The $40 trillion national debt threatens the whole economy. But a fix is possible.
Nobody likes federal deficits or debt. Poll after poll after poll finds voters want to reduce both.
Earlier this month, however, our nation’s debt hit $40 trillion. And interest on the debt will exceed spending on Medicaid ($700 billion) and defense ($1 trillion). In 20 years on the current path, interest payments will squeeze out the investments needed for families to thrive, including housing and education as well as healthcare.
Every time, Republicans have pretended that lowering taxes for the rich will supercharge growth and decrease deficits. And every time, they’ve been wrong.
If we care about the success of the next generation, we have to break this cycle of debt dysfunction and we have to break it now. Ideally that will mean balancing the federal budget. But as lawmakers work toward that goal, we must quickly stabilize the debt as a share of the overall economy — or, to put it more technically, the ratio of our debt to our national gross domestic product.
Our debt is now more than 100% of our GDP and rising. Halting that climb means acknowledging how America grew a huge debt: deficit-financed wars in Iraq and Afghanistan and a series of revenue-reducing tax bills that mostly enriched the wealthiest Americans. Republicans passed four of these bills in the past quarter century, two under President George W. Bush and two under President Donald Trump. Every time, Republicans have pretended that lowering taxes for the rich will supercharge growth and decrease deficits. And every time, they’ve been wrong.
The last of these bills, the so-called One Big Beautiful Bill, passed on a party line vote last year and cut Medicaid and nutrition programs as well as provided massive tax breaks for America’s best-off. The nonpartisan Congressional Budget Office estimates the bill will increase the national debt by $30 trillion over the next 30 years. In a single bill, Republicans added more to the debt than was added during President Joe Biden’s entire term.
As a result, our revenues are 17% of our GDP while our expenditures are 23%. In short, our debt is growing at 6% per year, while our economy is only growing at 2% to 3% per year. So the hole keeps getting deeper. We have to quit digging.
The growing debt will crowd out important investments for families. And it could also destabilize our economy, with bleak consequences for all. Selling more bonds to finance our debt will drive down the price investors pay for them, increasing the interest rate. And a higher interest rate is devastating. The CBO estimates that a 1% increase in the interest rate would add more than $40 trillion to our debt over the next 30 years.
Deficit spending is sometimes necessary, such as during a severe recession, war or a pandemic. But our government is now running destructively high deficits at all times.
In addition, the growing national debt may encourage nations to diversify their reserve currency holdings by selling Treasury bonds and buying up other currencies or bonds. In fact, the U.S. Treasury just bought Japanese yen to prevent Japan from selling off U.S. bonds, fearing the sell-off would drive up the interest rate the U.S. pays to finance debt.
Those higher interest rates could then affect the cost of loans for families and businesses, decreasing the investments by businesses large and small and undermining consumer purchases. This is recession territory.
In short, America is dancing on the precipice. We need to act now to prevent falling into a debt vortex that will damage our nation for a generation.
We can stabilize our debt as a share of our economy by cutting our annual deficit in half, from 6% to 3% of GDP. Sounds impossible? Wrong. Imagine we raise revenue to 20% of GDP, the same level it was at the end of the Clinton administration, when the economy was growing at over 4% a year. Problem solved. Or we can cut spending by 1.5% of GDP while increasing revenue by the same amount. Again, problem solved.
Here is a more detailed path. First, eliminate the cap on income subject to Social Security premiums and apply the premiums to all forms of income for the wealthy. Eliminating the cap would reduce the 6% gap to 4.5%. Second, reverse the mega-giveaways to the wealthiest Americans to raise another 0.75% of GDP in revenue. Currently, the wealthiest Americans are able to structure their income to avoid taxes on the vast majority of it, while middle-income Americans are unable to do so.
Finally, achieving the remaining 0.75% necessary to stabilize our debt means a bit of belt tightening. The CBO has shown that we could achieve substantial, sustained savings by comprehensively shrinking the size of the Pentagon’s budget, while still maintaining an effective deterrent that does not compromise national security. And we can produce significant savings in healthcare, without cutting benefits, by negotiating lower prices of more prescription drugs and cracking down on insurers who overcharge Medicare in the Medicare Advantage program.
Deficit spending is sometimes necessary, such as during a severe recession, war or a pandemic. But our government is now running destructively high deficits at all times. We need to get serious about getting our deficits under control. Doing so means that we will be able to grow our economy, invest for the future and reduce costs for families by investing in the programs they need to thrive.
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