225% of GDP by 2050, according to the Penn Wharton Budget Model.
To stabilize the debt near current levels, the government would need to permanently slash all spending by 30%, raise tax revenues by 40% or some combination of both, said Kent Smetters, a professor at the University of Pennsylvania and director of the Penn Wharton Budget Model. Those changes could come at the expense of younger generations who might be stuck paying more and receiving far fewer benefits from the government than their parents.
“We’re talking about a current fiscal path that’s very unbalanced,” Smetters said. “That’s not a partisan statement. It’s an accounting thing.”
Given his estimates, Smetters said, he worries that investors lending to the U.S. will pull back “if we don’t do something before the 2030s, pretty boldly.”
So, why aren’t more economists sweating the debt right now?
First of all, the costs of servicing the debt have fallen over time. Investors are charging less to lend to the federal government. This has occurred even as the national debt has climbed almost nine-fold since 1991.
How did that happen? Interest rates are dramatically lower. The interest on a 10-year Treasury Note in December 1991 was 7.09%, compared to 3.62% last month. That means the U.S. government is spending less money as a share of the total economy to repay the interest now than it did more than 30 years ago.
McCarthy has emphasized the total debt size when calling for Biden to hold negotiations on spending cuts. His argument is that Biden funded $1.9 trillion in coronavirus aid through debt, which contributed to the inflation that now threatens the economy.
“We have now hit a point that we can’t continue,” McCarthy said Tuesday on Fox Business News. “Right now, we have to save America and stop the spending.”
House Republicans favor a path toward a balanced budget that their leaders — including McCarthy — have yet to publicly detail, while Biden wants to increase the borrowing cap without preconditions.
“I will not let anyone use the full faith and credit of the United States as a bargaining chip,” Biden said in a Thursday speech in Virginia. “In the United States of America, we pay our debts. It took 200 years to accumulate that debt.”
One of the challenges in holding any negotiations is that Republicans have yet to embrace a set of policies. Some lawmakers have floated cuts to Social Security and Medicare, which McCarthy has rejected as he has publicly said he wants to identify waste in spending that can be cut.
But basic math poses a problem for balancing the budget. If tax hikes, Social Security, Medicare, Medicaid, national security and veterans’ support are off the table, every other government program would need to be cut by 85% to balance the budget in 10 years, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.
The debt is largely the gap between the taxes that people are willing to pay and the benefits they expect to receive from the government. Voters generally want minimal taxes, but they also want more Social Security, health care and other programs.
