Some Real Debt Talk

Why We Need to Cut the Deficit and National Debt

The federal budget almost always has a deficit, and has had one for 45 of the last 50 years. In those 50 years, Bill Clinton and Lyndon Johnson were the only presidents who presided over budget surpluses. Generally, this has not been an issue because the gross national income grows faster than the gross national debt, meaning debt levels decline even with budget shortfalls, however, with the deficit projected to boom and Congress making no effort to combat it, the national debt is becoming a much more serious issue.

In recent decades, deficits were permitted to reach levels beyond the rate of GDP growth, causing the national debt level to rise. Debt as a percentage of the gross domestic product more than doubled under Reagan and H. W. Bush, mostly due to tax cuts and interest obligations. Another major contributor was the growth in welfare spending, which has ballooned since 1965, mostly due to rising income inequality, which itself has much to do with demographic shifts and the decline in labor unions.

Recessions such as the 2008 Financial Crisis have substantial impacts on debt levels for several reasons: GDP falls, government revenues decline, and more people become eligible for government assistance. One unseen consequence of the 2008 recession was that the number of Social Security beneficiaries shot up by several million; elderly people left the workforce in record numbers, driving the deficit up.

Debt can be a great asset, or a great liability. When the government borrows money, it can make investments which deliver a return greater than the interest our government will owe. If the government must borrow money to fund entitlements or social assistance programs, there won’t be a direct monetary return and so the tax payer will be burdened with increased net interest payments.

In 2016, the federal government spent $430 billion on debt interest, or just under 2.3% of GDP that year. With interest rates climbing, and the debt more or less frozen in proportion to the gross domestic product, federal interest obligations are slated to climb to roughly $577 billion in fiscal year 2020, or 2.6% of GDP that year. For comparison, in 2019 the US spent $409 billion on Medicaid and $651 billion on Medicare. Also, the rising burden of federal interest payments increases the deficit, making the national debt a self-fulfilling prophesy.

Picture from CNN Money.

How to Curb Deficits and Shrink Debt Levels

The deficit needs to fall below the rate of nominal GDP growth. That means our deficit must fall from $1.1 trillion in fiscal year 2020 to less than $0.8 trillion, preferably less than $0.5 trillion. Here are some policies and roughly how much they’d cut the deficit in 2021:

  • Raise the Corporate Income Tax to 40% ($257 billion)
  • Enact a 1% tax on wealth over $50 million ($112 billion)
  • Enact a $10/ per ton Emissions Tax ($58 billion)
  • Tax long-term capital gains over $1 million at 28% ($29 billion)
  • Raise top income tax rate to 40% ($28 billion)

These reforms together would cut the projected deficit to $599 billion, or about 2.7% of GDP. Nominal GDP grew 4.0% year-over-year in the fourth quarter of 2019, so we’d be well within the debt-cutting zone. Some further steps to reduce long-term deficits (2020-2030):

  • Raise the full retirement age to 70
  • Use Chained CPI for Social Security
  • Allow Medicare to negotiate drug prices

Admittedly, it’s pretty difficult to make these kinds of policy changes, but it’s what ultimately must be done. Cutting the debt would allow the United States to finance more generous public welfare and infrastructure programs, cut taxes, strengthen the military, or anything else voters demand. If we refuse to pay the debt sooner or later, when interest rates kick up, we’ll be in for a hell of a fiscal nightmare as our debt interest obligations grow to be a quarter or a third of the budget.

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