Our National Debt
Just before the 218th Congress adjourned for the Christmas holiday, it passed a continuing resolution funding of the federal government through March 14, 2025. Had the Congress not authorized any further expenditures, the federal government would have had to suspend its non-essential operations. This action, however, did not provide for funding through the conclusion of the federal government’s current fiscal year which ends on September 30, 2025. Equally significant, it didn’t increase or suspend the nation’s debt limit which will be fixed on January 1, 2025 at its then level of approximately $36.172 trillion. This means that if the Congress does not increase the amount the federal government may borrow, it will quickly exhaust the monies remaining in the Treasury enabling it to only operate for an estimated three months.
Article I of the U.S. Constitution gives Congress control over the nation's finances, including the power to decide how money is spent. Until 1917, if the Congress wished to authorize an expenditure for which it didn’t have available funds, Section 8 Clause 2 of Article I authorized it to cause the government to borrow the necessary funds. During World War I when the nation was required to frequently make expenditures that exceeded its tax revenues, the Congress changed its procedures. Rather than authorize additional borrowings each time it made such an appropriation, it periodically authorized the borrowing of substantial additional sums of money which it could draw upon each time it lacked the necessary funds on hand. Thus, the concept of a debt ceiling was born.
From its inception and through most of the 20th Century the federal government operated on the principle that it should endeavor to raise sufficient revenues to cover each year’s anticipated annual expenditures. Only when unforeseen events resulted in a budgetary shortfall would it resort to borrowings. Even when that happened, it endeavored to quickly repay its debt obligations so as not to burden future generations with the financial obligations it had incurred
While this arrangement was both logical and designed to keep the federal government operating smoothly, it did not take into consideration that authorizing an increase in the debt ceiling would be used by a political party as leverage in the legislative process. Specifically, a political party could play “chicken” by refusing to allow the Congress to raise the debt ceiling unless the other party agreed to one or more of its legislative demands. I characterize this as a game of fiscal “chicken” because both of the nation’s principal political parties have always fully understood that a failure to continue the federal government’s operations for more than a few weeks could have serious adverse consequences for millions of Americans. More significantly, a failure to pay either the principal or interest on its outstanding debt obligations could have immediate and catastrophic economic consequences not only for the U.S., but also for most of the Earth’s developed nations.
Unfortunately, the financial brinksmanship we just experienced has become all-too-common. Although our political parties have always had conflicting agendas, prior to 1980, their political differences were always tempered by notions of financial necessity and fiscal conservatism. If there was a war to be fought or a weather-related disaster to be overcome, the Congress would authorize the sale of debt obligations to raise the funds necessary to address those situations and promptly levy taxes to repay those obligations. Thus, even though our nation had been required to go deep into debt to fund its participation in two “world wars” and recover from the Great Depression during the first 80 years of the 20th Century, by 1981 its cumulative indebtedness was still only $914 billion or roughly 32% of its $2,857 billion GDP. This was largely because the federal government had increased corporate and individual marginal income tax rates to raise enough monies to repay the bonds it had issued to meet those financial obligations.
That practice abruptly changed in 1981 with the election of Ronald Reagan whose economic policies were guided by “supply-side economics.” Supply-side economic theory postulated that if the nation increased its productive capacity it would put more of its citizens to work and thereby expand its federal income tax base and increase its total tax revenues. In this way, all Americans would benefit earning the nickname “trickle-down economics”. This was a departure from “demand-pull” economic theory which postulated that businesses only choose to expand their operations when demand for the goods or services they generate is increasing.
Relying on “supply-side” economic theory, President Reagan urged the Congress to reduce the income taxes it imposed on businesses and wealthy individuals (“job creators” in Republican parlance) on the assumption that they would use their tax savings to expand the nation’s industrial capacity. Reagan and his political allies predicted that the additional tax revenues thereby generated would actually exceed the reduction in income taxes that would otherwise have been imposed on the “job creators.” This fantasy was the economic equivalent of “If you build it, they will come.” It’s not clear whether President Reagan actually believed this economic mumbo jumbo (which his own Vice President had labeled “Voodoo economics”), but it served nicely as a justification for the Republican Party’s plan to divert the nation’s wealth into the hands of the individuals and entities who would support its political candidates.
Thereafter, Republican administrations used every opportunity to reduce the taxes imposed on corporations and wealthy individuals. Specifically, the administrations of George W. Bush and Donald Trump effected further significant tax cuts on wealthy individuals and corporations. In addition, Republican legislators uniformly opposed any and all efforts by Democratic administrations to reverse the tax cuts they had enacted. They even sought to limit the amount of resources appropriated for the IRS to collect the taxes owing by such individuals and entities. Indeed, this latest budgetary skirmish resulted in $20 billion being cut from the $80 billion IRS appropriation that had been approved during the Biden administration.
While these tax cuts had been promoted as “supercharging” the nation’s economic growth, their impact was hardly noticeable. Set forth below is a chart summarizing the post-World War II growth produced by each presidential administration:
For the most part, the records of Republican administrations do not compare well with those of Democratic presidents. It’s also important to note that the administrations of three of the Republican presidents serving after 1980 (George H.W. Bush, George W. Bush and Donald Trump) ended with the country in a recession. In fact, Ronald Reagan was the only post 1980 Republican president whose administration achieved a better than a 3% annual rate of economic growth. More importantly, the four Republican tax cuts favoring the wealthy not only produced large fiscal deficits, but their on-going impact was the primary factor underlying the nation’s subsequent annual fiscal deficits.
The adverse impact of the Republican tax cuts had become evident almost immediately and prompted a tax increase in Reagan’s second term and another during the presidency of George H.W. Bush. Even though the “revenue neutral” myth had been debunked, both of the succeeding Republican administrations continued to use it to promote tax cuts for corporations and the wealthy. The accumulating impact of those tax cuts can been seen on the chart below.
Since 1980 Republican politicians have contended that the rising level of the national debt was not the consequence of insufficient tax revenues, but rather because of wasteful, inefficient and fraud-infested social welfare programs initiated by Democratic administrations. To be sure, those social welfare programs have been experiencing rising costs, but that hasn’t been due to fraud and waste (see, “Eliminating Fraud, Waste & Inefficiency”). Rather, their problems have been (and continue to be) the product demographic changes.
Specifically, the number of Americans entitled to receive Social Security and Medicare benefits has been increasing both in absolute terms and as a percentage of the number of workers whose paychecks were funding the Social Security Trust Fund. Stated another way, in 1935, when the Social Security program was initiated, there were 160 workers making contributions into the Social Security Trust fund for every American receiving Social Security benefits. Today, that ratio has fallen to roughly 3.5 workers for every Social Security recipient.
Even more importantly, the average life expectancy of Americans has increased from 70 years in 1960 to almost 80 today. This means that whereas in 1960 the average Social Security (or Medicare recipient) received benefits for five years (i.e., from age 65 to age 70), today the average recipient receives benefits for almost 15 years (from age 65 to age 80). To address these problem, FICA payroll taxes have been periodically increased along with annual increases in the highest level of income on which that tax is imposed. Nevertheless, projected demographic changes indicate that continuing fiscal problems lie ahead for these two programs with almost 100 million beneficiaries.
The real villain in this story, however, is that the Republican initiated tax cuts have essentially transferred $50 trillion of the nation’s wealth from those individuals whose annual incomes are in the bottom 90% of all Americans to those whose annual incomes are in the top 1%. Stated another way, the nation has incurred almost $36 trillion of debt to fund 70% of the money it has transferred (via changes in its tax laws) to those with annual incomes in the top 1% of all Americans.
Although Congress seems to have abandoned efforts to achieve balanced budgets, we are quickly approaching a point where further increases in national debt will lead to serious economic consequences. This is because our national debt is growing faster than the economy, with the result that interest payments on that debt will consume increasingly larger portions of the federal government's annual spending. That, in turn, will limit its ability to provide for the nation’s security and the health and welfare of its citizens.
This even pessimistic conclusion optimistically assumes that the rate of interest accruing on our outstanding national indebtedness will remain relatively low. However, as we have recently learned, many events outside of our control (like wars, infectious diseases and natural disasters) can precipitate inflationary forces which will drive up interest rates, making this problem significantly worse. There is also a danger that at some point those who own our nation’s debt obligations will become concerned about our government’s ability to pay the accruing interest (much less the principal amount) on the obligations they hold. When that happens, interest rates are likely to increase rapidly, further accelerating a downward spiral toward economic malaise. This has happened to numerous countries and it can take years of economic hardship for a country to recover. Accordingly, the longer our federal government ignores this problem, the more painful and prolonged the recovery process will be.
For our nation this will mean slower economic growth and higher unemployment. Other consequences could include a decline in infrastructure improvements and a reduction in defense spending. For the average American it will mean stagnant (if not reduced) wages, higher taxes and fewer government services and smaller social welfare programs. For a more comprehensive discussion of the ramifications of a default involving a nation’s outstanding indebtedness see, Wikipedia—Sovereign Default.
A contraction of the U.S. economy will not only be catastrophic for Americans but also for most of the world’s economies. That’s because many countries have invested heavily in U.S. dollar denominated securities and debt obligations which will lose significant value if the U.S. fails to meet its debt obligations. Similarly, many countries have strong trading relationships with the U.S. which will be diminished, if not altogether disrupted, if the economy of the U.S. falters. Thus, a U.S. economic problem could quickly become a global economic problem.
The question that no one seems to be able to answer is at what point will the U.S. begin to tumble into an economic downward spiral. The problem is that we may not learn the answer to that question until we are already engulfed in an economic crisis. Previously, the conventional wisdom was that as long as our national debt did not exceed 90% of GDP, the nation’s economy would remain sound. We have now significantly passed that economic milestone. Similarly, Japan’s outstanding debt now exceeds 258% of its GDP; and although its economy is struggling, its continued existence is not threatened. This leads some economists to believe that an increasing level of national debt, while a serious concern for future generations, is not an existential problem for the nation. While the continued existence of a debtor nation (particularly a large and powerful one like the U.S.) may not be placed in jeopardy, the quality of life of its citizens will surely be adversely impacted.
During the recent budget negotiations, President-elect Trump urged the Congress to simply do away with the debt ceiling as it seems to serve no function other than to provide an opportunity for political extortion. My answer is that the debt ceiling continues to serve as a “Stop” sign warning the Congress that before proceeding to authorize additional borrowings a reassessment of the nation’s tenuous economic situation is warranted. That reassessment should entail an appraisal of just how close the nation is to an economic precipice and whether a continued failure to take remedial action will have grave consequences.
We know that cuts to major social welfare programs are both politically unfeasible as well as highly detrimental to the nation’s economic growth. Moreover, the elimination of other federal programs will not likely be sufficient to have a significant impact on reducing the nation’s outstanding indebtedness. Accordingly, the obvious solution is to (a) increase the age requirement for participation in the nation’s social welfare programs, (b) reverse the tax cuts wealthy individuals have enjoyed over the past 44 years, (c) increase the current corporate tax rate from 20% to 28%, and (d) institute a minimum corporate tax rate. Unfortunately, the likelihood of this happening any time soon seems remote as Congress has not shown itself to be a bastion of political courage. It therefore will likely require a major economic collapse to incite Congress to take remedial action. As Winston Churchill once observed, “Americans can always be trusted do the right thing only after they have tried everything else.”