For all the sound and fury about raising the US 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 US runs out of accounting manoeuvres 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 US economy, but the debt’s path in the decades to come might put at risk national security and major programmes including Social Security and Medicare.
The national debt is the accumulation over time of the yearly deficit. If the government cuts spending or raises taxes, it can trim the deficit and run a surplus, something that last happened in 2001. Lower levels of borrowing can contain and even reduce the cumulative debt.
However, at a time when high inflation already has the US 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 US gross domestic product, a measure of yearly economic output. It’s on track to be 225 per cent of GDP by 2050, according to the Penn Wharton Budget Model.
To stabilise the debt near current levels, the government would need to permanently slash all spending by 30 per cent, raise tax revenues by 40 per cent 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 US 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 per cent, compared to 3.62 per cent last month. That means the US 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 emphasised 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 favour 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.
McCarthy has said it’s reasonable to negotiate over the issue, but the White House stressed on Friday that he has yet to identify any cuts that would have support from the Republican majority, let alone the Democrat-controlled Senate and Biden.
“We haven’t seen a plan from Republicans — what’s their plan?” White House press secretary Kaine Jean-Pierre asked reporters at Friday’s briefing. “They want to cut, cut, cut, but they’re just saying this rhetoric that is incredibly dangerous.”
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 programme would need to be cut by 85 per cent 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 programmes.
All of this makes the politics tricky, said Doug Elmendorf, a former director of the Congressional Budget Office and now dean of the Harvard University Kennedy School of Government.
“It’s very hard to build a coalition for specific sorts of debt reduction,” Elmendorf said. “The inability of Democrats and Republicans to have constructive engagement on this topic, for decades now, poisons the well for future compromises.”
By wanting to focus on the deficit, McCarthy is “manufacturing” a crisis that would detract from other risks to the economy such as climate change and poverty, said Sharon Parrott, president of the liberal Centre on Budget and Policy Priorities.
“It’s really telling, right, that there’s not a clear articulation of the spending that they want to cut,” Parrott said. “The public is pretty clear that they want schools to be funded, and they want investments in transportation, and they want low income families to have access to food assistance.”
Michael Strain, an economist at the centre-right American Enterprise Institute, said he thinks there is too much scepticism about the parties’ willingness to tackle the debt. He noted that Ronald Reagan effectively reduced Social Security benefits, while Democrats’ tax proposals would increase revenue.
But would a debt limit standoff actually change the federal debt’s trajectory?
“No,” Strain said.