Coming To Terms With The National Debt

Feb 25th, 2023 | By | Category: Featured Issues, Politics & Current Events

The mission of Issues in Perspective is to provide thoughtful, historical and biblically-centered perspectives on current ethical and cultural issues.

The Bible has much to say about the careful management of money, property and about wisely preparing for the future.  Scripture affirms the wisdom of a balanced budget—whether talking about an individual, a business or the government: Significant debt is unwise and foolish! A few years ago, columnist and economist Robert Samuelson poignantly observed that “It’s getting harder and harder to write these budget columns, because it must be obvious to almost everyone by now that hardly anyone in Washington (or perhaps any place) cares about the budget deficits. The assumption is that we can raise spending and cut taxes forever—or until some crisis occurs that forces us to do involuntarily what we won’t do voluntarily.  There is a bipartisan consensus of sorts that the presumed discipline of balancing the budget—discarding the least useful programs and increasing the least burdensome taxes—has been overtaken by expediency. Why bother to curb budget deficits when there seem to have been few, if any, damaging consequences in letting them continue? Worse, deficit reduction now might raise the risk of recession.  Among Republicans and Democrats, there is little sense of embarrassment about this.”

The brutal facts are that our governmental leaders are taking our country on what economist Greg Mankiw calls a “high-stakes deficit gamble.”  This is not only dangerous; it is ethically wrong.  Our leaders are lying to us, in effect saying there is no danger; this is a “free lunch” financial management strategy.  We will never have to pay for this.  Our leaders have abandoned one of the core principles in managing a national economy:  “Prudent governments keep their fiscal house in order during good times so that they have more fiscal room to deal with bad times.”   A prudent society recognizes this and takes preventive steps.  But, “we are not prudent. We are just raising the risks, seemingly determined to learn how much we can test the bounds of our ignorance.”

As David Lynch of the Washington Post suggests, “The reliance on so much debt also will leave scars after the pandemic passes, economists say, making it difficult for policymakers to withdraw support and leaving the economy more vulnerable than before this crisis began.”

“We should be very worried,” said Atif Mian, an economics professor at Princeton University who has written widely on the subject. “We are talking about a level of debt that would certainly be unprecedented in modern history or in history, period. We are definitely at a tipping point.”  Our leaders need to find an exit from the extraordinary levels of government borrowing.  Lynch:  “Building a consensus for the blend of tax increases and spending cuts needed to shrink the mammoth post-crisis debt will be tough to manage. Neither political party emphasized spending limits in recent years.”

In fact, over the last several decades, the United States, including the federal government, corporations, local governments and individual citizens have become addicted to debt.

“Total government, business and household debt now exceeds 250 percent of annual output, three-quarters greater than in 1980, according to government statistics . . .  An era of perpetually ultralow interest rates [had] distort[ed] the economy by eliminating the traditional market discipline that discriminates between worthy investments and unprofitable ones.”  An illustration of this addiction to debt is how the US responded to the COVID pandemic crisis:  Economist Howard B. Adler summarizes what occurred:  “Beginning with Congress’s passage of the Cares Act [of 2020], the Treasury and the Fed . . . infused about $5 trillion into the economy through 22 emergency Treasury programs and 14 direct Federal Reserve lending programs.  The monetary and fiscal authorities must work together.  The Treasury funds its lending by issuing debt and the Fed purchases that debt by printing money.  This expands the money supply . . . By the end of 2020, when the financial crisis had already abated and financial markets were on the upswing, the Fed’s balance sheet topped $7 trillion . . . By early 2022, the Fed’s balance sheet was at a historically unprecedented $8.9 trillion, with about $5.7 trillion in Treasury debt and about $2.7 trillion in mortgage-backed securities.  The total national debt of the federal government [a different category of debt] is now over $31.4 trillion.


How did the US acquire a national debt of over $31.4 trillion?  Jim Tankersley of the New York Times recently provided a superb summary of this development: “America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade. . . But America’s ballooning debt is the result of choices made by both Republicans and Democrats [e.g., the debt accelerated $7.8 trillion under President Trump.]  Since 2000, politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers and emergency measures to help the nation endure two debilitating recessions.  ‘There have been bipartisan tax cuts and bipartisan spending increases’ driving that growth, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget and perhaps the pre-eminent deficit hawk in Washington. ‘It’s not the simple story of Republicans cut taxes and Democrats grow spending. Actually, they all like to do all of it’. . . It has been nearly a quarter-century since the last time the government spent less than it received in taxes.”  In just two decades, America has added $25 trillion in debt. How it got itself into this fiscal position has its roots in a political miscalculation at the end of the Cold War:

  • “In the 1990s, America reaped a so-called peace dividend. It reduced spending on the military, believing it would never have to invest as much in national security as it had when the Soviet Union was a threat. At the same time, a dot-com boom delivered the highest federal tax receipts, as a share of the economy, in several decades.”
  • “As the 20th century ended, America’s coffers were flush with tax revenue and light on military obligations, a combination that many leaders thought would hold up well into the future.  It did not last a year.  The dot-com bubble burst, cutting into tax revenue. The Sept. 11, 2001, terrorist attacks spurred a furious rearmament push in Washington, as President George W. Bush mobilized wars in Iraq and Afghanistan.  Mr. Bush, a Republican, broke from historical precedent and did not raise taxes or issue war bonds to pay for those conflicts. (War bonds tend to pay lower interest than other government bonds, adding less to the debt.) Neither did his successor, President Barack Obama, who inherited those conflicts. The resulting spending added trillions of dollars to the national debt.”
  • “The Defense Department estimated last year that the direct costs for the wars in Iraq, Syria and Afghanistan exceeded $1.6 trillion. Brown University researchers, who add indirect costs, particularly care for veterans of those wars and interest on the money borrowed to finance the military, found that the total cost was much higher: just under $6 trillion for all of America’s ‘War on terror’ efforts in the wake of Sept. 11.  As military spending surged, federal revenue declined as a share of the economy. That decline was a direct result of tax cuts that Mr. Bush signed in 2001 and 2003. Those tax cuts were temporary, but in 2012, Mr. Obama struck a deal with congressional Republicans to make more than four-fifths of them permanent.  The Center on Budget and Policy Priorities, a left-leaning think tank, has estimated that from 2001 through 2018, those tax cuts and the additional interest costs of borrowing to finance them added up to $5.6 trillion — or about one-third of the additional debt the government had incurred in that time.”
  • “In 2018, a new round of Republican tax cuts signed by President Donald J. Trump—

which did not include spending cuts to offset their cost — kicked in. They were passed by some of the same lawmakers now contending that the government must not raise the borrowing limit without first taking steps to rein in debt.  Some conservatives claimed those cuts would ‘pay for themselves’ by boosting economic growth and tax revenue, but independent analysts disagreed. The nonpartisan Congressional Budget Office estimated in 2018 that the law would add more than $1.2 trillion to the debt through the 2022 fiscal year, even after accounting for increased economic growth.”

  • “Some new, permanent spending programs also contributed to the debt. A Medicare prescription drug benefit, passed on a bipartisan basis under Mr. Bush, ‘clearly’ increased deficits, costing more than $100 billion in 2022 alone, said Josh Gordon, health policy director for the Committee for a Responsible Federal Budget in Washington.”
  • “The biggest—and often bipartisan—drivers of debt have been the federal responses to two sharp economic downturns: the 2008 financial crisis and the 2020 pandemic recession. Shortly after Mr. Obama took office in 2009, inheriting a recession, he pushed Congress to approve a nearly $800 billion package of tax cuts and stimulus spending. Safety-net spending continued at high levels for the next several years as the economy recovered sluggishly.  Mr. Trump approved a much larger collection of aid packages, totaling more than $3 trillion, after Covid-19 swept the world in 2020. Mr. Biden took office the next year and signed a $1.9 trillion stimulus plan soon after.”
  • It is difficult to fully assign responsibility to individual presidents or parties for total levels of debt, because policy decisions often influence one another. By one crude measure, debt has been a bipartisan pursuit: It grew by $12.7 trillion when Mr. Bush and Mr. Trump, both Republicans, were in office, and by $13 trillion under the Democratic administrations of Mr. Obama and Mr. Biden.

The US is now facing a policy crisis over the debt ceiling.  What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.  The limit has been hit. What now? America hit its technical debt limit on 19 January 2023. The Treasury Department will now begin using “extraordinary measures” to continue paying the government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid. Those options could be exhausted by June.  What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis.  Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.

As the Wall Street Journal editorially observed, “The US has already borrowed and spent this money, and debt held by the public is a contract. Nobody sane in Washington wants to be blamed for triggering a default, and the bond market ructions it would cause . . . .  Republicans are right to want to stop the reckless spending trends of the last four years [i.e., the last two years of the Trump administration and the first two years of the Biden administration.]  US debt held by the public is now about 100% of GDP, up from 39.2% as recently as 2008 and 77.8% since 2018.  The cost of financing that debt is rising fast along with interest rates, and interest on the debt will take an increasingly large share of federal revenue.  Priorities like national defense will be squeezed . . . All of which means Republicans will have to pick their spending targets carefully, explain their goals in reasonable terms so they don’t look like they want a default, and then sell this to the public as a united team.”  But the Party is fragmented and it is doubtful they can do this!  We shall see.

Are we at a tipping point in terms of debt?  Probably not, most economists would argue.  But, past projections always focused on interest rates remaining low, the Feds ability to simply print money and the certainty that for the near future inflation will remain low.  Interest rates are no longer low and, although modest, inflation is a real aspect of the current economy.  The US is arguably in unchartered territory when it comes to its debt—it is so massive!  The nation is putting its debt on the shoulders of the next generation(s).  That fact alone raises significant concern.  If we are intellectually honest, that not only seems foolish; it is preposterous.

See Robert Samuelson in the Washington Post (25 August 2019); Stephen Moore in the Wall Street Journal (30 August 2019); Jim Tankersley and Emily Cochrane in the New York Times (22 August 2019); Valerie Ramey in the Wall Street Journal (24-25 August 2019); David J. Lynch in the Washington Post (19 April 2020); Greg Ip in the Wall Street Journal (24 April 2020); Neil Irwin in the New York Times (28 March 2020); Howard B. Adler in the Wall Street Journal (21 December 2022); Jim Tankersley, “How the U.S. Government Amassed $31 Trillion in Debt” in the New York Times (22 January 2023); and Wall Street Journal editorial (17 January 2023).

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