This week in Bidenomics: Debt Doom
For the next few months, President Biden will be sparring with House Republicans over raising the federal borrowing limit.
The Treasury Department has hit the maximum amount of borrowing allowed by Congress, $31.4 trillion, and can’t borrow more until Congress raises the cap. By sometime this summer, there will be no wiggle room left and lack of action will threaten a disastrous federal default.
But in a few years, it will all seem so quaint, dickering over a mere $31 trillion. The Congressional Budget Office updated its long-term economic outlook on February 15, and the problems of the future will make us nostalgic for today’s meager imbalances. Annual deficits are due to rise from $1.4 trillion per year now to $2.9 trillion by 2033. That’s without another big recession—or war—and the type of debt-funded stimulus spree we saw during the Covid pandemic, in 2020 and 2021.
The nation’s total debt will rise from $31 trillion to $51 trillion in just a decade. How much is $51 trillion? Nobody knows! It’s more than the whole US economy now and it will be more than the whole US economy then. Suffice to say it will be the biggest debt ever owed by any institution in the history of humankind.
Will $51 trillion in debt cause any problems?
It probably will, but once again, nobody knows for sure. Many economists predicted we’d already have problems with too much federal debt, which soared from 56% of GDP in 2000 to 91% of GDP in 2010 to 123% of GDP in 2020. Other measures of the debt are smaller, counting only debt held by the public and leaving out government securities held by federal agencies, such as the Social Security and Medicare trust funds. However measured, the trajectory of the debt is basically the same, which is terrible.
Problems may arise when a couple of things happen. First, the more debt Uncle Sam takes on, the more it will have to pay in interest, leaving less money to spend on programs for taxpayers. The CBO sees interest payments rising from $475 billion in 2022 to $1.4 trillion in 2033. That would take interest payments from a relatively manageable 7.6% of all federal spending to a much meatier 14.4%. This problem will get worse if interest rates go higher than expected.
Huge amounts of federal borrowing can also “crowd out” private-sector investment, as more investor money goes to government debt and less goes to private borrowing. That means less job creation, lower income gains and stagnating living standards. If any of this happens, we’ll know it, through spiraling interest rates, downgrades of US debt or other types of financial turmoil.
Is anybody in Washington trying to solve the problem? You know the answer. Nope. Instead, there’s a growing rhetorical battle over Medicare and Social Security, the two very popular safety-net programs for seniors. Social Security and Medicare are a big part of the gloomy fiscal outlook. Both programs will get increasingly expensive, as life expectancy rises and more people enroll. Within 5 to 10 years, the dedicated taxes used to fund each program will fall short, forcing benefit cuts if nothing changes.
Reforms to these programs are inevitable, and they will almost certainly require a combination of higher taxes, trimmed benefits and eligibility adjustments. But that won’t happen until there’s a crisis, and no other choice. Until then, we’ll see the kind of grandstanding that’s happening now and has been happening for decades.
Republicans who control the House are demanding spending cuts as a condition of raising the federal borrowing limit. Some of them have targeted Social Security and Medicare for cuts, because that’s where the biggest chunk of money is. But voters strongly oppose any such cuts, and Biden has exploited the political opening by portraying Republicans as cruel to seniors and himself as the savior to every grandparent.
Republicans are starting to cave.
Sen. Rick Scott of Florida amended his unpopular budget-cutting plan to specifically exempt Social Security and Medicare, leaving most other federal programs to automatically “sunset” after five years, requiring Congressional action to keep them going. House Speaker Kevin McCarthy has said Medicare and Social Security are “off the table” in terms of programs Republicans want to cut. But he hasn’t said what Republicans do want to cut. Exempting Social Security and Medicare, plus defense, as McCarthy has said, leaves very little left to cut.
These 2023 budget battles are all a sideshow. Odds are exceedingly high that Congress will have no choice but to raise the debt ceiling this year, with no meaningful changes that will arrest the nation’s borrowing boom. The reason nothing will change is that neither party is willing to risk the voter wrath sure to come from a real effort to improve the nation’s finances. That would entail tax hikes and spending cuts deep enough to cause some voters real hardship.
When the day of reckoning does arrive, there are ways to handle it. One would be a new value-added tax, similar to a national sales tax, that could provide tons of new revenue. The prospect of such a wide-ranging new tax could be daunting enough to compel spending cuts, if the pain is spread more or less evenly. The economy might waver for a while, but the nation will survive.
That won’t happen in 2023, however, because Washington can still afford to ignore the bad news for a few more years.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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