The Self-Fulfilling Prophecy
Have We Lost Our Way, Our Vision or Just Our Minds?
Welcome to the Civic Way journal, our quick take on the relevance of current events to America’s future governance. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving public agencies.
We have a dysfunctional government. We are addicted to debt. This path we are on is simply not sustainable. – Erskine Bowles
Introduction
Erskine Bowles, the sage of fiscal reform, was President Clinton’s chief of staff and point person for the 1998 budget negotiations which produced our last balanced budgets. In 2010, Bowles and former GOP Senator Alan Simpson co-chaired the last bipartisan commission to tackle the debt issue. In 2012, Bowles called the federal debt "the most predictable economic crisis in history."
Bowles was right, deficits matter. Since 2008, the debt ratio—the accumulated federal debt as a percent of the Gross Domestic Product (GDP)—soared from 40 to over 100 percent and could surpass 230 percent within three decades. Without corrective action, the nation’s interest costs will devour nearly all annual tax revenues and stifle pain free opportunities for solving the problem.
The Glaring Fiscal Trends
Overall – As individuals, we know that borrowing often makes sense—buying a home, earning an education or starting a business—but not always. Every year since 2001, the federal government has spent more than it has generated. Deficit spending is necessary during crises like the 2008 financial meltdown and 2020 Covid-19 pandemic, but it can be foolheardy during normal times.
Revenues – Over 97 percent of federal FY23 revenues came from taxes, including 49 percent from individual income taxes, 37 percent from payroll taxes (including Social Security and Medicare payments), over 9 percent from corporate income taxes.[i]
Federal revenues have been growing more than inflation, but less than costs, one result of unfunded tax cuts. The Bush-Trump tax cuts have cost over $10 trillion and accounted for 57 percent of the rising debt ratio[ii]. The 2017 tax law alone will cost at least $1.7 trillion over ten years[iii]. Wealthy individuals and large corporations were the biggest beneficiaries[iv]. Extending the 2017 tax cuts—they expire at the end of 2025—will generate even larger benefits for the rich and deficits for the nation[v].
Expenditures – In FY23, the federal government spent $6.2 trillion ($18,400 per person). Mandatory spending—legally required (not subject to annual appropriation)—accounted for 62 percent and discretionary spending accounted for 28 percent. The largest cost items are Social Security (22 percent), defense and veteran support (18 percent), state transfers (18 percent) and Medicare (14 percent). The single biggest outflow is for benefit checks (e.g., Social Security, Medicare, Medicaid, veteran benefits and unemployment insurance)[vi].
Overall spending has increased by an average annual rate of 5.5 percent, over twice the average annual inflation rate of 2.5 percent. From FY19 to FY23, federal spending increased by 15.9 percent (the pandemic), but fell by 8.5 percent from FY22 to FY23. Despite their declining faith in the federal government, voters strongly support most mandatory and many discretionary programs (e.g., public health, clean water and border security). Interest costs are the most unpredictable—and least defensible—item. We spend more on debt interest than Medicaid and defense.
Deficits – The annual deficits are the natural byproducts of two factors—revenue losses and costs. In FY23, the federal government collected $4.5 trillion in revenue but spent $6.2 trillion and ran a $1.7 trillion deficit[vii]. From FY19 to FY20, the federal deficit more than tripled from $984 billion to $3.1 trillion. From FY22 to FY23, the deficit grew from 5.3 percent of GDP to 6.1 percent of GDP[viii].
Just last week, the CBO projected annual budget deficits of nearly $2 trillion for the foreseeable future.
Debt – As of June 14, 2024, the national debt—the accumulation of deficits over time—totaled $34.7 trillion. The federal debt more than doubled as a share of GDP, up from 47 percent of GDP in 1992 to 98 percent in 2022. The debt grew by $8.4 trillion during Trump’s first term and $4.3 trillion during Biden’s term, but Trump added $2.5 trillion more to the debt than Biden, excluding pandemic spending[ix].
The Coming Collapse
The facts could not be clearer, the federal government’s fiscal future is bleak. By 2053, the CBO expects federal spending to reach 29 percent of GDP and federal revenue to reach only 19 percent, a ten-point gap. This fiscal gap will be further exacerbated by extended 2017 tax cuts, an aging population, rising healthcare costs, a falling employment-to-population ratio and spiraling debt interest costs.
According to the CBO, entitlements will most significantly drive the nation’s future spending. By 2053, Social Security spending will rise from 5 to 6.2 percent of GDP and Medicare and Medicaid costs from 5.8 to 8.6 percent of GDP. Together, these three programs will absorb 66 percent in of non-interest federal spending in 2053, up from 50 percent today.
Unlike entitlements, interest costs help no one (except bankers). By 2029, annual interest will cost the US $1 trillion and consume over 14 percent of the federal budget (versus 6 percent a decade ago). Per CBO, over the next 30 years, interest payments on accumulated national debt will cost $71 trillion and consume 35 percent of all federal revenue. Per the Concord Coalition, without corrective action, federal interest costs will balloon from 2.5 percent to 6.7 percent of GDP. Even If rates don’t exceed four percent, annual interest payments will surpass Social Security and Medicare spending.
Our annual budget deficits are more structural than cyclical, occurring even during good times. And they will likely swell. The Congressional Budget Office (CBO) estimates that the federal government will borrow $116 trillion over the next 30 years. The Concord Coalition warns that, without corrective action, our debt will grow to 181 percent of GDP.
Sadly, some projections are even more pessimistic. The Committee for a Responsible Federal Budget (CRFB) estimates that, if federal spending keeps pace with economic growth (rather than inflation), our national debt will hit 222 percent of GDP by 2053. The Reason Institute predicts that the debt:GDP ratio will exceed 230 percent within 30 years (300 percent with interest rates over five percent)[x]. Several variables—productivity, private investment and interest rates—could impact these projections.
The federal debt is not the only long-term challenge facing US. Others include climate change, public health and cybersecurity. The fiscal crisis will severely constrain our nation’s ability to combat the other challenges. The data may confound, but the conclusion is unavoidable—the potential consequences of our suffocating federal debt are alarming.
Economic – America’s debt will become an economic albatross, increasing interest rates more than otherwise necessary. The CBO believes that federal debt will "slow economic growth” and Moody’s chief economist calls the debt economically “corrosive.”
Generational – The debt will penalize future generations. The CFRB, for example, estimates that by 2048 the federal government will spend only 6.3 percent of its budget on children, less than one-third of what it will spend on Social Security, Medicare and interest.
National Security – The national debt has serious national security implications. The CBO predicts that federal debt will “drive up interest payments to foreign holders of US debt[xi].”
Fiscal – According to the CBO, federal debt will “elevate the risk of a fiscal crisis, … and make the nation's fiscal position more vulnerable to an increase in interest rates[xii]."
Credit – Since 2011, two of the big three rating agencies have downgraded the federal government’s credit rating. Continued US credit downgrades will likely reduce interest rates for government securities and increase mortgage rates (which are benchmarked to 10-year Treasury yields)[xiii].
State budgets – Rising federal debt will likely slash state grants. States, already facing fiscal challenges associated with such trends as aging baby boomers, higher Medicaid costs, climate change-driven disasters and outmoded tax systems, will face fiscal crises of their own.
We are putting the world’s strongest economy at risk. We are prioritizing seniors over children yet making Social Security insolvent. We are hemorrhaging more money on interest leaving less for programs that benefit everyone—education, healthcare, natural resources, food safety, emergency aid and infrastructure. There is nothing progressive about accumulating debt like there’s no tomorrow.
Our fiscal path is unsustainable. Unless we make tough choices now, future generations of Americans will have few if any choices. Every year, our menu of options will become shorter and more painful.
Taxing the one percenters must be part of the solution.
Of the people who actually think about these things, there are only a handful who do not believe the deficit is a BIG problem. The question is what to do about it. This is a problem at two levels. It is an immediate problem because it is extremely unlikely that Republicans will pass up a chance to keep taxes on the rich lower. I simply can’t imagine how to stop them. It will require all our energy to minimize the damage to those unable to defend themselves as the GOP tries to justify their tax policy by cutting “entitlements”. Figuring out what to do longer term is an even more profound problem. It will require a reordering of national priorities at a level that has not happened since the Depression and World War II made it unavoidable. The issue is not solely the deficit, but the fact that while we are running these unsustainable deficits, we are still underfunding critical things, like environmental protection. Under what circumstances could the current political order undertake this kind of reordering?