The federal debt has a long history in the United States and has been deemed necessary in times of crises such as wars and pandemics. According to economist Barry Eichengreen’s book “In Defense of Public Debt,” borrowing allows governments to mobilize national resources. Additionally, government borrowing and spending are essential for stimulating the economy during recessions. Moreover, Treasuries play a critical role in the global financial system, prompting concerns in the late 1990s about the consequences of reducing federal debt too much when economic growth and decreased military spending occurred.
However, the United States’ current practice of heavy borrowing during periods of economic growth to meet ongoing obligations is increasingly unsustainable. The Congressional Budget Office projects that annual federal budget deficits will average $2 trillion per year over the next decade, adding to the existing $25.4 trillion debt owed to investors.
While borrowing may seem like a feasible solution, it is costly. Significant portions of federal revenue that could benefit the American people are directed towards interest payments to investors who purchase government bonds. Essentially, instead of collecting taxes from the wealthy, the government is paying interest to borrow their money.
According to the Congressional Budget Office, by 2029, the government is on track to spend more on interest payments than on national defense. Furthermore, by 2033, interest payments will consume 3.6 percent of the nation’s economic output.
Before the pandemic, low interest rates kept interest payments relatively modest despite the swelling federal debt. However, the era of low interest rates has ended, and the costs of borrowing are rising. Therefore, it is imperative for national leaders to chart a new course.
Unfortunately, the recent deal reached to raise the debt ceiling does not represent a significant starting point. Democrats agreed to modest spending cuts, while Republicans refused to consider revenue-increasing measures. Consequently, the debt is projected to reach $46.7 trillion in 2033, only marginally smaller than the pre-deal projection of $45.2 trillion. This amounts to 115 percent of the nation’s annual economic output, an all-time high.
Both political parties acknowledge the need for substantial changes. President Biden declared that more would be done to reduce the deficit, while House Speaker Kevin McCarthy expressed an intention to form a bipartisan commission to tackle debt. However, given their respective histories, it is challenging to take their talk seriously. Republicans have consistently passed tax cuts that increase borrowing, while Democrats are reluctant to curtail spending due to unfulfilled predictions of dire consequences and the cycle of tax cuts that follow any spending cuts.
The debt ceiling itself is part of the problem. It was never meant to limit federal debt but was created to facilitate borrowing during World War I. Its current use as a means for Republicans to extort spending cuts from Democrats by threatening default is unproductive. Meaningful changes will only happen if both political parties actively participate.
A first step towards resetting the conversation is eliminating the debt ceiling before its next scheduled appearance in 2025. President Biden has overlooked calls to pursue a legal ruling on the constitutionality of the ceiling, repeating the mistake made last fall when he failed to push for its repeal through legislation. Legal avenues, such as the federal court case brought by concerned federal workers in Boston, should be explored. Pursuing a ruling while there is no immediate danger of hitting the ceiling is a sensible approach. If the courts reject the legal challenges, it would provide clarity on the matter.
Ultimately, any substantial deal will require a combination of increased revenue and reduced spending. Both parties must be willing to compromise for a politically viable solution. Republicans need to accept the necessity of collecting government owed funds and imposing taxes on the wealthy, while Democrats must be open to changes in Social Security and Medicare. Anything less will not be financially sustainable.
Although painful choices are inevitable, the failure to make those choices also comes at a cost that is rapidly increasing.
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