Fiscal Policy

A Trillion Here, and a Trillion There . . .

(NiseriN/Getty Images)
The politicians who’ve run up our current record debts and deficits should be ashamed of themselves.

The first step to solving any problem is admitting that you have one. And the United States definitely has a spending problem.

Sadly, no one in Washington wants to admit it.

But refusing to accept reality does not make it go away; reality has a tendency to reassert itself at inconvenient times. And the reality is this: The United States is the most indebted entity in the history of the world. As of January 1, 2021, the federal debt topped $28 trillion: that’s twenty-eight million million, or $28,000,000,000,000. (Unless otherwise noted, all data in this article come from the St. Louis Fed.) That is an increase of nearly $5 trillion in the last twelve months, and a nearly $14 trillion increase over the last ten years. For context, the public debt did not reach $14 trillion until 2010, meaning that we have added as much debt to our national ledger in the last decade as we did in the first 221 years as a country. None of this includes the trillions more that Congress appears intent on spending on “infrastructure” both “hard” and “soft,” whatever those terms may mean.

The debt is out of control because spending is out of control. In four of the last five fiscal quarters, the United States spent, on an annualized basis, at least $7.2 trillion, and as much as $9.1 trillion. Yes, much of that was in response to the pandemic (though even more was in response to the government’s response to the pandemic). But even before the pandemic, in 2019, we were spending nearly $5 trillion annually. Do you feel like you are getting $5 trillion worth of value from your federal government each year? Neither do I.

These numbers are staggering enough, but not nearly as staggering as the coming tsunami of spending and debt that this country is facing from entitlement programs such as Social Security and Medicare, at least as currently structured. The government’s own estimates show that social-insurance programs will spend roughly $65.5 trillion more than they take in. But that may be low. By one estimate, promises made about future Social Security and Medicare benefits total over $95 trillion (again, that’s ninety-five million million or $95,000,000,000,000). Regardless of which estimate is used, we are looking at a number so large that it is difficult to comprehend. To take just one example, the amount of unfunded liabilities is substantially more than what is available to the banking system: All of the assets in all of the commercial banks in the country equal only $21.9 trillion. What makes this worse is that we have known for years — decades even — that our entitlement programs were on the glide path to bankruptcy. But rather than making the tough choices required of true leaders, politicians in Washington continued to kick the can down the road, recklessly promising more spending and leaving the mess to future generations.

So yes, America has a spending problem. We have spent more than we have taken in. And we have made promises of future spending that we have not adequately financed. This spending problem is bipartisan: In the four years of unified Democratic control of Congress from 2007 through 2010, the debt grew by $5.3 trillion, while it grew by nearly $4 trillion from 2015 through 2018 when Republicans had unified control of Congress. Each of those periods also featured two years of a Republican in the White House, and two years of a Democrat in the White House. While the faces may change, the story stays the same: We. Spend. Too. Much. Money.

This is probably because there is no political constituency for fiscal restraint. There is no great mass of American people demanding that we spend less, while plenty are demanding that we spend more — at least on what they want it spent on. At the end of the day, the people get the government that they want. And right now the people want a government that does not care about running up debt.

Nor is the bond market proving to be an adequate check on the insatiable desire of politicians to spend other people’s money. Politicians used to exercise at least some restraint for fear that not doing so would adversely affect borrowing costs. James Carville, a close adviser to President Bill Clinton, once quipped that he wanted to be reincarnated “as the bond market. You can intimidate everybody.” But fear of the bond market is not pushing America to get its fiscal house in order. This is likely for at least two reasons. First, experience has shown that large debt balances do not adversely affect the ability to borrow, at least not much. For example, Japan has no problems issuing new debt despite having a debt-to-GDP ratio well in excess of ours; indeed, much of Japan’s short-term debt has negative yields. This is perhaps because there is so much capital searching for safe assets that a highly indebted Japan is still a safer investment than nearly every other option.

Second, the bond market itself may not adequately assess the risk posed by excessive government spending. In 2011, S&P lowered its rating of United States sovereign debt. It did so because the legislative process for fiscal policy was too “contentious and fitful” to address the country’s debt issues, and questioned the overall “effectiveness, stability, and predictability of policymaking and political institutions.” It also expressed concern about the country’s entitlement programs and debt-to-GDP ratio, especially as compared with other peer countries such as the U.K. The downgrade did not appear to have any real effect on U.S. borrowing — from the third quarter of 2011, when the rating was downgraded, through the first quarter of 2021, total federal public debt nearly doubled, and our borrowing rates are at or near all-time lows. Perhaps most telling is the fact that S&P has not further downgraded the U.S. rating since 2011 despite the fact that each of the items that drove its initial downgrade have gotten appreciably worse: The legislative process is even more contentious than it was in 2011, the solvency of our entitlement system continues to erode, and our debt-to-GDP ratio is much worse now than it was before.

Further, S&P, and the bond market more generally, may not understand that the path to fiscal discipline must focus more on reducing spending rather than raising taxes, at least where the U.S. is concerned. In announcing the rating downgrade, S&P noted that, even though it was officially neutral on whether taxes should be raised, it was changing assumptions it made about certain changes in tax policy because “Republicans in Congress continue to resist any measure that would raise revenues.” This was consistent with how S&P evaluates sovereign debt generally, looking at whether “the government is able and willing to raise revenues through increases in tax rates” But in the United States, federal collections as a percentage of GDP have stayed within a relatively narrow range, regardless of what the top marginal rate is:

Our fiscal situation is a moral as well as a financial tragedy. We are leaving our children, and their children, and their children, with trillions in debt. It is not enough to point to COVID relief efforts and claim that all government debt is good and necessary. Leaving aside the fact that much of our federal spending over the past 18 months was not on responding to COVID per se, but rather responding to the economic harm wrought by the government response to COVID, that argument completely ignores the fact that we as a country had run up astronomical amounts of debt before 2020. And most of this debt was not incurred to make internal improvements to help the country flourish or defeat fascism. No, it was to fund current consumption, and allow politicians to put their names on buildings, or at least help their reelection. They should be ashamed of themselves.

Eric Blankenstein is director of policy at the American Cornerstone Institute and former associate director of supervision, enforcement, and fair lending at the Consumer Financial Protection Bureau.


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