The national debt currently stands at almost $25 trillion, with interest of $382 billion. However, it receives minimal attention. Since the 1960s, we have seen the number of federal programs increase dramatically, pushing the US further into debt. The public seems to favor increasing entitlements, as if unaware that the government does not have an endless pool of resources from which to draw. In Congress, Republicans have traditionally been fiscally conservative while Democrats pushed to spend more freely. However, with President Trump signing into law a spending package totalling $1.4 trillion in December of 2019 to fund the government through this September, it is clear that responsible spending has all but disappeared from the Republican party. Washington needs to consider fiscal responsibility to be one of the most important issues, and pass more conservative budgets.
The Covid-19 pandemic currently affecting the country has caused a spending blitz that will only add to our national debt. Since March, Congress has passed, and Trump has signed, four rounds of spending bills that included greater unemployment benefits and small business relief. This included an historic $2 trillion spending bill known as the CARES Act. With many small businesses closed and 30 million Americans out of work, economic relief was imperative to alleviate the disastrous economic effects of the virus. However, continuing to pass large spending packages is economically unsustainable. Citing the growing federal deficit, Senate Majority Leader Mitch McConnell warned against immediately passing new relief legislation. The push by Democrats to pass another $1 trillion spending bill that includes expanding unemployment benefits and direct payments to Americans is not economically sustainable and would increase the national debt.
Democrats have proposed to grant state and local government an additional $500 billion that would help bail out state and local governments. However, Republicans point out that many of these states are in financial straits because of irresponsible government prior to the virus. The Federal Government cannot be expected to use nonexistent funds to pay off states’ unfunded liabilities, such as pensions and medical benefits in retirement, which have nothing to do with Covid-19. Taxpayers in Wyoming, which has a hefty “rainy day fund”, should not have to help foot the bill for states like New York and Illinois, whose debt problems are attributed to imprudent state leaders.
The pandemic has had a devastating impact on the national debt. What was once the longest economic expansion in American history has what many economists think are the signs of recession. The huge spending on the stimulus packages will not be offset by government revenue.
While the United States has always run budget deficits, the current situation is alarming to many economists. For the last fiscal year ending September 30, 2019, the federal government held $3.5 trillion in revenue but had spent $4.4 trillion. Covid-19 has amplified the national debt problem. The Congressional Budget Office (CBO) predicts the deficit will quadruple this year to a record high of $3.7 trillion, or 17.9% of GDP. To put this in perspective, in 2009, following the Great Recession, the budget deficit was $1.4 trillion, about 2.5 times less than the projected 2020 deficit. The CBO forecasts that annual deficits will continue to surpass $1 trillion ad infinitum unless the tax and spending programs change course. Maintaining this path, the deficit will have increased for eight consecutive years by 2023 — the longest such streak in our country’s history. Even more disturbing is the fact that our country’s publicly held debt, or money the US government owes to outside investors, is expected to outgrow the size of the economy in 2020 for the first time since the 1940s.
Our growing national debt also means expanding net interest payments on the debt– the amount of money the federal government pays on public debt every year. In 2019, net interest payments summed $393.5 billion. A major reason for growing interest rates is spending on programs such as Social Security and Medicare. However, it is also due to borrowing from foreign countries. A large amount of our public debt is owned by foreign governments; in 2019, this summed to 6.7 trillion dollars. Japan and China, the biggest holders of our debt, thus have major leverage when conducting trade deals with the US. They hold the power to threaten to sell all of their US Treasury bonds, bills, and notes, in turn driving up US interest rates and prices and harming US economic growth. While China has not used this debt for foreign gains to date, it does provide an unhealthy overhang on the strategic balance between our countries in the long term, and it remains an unwritten subtext in every trade negotiation. While it would seem to be unwise to borrow so much from other countries, particularly China, current interest rates make it advantageous.
The Federal Reserve’s decision to slash interest rates to nearly zero means that the US government can borrow money at a lower cost. So, the US expanding foreign borrowing may be a prudent economic move while interest rates are so low. If there is an increase in interest rates following the pandemic, it should be minimal, as many economists believe low interest rates can help the US handle the growing national debt. Additionally, the Federal Reserve is buying some of the US debt by purchasing Treasury bonds.
Tackling our national debt problem will necessitate hard decisions such as cutting social welfare programs to a degree. Medicare and Medicaid spending are a huge burden on our national debt, and they must undergo significant cuts. Social Security takes a huge toll on our deficit. If the system is not reformed by 2034, payroll tax revenue (what funds Social Security) will only be able to pay 79% of assured benefits. It is critical that we raise the age at which even reduced Social Security benefits begin, from 62 to 66 years old. Life expectancy in the US has been increasing at a linear rate, and currently stands at about 79 years — 9 years longer than in 1960. Currently, full benefits begin at 67 years old for those born in 1960 and later, and we should raise this threshold to 69 years old. If seniors retire at a later age and wait a couple of more years to tap into their Social Security benefits while continuing to pay taxes on their income, the Federal Government can accrue more revenue. Since 2010, Social Security started running a deficit, and by 2030, we are expected to only have approximately 2.2 workers for every Social Security beneficiary, as compared to 5.1 workers for every beneficiary in 1960. The aging demographic of our country and decreasing fertility rates are already adding an extra burden to the Social Security system and thus to our national debt. If Social Security is not reformed, when current Brown students reach retirement age, they will very likely be receiving less than they paid into the system — that is, if Social Security still exists by that point. Given this possibility, we must reform Social Security as well as offer the opportunity for a private sector option. The American Institute for Economic Research has laid out a plan for reforming social security which includes some of the following changes: reducing benefits, raising the limit on taxable earnings to 90 percent, increasing the retirement age, and raising payroll taxes 1 percent, divided between employers and employees. Those Americans who would prefer more control over their retirement funds could choose the private sector option, where they allocate some of their annual salaries to a private fund controlled by investment companies that are competing for investors. People would have the ability to choose their own investment plans, albeit at their own risk. This would reduce the annual deficit by dramatically reducing an entitlement program.
Secondly, the Federal Government needs to find sources to raise revenue in order to tackle the debt crisis. Selling federal assets such as loans as well as state-owned companies like Amtrak and the Tennessee Valley Authority could raise revenue. The government could also raise user fees for some goods and services it provides such as entrance fees for national parks. Finally, greater federal revenue can originate from increasing sales taxes and excise taxes, and increasing medicare premiums. While an increase in income taxes would increase federal revenue, it would theoretically impede economic growth. An increase in corporate income taxes have been found in study after study to be the most harmful to economic growth.
We are running out of time to restore responsible federal spending. Social Security, Medicare, and Medicaid, account for 47% of our federal spending. As the American population ages, and more people become eligible for Social Security benefits and require more healthcare, the percentage of federal spending on these programs will only increase. The Medicare Part A trust fund will be empty by 2026, and as stated above, the Social Security trust fund will be exhausted by 2034. The CBO estimates that by 2039, Medicare, Medicaid, and Social Security, along with other entitlement programs, will absorb all of our federal revenue, leaving no revenue to be allocated toward our nation’s defense, infrastructure, housing, agriculture, and other necessities. For all of the talk about too much money being allocated to the military, military spending only accounts for 15% of the federal budget.
In 2019, a study by Pew Research found that only 48 percent of the public thought cutting the annual federal deficit should be a top priority for the president and Congress. More high schools should require classes that teach how to balance a checkbook and a budget. Classes that teach how to invest responsibly should be more prevalent. Additionally, younger generations should come to the realization that as government programs expand, their choices diminish (see the Medicare-For-All plans proposed by many politicians which would abolish private health insurance.) Hopefully, as the inheritors of an ever-growing national debt, they will start to understand this. Among America’s youth, a greater understanding of the government and its ability to fulfill the needs of Americans would likely cause them to think twice about voting for candidates who promise more “free” stuff. Young people looking for a sobering moment should turn to USDebtClock.org where the numbers change so quickly it is dizzying. Let’s hope some minds are changed. The future economic well-being of our nation depends on it.
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