The U.S. federal debt surpassed $40 trillion last week, but there are reasons not to panic. Raw numbers, even very big ones, don’t explain how large debt and related interest costs are relative to the size of the economy, which is the metric economists and budgeteers rely on. And even when contextualized with the size of the economy, the level itself is less important than the trajectory.
What’s matters most is that U.S. federal debt is not only historically high outside of World War II, but it’s also on track to rise indefinitely. This is a bad situation that Congress must address.
Critics often argue that because federal revenues have remained “roughly flat” as a percentage of gross domestic product while spending has risen, spending is the culprit. Data proves, however, that tax cuts enacted this century are driving this fiscal imbalance.
Let’s consider two critical points.
First, without these tax cuts, debt as a percentage of GDP would be declining. Put simply, it is a mathematical truth that had the Bush and Trump tax cuts never been enacted, the U.S. debt ratio would be declining indefinitely.
Second, we have to look at how the budget fell out of long-term stability and what changed. Throughout U.S. history, long-term debt-to-GDP trajectories have fluctuated between stability and fiscal gaps (read: instability). Sometimes it was tax cuts that threw us off balance; sometimes it was increased spending. The question is how the country got out of balance this time.
Under the tax-and-spending structure crafted by the Clinton administration, surpluses would eventually end but federal debt was projected to shrink continuously as a percentage of the economy, even as the retirement of the baby boomer generation and rising healthcare costs loomed. Put another way, we always knew federal spending would increase, but we used to have a tax system that was set to keep pace with it. Then taxes were cut. And now there’s not enough revenue.
To blame the whole fiscal problem on revenue, all of the worsening outlook relative to the old Clinton dynamic would have to come from tax cuts. That is, while my first point is true — tax cuts are larger than the fiscal gap — if it were also true that our spending outlook had worsened, taxes couldn’t be the only reason; in that case, spending would share at least some of the blame.
But the opposite is true. Relative to the last time the U.S. had a stable long-term fiscal outlook, long-term spending projections are actually lower than anticpated. While federal spending is higher now than in years past, it is rising more slowly than was forecast back when the country still had a stable long-term outlook. We always knew the baby boomers would retire, pushing up spending, but spending has actually been pushed up less than expected.
That means that spending changes have improved the long-term debt outlook relative to expectations, making tax cuts responsible for all of the worsening fiscal gap relative to the last time the United States had long-term fiscal stability. It doesn’t make sense analytically to blame spending increases relative to the old outlook that were previously fully budgeted for when they actually came in below expectations.
The root cause is clear. And, importantly, our current path is unsustainable — it hurts the economy, driving up interest rates and dragging down real wage growth.
Congress must work to responsibly stabilize the debt-to-GDP ratio. That means nominal debt figures like that $40 trillion headline number will continue to rise, but the actual burden would stop worsening. (Note that headline figures such as $40 trillion are not precise, thanks to intragovernmental accounting quirks that overstate some debts while excluding some assets.)
In acting to fix the problem, it is essential that Congress not do more harm than good. Irresponsible deficit reduction would be significantly worse than inaction. Congress would do more harm than good, for instance, by slashing crucial aid that Americans rely on, such as food benefits, housing assistance or healthcare coverage for struggling Americans. Instead, lawmakers should look first and foremost to undo some of the many tax cuts significantly tilted toward the wealthy that are responsible for the creating fiscal gap.
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