This week marks an ignoble milestone: America’s national debt is crossing $40 trillion for the first time, months earlier than was forecast. Although this exact threshold is more symbolic than intrinsically significant (there are other, more critical alarms flashing), now is as good a time as any to reflect on how we got here.
Economists prefer to work with debt held by the public when studying this issue, rather than the headline total, which includes debt the federal government effectively owes to itself. (Among those considered “public” are banks, investment funds, the Federal Reserve, and foreign countries.) By this more relevant measure, our debt stands at the slightly less mortifying figure of $32.2 trillion, or just less than the size of the whole U.S. economy. This year, the federal government will spend a projected $931 billion to service this debt, or around 3 percent of national income. Interest costs are now the third-greatest federal expenditure, behind Medicare and Social Security. It, along with the underlying debt, will only balloon from here.
Believe it or not, in 2001, the Congressional Budget Office (CBO) projected that, under then-current law, the nation would pay off its entire public debt by 2009. As in, reduce the debt to zero. Suffice to say, that did not happen. Debt held by the public began at 31 percent of GDP in 2001, jumped to over 50 percent by 2009, and spiked briefly above 100 percent in 2020. Don’t worry, we’ll get back there soon!
The indispensable think-tankers at the Committee for a Responsible Federal Budget used subsequent CBO reports to see what caused the debt to get so off track. They identified three big categories of fiscal policy changes that explained the whole story:
Reviewing major deficit-increasing legislation and executive actions over the past 22 years, 3we find that major tax cuts are responsible for 37 percentage points of debt-to-GDP, net discretionary spending increases and major Medicare expansions are responsible for 33 percentage points, and response measures to the Great Recession and the COVID-19 pandemic and recession – before accounting for economic feedback – explain 28 percentage points.
Absent any two of these sets of policies, the debt-to-GDP ratio would be near the FY 2001 level. Absent these tax cuts, spending increases, and recession responses, debt would be fully paid off.
The big-ticket tax cuts were under George W. Bush and Donald Trump’s first term — 2001, 2003, and 2017 — all of which were extended by later Congresses. Spending increases were mostly for “wars, natural disasters, emergencies, and other initiatives,” split evenly between defense and nondefense. (Think Afghanistan, Iraq, and Obama.) Willful expansions of Medicare, such as the creation of Part D, added another trillion to the pile. Recession responses, which correlated with the two major surges in national debt, were during the Great Recession and Covid-19.
In sum, both changes in spending and revenue are to blame for current debt levels. As are both parties: Almost 80 percent of debt is from laws enacted by bipartisan majorities. Only 12 percent comes from legislation passed overwhelmingly by Democrats, and 8 percent from laws passed by Republicans.
A quarter-century after 2001, we are now in a situation where CBO debt projections — which have historically been overly optimistic — do not show us paying off the national debt. No, quite the opposite: Under current law, projections have the debt rising to 120 percent of GDP in ten years. In 30 years, they have it going to 156 percent. Remember, this trajectory assumes no new wars, recessions, tax cuts, or domestic spending programs, and that interest rates on Treasuries will remain moderate in perpetuity. Good luck to us all.
In a later post, I will break down the factors expected to drive this future debt. Spoiler alert: The AARP will not appreciate it.