Think America’s National Debt Burden Is Bad? It’s Actually Worse
By Taylor Millard – December 13, 2023
The bad news for American taxpayers? A respected university analysis says the United States has just two decades or so left before defaulting on its debt.
The worse news? Many economists believe that’s too optimistic.
The Committee for a Responsible Federal Budget (CRFB) reported this week the federal government borrowed $381 billion dollars just in the first two months of the fiscal year (October and November 2023).
“It’s hard to tell what’s more disheartening about today’s deficit numbers from the Treasury: the fact that we borrowed over a third of a trillion dollars in just two months – $6 billion per day – or the fact that we’re barreling into 2024 without a budget or a serious plan to change course,” said CRFB President Maya MacGuineas. “In truth, both are dismal.”
As a result, the U.S. is approaching a true fiscal cliff, economists warn.
The spending trajectory is impossible to miss. In 2016, the federal government spent $3.9 trillion and had a deficit of $587 billion.
Last year, federal spending soared to $6.7 trillion — up 72 percent since 2016 — and had to borrow $1.4 trillion. That is nearly three times the 2016 deficit.
The net result of all this borrowing and spending is that American taxpayers are now on the hook for $33 trillion in debt, and that number is likely to grow by $1 trillion or more each year. No wonder budget modeling groups and credit agencies are pessimistic about the American government’s fiscal future.
In October, Penn Wharton Budget Model (PWBM) analysts gave the federal government about 20 years and — more bad news — “no amount of future tax increases or spending cuts” could keep a default from happening.
The CBO has come to a similar conclusion. Its most recent budget projections suggest the federal debt will reach 181 percent of the gross domestic product (GDP) in 2053. CBO analysts said the high and rising debt would “slow economic growth” but also “pose significant risks to the fiscal and economic outlook” of the country. That also causes rising interest payments to foreign holders of U.S. debt.
As bad as those numbers are, economists think the projections are too optimistic.
“I don’t think we have 20 years,” Dr. Veronique de Rugy at Mercatus Center told DCJournal. “I think they’re wrong to assess that we can go much above like where we are…without problems. They’re assuming that inflation will be tamed, that it’s done. I don’t think it’s done.”
An actual default would be catastrophic for the U.S. economy. Accountants from RSM US estimated that unemployment would jump to almost seven percent if the U.S. decided not to pay its bills for an extended period. If the U.S. ran out of money and defaulted, it would become “an unfettered economics catastrophe” with more than 12 percent unemployment and high inflation.
De Rugy hopes policymakers learned their lesson regarding federal spending and that spending can’t go over 100 percent of GDP. What concerns her is that foreigners aren’t buying U.S. debt as much as they have in the past.
This is similar to observations made by the Federal Fiscal Sustainability Foundation. William Owens and Barry W. Poulson have warned about a so-called “silent run” on the dollar. The pair blamed a combination of factors, including fiscal and monetary policies, for why foreign nations have been selling off US Treasury dollar-denominated bonds.
Their Federal Fiscal Sustainability Foundation colleague, Dr. Steve H. Hanke, agrees – particularly on the spending. Hanke said the Biden administration turned to industrial policy “as an economic program” over the free market. “This embrace of industrial policy has led to unchecked government spending, waste, fraud, and abuse. For example, The CHIPS and Science Act, signed by Biden in mid-2022, awards $77 billion in cash grants and tax breaks to chipmakers that build or expand plants stateside, as well as $200 billion earmarked for ‘R&D and commercialization.’”
Moody’s Investors Service has now downgraded its U.S. rating from stable to negative. When Moody’s announced the downgrade, the agency implored Congress to take “specific policy action” or else the government’s revenue base would rise “at a much slower pace than the rise in interest payments.”
Hanke, a professor of applied economics at The Johns Hopkins University, said Moody’s made the right call because “Unjustified reckless spending has put Uncle Sam in an untenable, unsustainable fiscal situation.” He said he believes the nation’s “growth and productivity potentials will be downgraded” because the Biden administration uses industrial policy as a strategy.
“It’s not as if we don’t know what to do,” said de Rugy. “Let’s say they come up with a mix of tax and entitlement reform, right? Based on spending cuts, on benefit cuts [in Social Security and Medicare], and tax increases. Like whatever mix they all agree to, is Congress gonna pass it? I don’t know.”
Hanke isn’t hopeful, either.
“Congress should cut spending, but wishing for it to happen is believing in the Tooth Fairy.”
Taylor Millard writes about politics and public policy. He wrote this for InsideSources.com.