America Is Living on Borrowed Money

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The federal debt is as old as the nation, and adding to it is sometimes prudent. For governments confronting “existential crises” like wars or pandemics, borrowing makes sense as a way to mobilize national resources, as the economist Barry Eichengreen wrote in the 2021 book, “In Defense of Public Debt.” Government borrowing and spending are necessary to stimulate the economy during recessions. And Treasuries, safe and liquid, play a critical role in the global financial system — so much so that in the late 1990s, when a period of economic growth and reduced military spending allowed the government to sharply reduce borrowing, economists and bankers raised alarms about the consequences of too little federal debt.

The United States, however, now borrows heavily during periods of economic growth to meet basic and ongoing obligations. It’s increasingly unsustainable. Over the next decade, the Congressional Budget Office projects that annual federal budget deficits will average around $2 trillion per year, adding to the $25.4 trillion in debt the government already owes to investors.

Borrowing is expensive. A mounting share of federal revenue, money that could be used for the benefit of the American people, goes right back out the door in the form of interest payments to investors who purchase government bonds. Rather than collecting taxes from the wealthy, the government is paying the wealthy to borrow their money.

By 2029, the government is on pace to spend more each year on interest than on national defense, according to the Congressional Budget Office. By 2033, interest payments will consume an amount equal to 3.6 percent of the nation’s economic output.

Before the pandemic, a decade of very low interest rates meant that even as the federal debt swelled, interest payments remained relatively modest. Measured as a share of the national economy, the federal debt was roughly twice as large at the beginning of 2020 as it was at the beginning of 1990, but the burden of interest payments was barely half as large.

The era of low interest rates has ended, however. The cost of living on borrowed money is rising. It is imperative for the nation’s leaders to chart a new course.

Although one wouldn’t know it from the celebrations in Washington last month, the deal reached to raise the debt ceiling does not amount to a meaningful start. Democrats agreed to modest spending cuts; Republicans refused to consider any measures to increase revenue. The result? Before the deal, the C.B.O. projected the debt would reach roughly $46.7 trillion in 2033. After the deal, it projected the total would be only marginally smaller, at $45.2 trillion. That would equal 115 percent of the nation’s annual economic output, the highest level on record.

Both parties say they understand the need for larger changes.

“We’re going to do even more to reduce the deficit,” President Biden declared in a speech from the Oval Office after Congress voted to raise the debt ceiling.

House Speaker Kevin McCarthy, acknowledging that the legislation didn’t amount to much, said after the vote that he intended to form a bipartisan commission “so we can find the waste and we can make the real decisions to really take care of this debt.”

The talk, however, is hard to take seriously. Republicans evidently are not concerned about the debt. Every time they have had the opportunity in recent decades, they have passed tax cuts that force the government to borrow more money. They’ve already got a new tax cut package in their sights. Democrats, for their part, have grown wary of calls to curtail spending because predictions of dire consequences have not come to pass, and because they have learned the bitter lesson that agreeing to spending cuts simply creates room for Republicans to justify another round of tax cuts.

The debt ceiling is part of the problem. It was never intended to limit the federal debt. It was actually created to facilitate borrowing. During World War I, Congress got tired of authorizing each new round of bonds, so it gave the Treasury permission to borrow up to a specific limit. Its current use, as a means for Republicans to extort spending cuts from Democrats by threatening to push the nation into default, is even less productive. Larger changes are going to happen only if both political parties are willing participants.

A first step in resetting the conversation is to eliminate the debt ceiling before its next scheduled appearance in 2025. President Biden has brushed aside calls for his administration to pursue a legal ruling that the ceiling is unconstitutional. In doing so, he is repeating the mistake he made last fall, when he failed to press for legislation to repeal the ceiling. A case pending in federal court in Boston, brought by federal workers concerned that a default would come at the expense of their pensions, offers a potential vehicle. Other legal avenues also should be explored. It makes sense to pursue a ruling while there is no imminent danger of hitting the ceiling. If courts reject the legal challenges, that would also be clarifying.

Any substantive deal will eventually require a combination of increased revenue and reduced spending, not least because any politically viable deal will require a combination of those options. Both parties will have to compromise: Republicans must accept the necessity of collecting what the government is owed, and of imposing taxes on the wealthy. Democrats must recognize that changes to Social Security and Medicare, the major drivers of federal spending growth going forward, should be on the table. Anything less will prove fiscally sustainable.

That will require painful choices. But the failure to make those choices also has a price — and the price tag is increasing rapidly.

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