Because of runaway spending, the United States owes almost an entire year’s national income.
Fiscal-policy brinkmanship might be the only thing that can save us from catastrophe.
I t is astonishing how far and how rapidly the financial situation in the United States has deteriorated. Perhaps we have grown accustomed to the wailing about debt and deficits, but it has not always been so.
When Ronald Reagan took office, government debt held by the public was about $650 billion. The few liberals who still bother to criticize his presidency will concede that he won the Cold War, defeated inflation, and started a long-lasting economic boom, but his profligate defense spending — they will be quick to add — increased the national debt by a then-unprecedented amount. By the time Reagan left office, debt held by the public had indeed jumped, to about $2 trillion. Back then, liberals told us that the $1.4 trillion addition to the national debt threatened calamity. The fact that Reagan’s total effect over eight years was smaller than that of the “Inflation Reduction Act” highlights just how much times have changed.
We have spent our way into a colossal mess. After all the stimulus and other spending, debt held by the public is more than ten times the level with which Reagan left us, at about $24 trillion (though adjusting for inflation would somewhat lower this increase). If that number sounds familiar, it’s because it is similar to our recent levels of GDP, meaning that we owe almost an entire year’s national income because of our runaway spending.
Small-government conservatives have been outraged by our profligacy for decades, of course, but the stakes are getting very, very high. The fact is that if we don’t change the trajectory of our fiscal policy soon, we will inevitably suffer a Weimar Germany–style collapse of our currency. After all, in 1919, the debt that eventually led to German hyperinflation was just 50 percent of the country’s GDP! Indeed, repairing our finances enough to better resemble Weimar in 1919 would be a major accomplishment. At the peak of its hyperinflation, debt in Weimar Germany topped out well below our currently projected path.
According to the Congressional Budget Office’s latest long-run budget outlook, if spending goes according to current plan (which, on the upside, is impossible), then at the end of 2052, debt held by the public will be 185 percent of GDP, or, to put it back into dollars, about $137 trillion. If we assume that nominal interest rates are 5 percentage points — a conservative assumption given all of that debt — then we will spend 9.25 percent of GDP just to pay the interest on that debt. If we stress-test that calculation the way the government demands that private firms do, then the percentage of GDP spent on interest in a high-interest-rate scenario climbs to about 13 percent of GDP.
What’s 13 percent of GDP? Looking out over the next decade, the CBO projects that in 2024, for example, total entitlement spending will be 13.4 percent of GDP, and total discretionary spending will be 6.6 percent. With interest payments of that scale, the government of 2052 could well try to raise taxes to cover them, but doing so would so crush the economy that an economic death spiral would surely ensue.
There is a way off this disturbing path to destruction, and that is to control spending now. This is the part of the equation that markets now likely misunderstand. Many Republicans who were loath to make Kevin McCarthy speaker, along with many others who supported him, know and care about our current road to ruin, and they stand ready to go to the ramparts to do something about it.
We won’t be able to continue to spend like drunken sailors if Congress fails to lift the debt limit. When we hit the current debt limit in August, it will be necessary for Congress to vote to lift it. Traditionally, politicians have caved because they have been worried about the reputational risk inherent in the United States’ failing to make interest payments and defaulting on its debt. But, if we are already set to out-borrow Weimar Germany and head for ruin, as the numbers clearly indicate, what’s the added harm from that risk?
The truth is that brinkmanship now is the only thing that can save us from catastrophe. My guess is that a Republican Party tough enough to put McCarthy through the wringer won’t lift the debt limit unless each additional dollar by which the debt limit is lifted can be guaranteed to produce many more dollars of reduced government spending in the future. The Democrats will accuse them of being irresponsible, but since it is far more irresponsible to run spending to 200 percent of GDP, Republicans will likely not cave. This will be a showdown for the ages.