The Scary Future Federal Debt
As we near June 1, the date at which Treasury Secretary Janet Yellen claims that the federal government will default on the federal debt if the debt ceiling is not raised, there’s a lot of discussion about the debt, as well there should be. Republican House Speaker Kevin McCarthy has managed to corral enough votes in the House of Representatives to pass a bill that would allow an increase in the federal debt limit and roll back discretionary spending to the 2022 level and then allow it to rise by 1 percent annually for the next ten years. What that means, since inflation is likely to average over 1 percent, is that discretionary spending would fall slowly in real terms. So far, President Biden has refused to negotiate any cuts in the rate of growth of discretionary spending. But even if he goes along with Speaker McCarthy, the slower growth in discretionary spending will be only a small down payment on a huge and growing problem: the massive and growing federal debt.
If the federal debt continues to grow at the rate predicted by the Congressional Budget Office, then, to avoid default in the 2030s, Congress will have to pass a package of spending cuts and tax increases. On the tax side, though, Congress is constrained by one of the few constants that we ever see in macroeconomics: the size of federal tax revenues as a percent of gross domestic product. If that constant holds up in the future, the only choices would be large spending cuts or a default on the federal debt.
These are the opening paragraphs of David R. Henderson, “Slouching Toward Debt,” Defining Ideas, May 17, 2023.
But the really big deal is the projected spending, deficits, and debt beyond 2033. In its Table 4, the CBO projects that from 2034 to 2043, federal spending will average 26.3 percent of GDP and, from 2044 to 2053, 29.0 percent of GDP. Deficits are projected to average 8.0 percent of GDP from 2034 to 2043, and a stunning 10.2 percent of GDP from 2044 to 2053. By 2043, the CBO predicts, federal debt held by the public will be 152 percent of GDP and, by 2053, 195 percent.
Budget cuts would work:
The bad news is that there appears to be zero appetite among congressional Democrats and only a slight appetite among congressional Republicans for large cuts in the growth of spending. The good news is that if they ever decided to take spending cuts seriously, they could see a major US example after World War II and more recent experiences in Canada and the United States in which spending actually fell in real terms (post–World War II United States) or spending as a percent of GDP fell substantially (Canada and the United States) with apparently few bad effects and some major good effects.
In response to economists Lawrence Summers and Jason Furman, who minimized the danger of large budget deficits, I wrote two articles on this site: “Who’s Afraid of Budget Deficits? I Am,” February 20, 2019, and “Furman, Summers, and Taxes,” May 1, 2019. I wonder what they think of federal budget deficits and debt now. Of course, they could argue that no one expected the gush of federal spending that came with COVID-19 and lockdowns under both Presidents Trump and Biden. But that suggests yet another reason not to be so calm about deficits and debt: we need to keep our powder dry. My guess is that Summers and Furman are at least a little more worried than they were.
Read the whole thing.
May 19 2023 at 11:54am
The longterm prospects should be known to be scary already. Last night I checked the National Debt clock and as of then it said:
US Unfunded Liabilities: $187.6 trillion – $561k per capita
US Total National Assets: $187.9 trillion
without the rounding that works out to $211 billion in national assets over liabilities, and that is likely to go into the red soon of course.
May 19 2023 at 11:56am
Thomas Jefferson warned about in a letter to James Madison in 1789 where he complained about the idea of acquiring long term national debt, or by extension other obligations:.
May 20 2023 at 7:58pm
The way that one generation can pass on a “debt” to another generation is by consuming rater than investing the amount of the increase in debt, a deficit. All concerns about debt devolve to concerns about suboptimal choices made with regard to taxes and expenditures.
May 19 2023 at 3:59pm
I agree we need to cut deficits and debt but some of the numbers arent making much sense. The GOP wont increase revenue and the Dems wont cut spending. Lets assume the Dems give in as usual since it seems likely the radicals in the House really are willing to default. They only want to cut discretionary spending, and even there they say they wont touch military or veterans spending. That leaves a very small piece of the budget and they would have to make very large cuts in those parts. I read abut the Canada cuts years ago but I dont think that is how they did it. I think you have to look at entitlements.
May 19 2023 at 6:30pm
And not only look at them, but cut their growth rate substantially.
May 19 2023 at 4:03pm
At the same time that the government is working to increase its debt relative to GDP, it’s also working to decrease GDP. Mountains of new regulations, restrictions on energy production, restrictions on credit to the energy industry, trade restrictions, new employee benefit mandates, and further empowering labor unions will all serve to stifle the economy.
May 19 2023 at 8:12pm
And above all restriction on immigration!
May 19 2023 at 6:27pm
During the pandemic the administration spent 5 trillion in stimulus. Financed with a 30% increase in m2, 2021 to 2022. Before covid, the rate of m2 increase was about 6% per year. If the debt continues to burgeon, another financial crisis, as screamed by the central planners, will be solved with another QE. Given the lack of political will to address this, I don’t see an alternative. About 45% of federal expenditures are SS and Medicare. I suspect that’s what gives politicians pause when they consider cuts in spending.
May 19 2023 at 8:10pm
I agree about the high desirability of reducing deficits, ideally to near zero, heck, a surplus. I think the more important question is how to achieve that. What combination of which tax increases and which expenditure reductions. Formally, it is a combination of low deadweight loss taxes and NPV<0 expenditures. But which taxes and expenditure meet those criteria?
May 20 2023 at 5:10pm
Require every Congressperson to rank order spending from highest priority to lowest. Combine all rankings into one overall Congressional ranking of spending. Cut spending starting at the bottom of the list and work up towards higher priority spending until the desired deficit or surplus target is achieved. If the Associated Press can figure out how to combine sportswriters’ rankings of college football teams into one consolidated ranking, then I think we can figure out how to combine Congresspersons’ rankings of spending into one consolidated ranking of highest priority to lowest priority.
May 20 2023 at 8:00pm
Spending and taxation.
May 21 2023 at 8:34pm
Sure, one could similarly rank order taxes to determine which taxes to cut in the event of a budget surplus. Interesting symmetry between taxes and spending: the marginal tax and spending dollar are both the lowest ranked. The marginal dollar of spending is of lower priority than all other spending. The marginal tax dollar is worse than all other tax dollars: most distortive, least “fair”, hardest to enforce/collect, or however else one has ranked tax dollars. So, if one is trying to reduce a deficit, then cutting spending eliminates only the lowest priority spending while raising taxes adds a tax that is worse (lower ranked) than all current taxes. Conversely, if one is dealing with a surplus, then returning it to taxpayers by cutting taxes eliminates the worst taxes while spending the surplus on new spending adds only low priority spending, lower priority than all existing spending. That suggests favoring spending cuts over tax hikes to deal with deficits and favoring tax cuts over spending hikes to deal with surpluses. Less of the worst (spending cuts and tax cuts) is likely to be better than more of the worst (tax hikes and spending hikes).
May 19 2023 at 8:16pm
Of course, we can only have a sensible discussion avout defict reduction once the “debt ceiling” stun is over. I think the 100 Trillion coin idea is the best silly response to a silly issue.
May 20 2023 at 1:05pm
That’s not true. Indeed, one of the few times we have these discussions is when there’s controversy about the debt ceiling. I’m not sure how much you’ve followed federal politics over the years. That’s how politicians work.
Of course, you could say that the discussion we get at times like these is not serious. It’s just that it’s more serious than at any other time.
May 20 2023 at 4:41pm
To appraise the effect of the Federal budget deficit on interest rates, it is necessary to compare the deficit, not to a debt to N-gDp-ratio (a contrived figure), but to the volume of current net private savings made available to the credit markets. Unprecedented large deficits “absorb” a disproportionately large share of N-gDp (as gov’t spending is a component / factor of N-gDp).
May 20 2023 at 8:10pm
Exactly. Deficits transfer resources from investment to consumption. More than not. Higher interest rates that the Fed has to impose to hit it’s inflation target may reduce some consumption, not all federal expenditure is consumption and some taxes may reduce savings, not just consumption. But as a rule of thumb I think it’s helpful to think of federal deficits as pure transfer of respirces from private investment to private consumption.
May 20 2023 at 4:44pm
There will come a time (unpredictable) when it will be impossible for the government (federal) to collect enough in taxes to pay all of its expenses, including interest on the national debt. The Gov’t can of course borrow an indefinite amount through the Fed. (Concealed green backing) given a few changes in existing law. But that could lead to hyper inflation – i.e., a collapse in the credit of the Gov’t. So the easy way, is the way the French did it in 1960. Simply say that beginning Jan 1 (or any other date), new dollars will be issued, and that each new dollar is worth 100 old dollars. Then follow that up with a largely state controlled economy.
In 1960, the French economist / mathematician Jacques Rueff, during Charles de Gaulle’s presidency, converted the old franc, to a nouveau franc, equal to 100 of the old franc. However, even with this substitution, inflation continued to erode the currency’s value, though at lower rates of change, in comparison to other countries. And this new franc equaled 20 cents to a U.S. dollar. The old rate was 5.00 to a dollar.
In 1960, the French franc, which was one of the weakest currencies, overnight, became one of the strongest. Correcting policies included plans to 1) balance the budget, 2) stabilize the currency, and 3) eliminate currency controls.
The gold content of the franc increased 100%, & 1) foreign exchange rates, and 2) France’s internal prices, reflected the conversion overnight. Internally, prices dropped about 90 per cent, and the foreign exchange value rose from about 0.238 cents per franc, to about 20.389 cents per franc.
Domestically, France was on a managed paper standard; externally, on a modified gold bullion standard. With the new policies, France’s economy strengthened, and the franc became fully convertible @ approximately its gold par, into gold for foreign exchange and into foreign currencies.
With the introduction of the Euro, the franc in Jan. 1, 1999, was worth less than 1/8 of its Jan. 1, 1960 value.
May 20 2023 at 4:45pm
Essentially, the charges on debt are related to a cumulative figure; and since the multiplier effects of debt expansion on income, the ingredient from which the charges must inevitably be paid, is a non-cumulative figure, it would seem that the time will inevitably arrive when further debt expansion is no longer a practical or possible expedient, either to provide full employment or to keep debt charges with tolerable limits.
May 20 2023 at 4:55pm
Dr. Franz Pick:
(1)”government bonds are certificates of guaranteed confiscation.”
(2)“The fact is that the destiny of every currency is devaluation and expropriation.”
(3)“The difficulty with a debt that doubles every ten years is that the interest compounds to the point that it can no longer be paid out of the current revenues. Once the interest itself is debt financed, the compounding accelerates.
That’s why folks subscribed to Dr. Franz Picks’ “Pick’s Currency Report”, a monthly newsletter, and “Pick’s Currency Yearbook” (90 currencies each year).