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It’s Time to Start Worrying About the Deficit

Image via TIME

The United States today teeters on the brink of a budget crisis of unprecedented scale. In the last year, the federal deficit—the difference between what the US government spends and the revenue it brings in—surged from $1.37 trillion to $1.7 trillion. The deficit actually doubled when adjusted for distortions related to the president’s student debt relief proposal, jumping from $1 trillion in 2022 to $2 trillion in 2023. This year marks only the third time in American history—and the first outside of the Covid-19 era—that the federal deficit exceeded $2 trillion. Last year’s increase brings the total US debt to a jaw-dropping $33.17 trillion, the largest it has ever been. Though debt is nothing new, a unique combination of economic conditions—namely high interest rates and strong growth—make it more important now than ever before to take decisive action in addressing the budget shortfall. For the sake of our nation’s long-term fiscal health, lawmakers on both sides of the aisle must commit to taking the debt seriously and use every tool at their disposal to raise government revenues and avoid financial catastrophe.

In spite of its size, our debt has historically been considered more or less manageable in the context of the country’s broader economic picture. French economist Thomas Piketty famously characterized national debt as sustainable if a country’s economy grows at a rate faster than that of the cost of servicing its debt. In other words, debt is acceptable so long as GDP growth outpaces interest rate growth. Though there is debate over whether Piketty’s rule is universally true, it has long been considered conventional wisdom on the political left. 

With low interest rates characterizing the last decade of American monetary policy, progressive economists were generally not too concerned about the long-term sustainability of our debt. That changed earlier this year, however, when the yield on the 10-year Treasury note—a benchmark for economy-wide interest rates and the cost of servicing our national debt—rose above 5 percent, its highest level since 2007. Despite the US economy’s recent strong recovery, GDP is unlikely to grow at a sustained rate anywhere near 5 percent in the coming years, meaning we can expect our debt to pile up faster than the economy grows (as long as interest rates stay high, which investors expect they will).

How did we get into this situation? The answer, simply, is bad fiscal policy. Most economists agree that deficit spending is acceptable, even necessary, during times of downturn, when lower taxes and increased spending can help stimulate economic recovery. The important corollary is to ensure that deficits are offset once the economy is healthy again: Part of this is automatic, as rising output and declining unemployment necessarily mean greater tax revenues for the government. But typically, spending cuts and tax increases—contractionary fiscal policy—are also needed, both to balance the budget and to cool the economy.

In recent decades, US fiscal policy has been decidedly unbalanced. We have engaged in plenty of deficit spending, such as in the aftermath of the 2008 recession, but it has rarely been paired with the contractionary fiscal policy needed to keep the debt in check. In fact, both the Bush and Trump administrations haphazardly cut taxes while the economy was expanding, creating short-term economic growth at the expense of harming government revenues and causing the deficit to skyrocket. Today, as the economy grows following the shock of the Covid-19 pandemic, the time is ripe to reclaim contractionary fiscal policy as a critical tool to stabilize the federal budget.

Few politicians on the left have expressed serious concern over the deficit in recent years, leaving advocacy for debt reduction to a small group of budget hawks on the right. But today, strong political incentives exist for Democrats to take the debt seriously, too: The rising share of the federal budget devoted to paying the interest on our debt means less money going towards progressive spending priorities like education, welfare, or the environment. This year alone, the cost of servicing our debt exceeded $650 billion, a sum larger than the current budgets for the Departments of Education, Agriculture, and Transportation combined. This cost is all but assured to grow in future years, with debt payments forecasted to eclipse defense spending prior to 2028. Before dismissing concerns over the growing debt, Democratic lawmakers should think long and hard about what else could be done with that money.

So how do we reduce the deficit? Spending cuts, a favorite of Republican lawmakers, are one route. But the low-hanging fruits of government excess and wasteful programs have largely already been eliminated from the budget, leaving little left to cut. Reductions to mandatory programs like Social Security, Medicare, and Medicaid—which today make up almost two-thirds of the budget—have proven too politically toxic to try. The Pentagon budget is the next biggest item, but now seems like a particularly fraught time to cut defense spending given the growing threat from China, the war in Ukraine, and renewed instability in the Middle East. And as for the rest of the budget—a paltry 14 percent of total spending—previous rounds of budget cuts have left most departments chronically underfunded, with just about nothing else to eliminate. This leaves raising revenues as the only sustainable solution.

Living in a nation with one of the lowest tax-to-GDP ratios of any OECD country, Americans already pay far less in taxes than their peers in most of the developed world. Even in a purely American context, tax rates are lower today than they have been at almost any other time in our nation’s history. But selling tax increases to the public is notoriously difficult, and lawmakers must be careful about generating too much backlash. To this end, the most obvious source of untapped revenue lies at the higher end of the tax bracket, where irregularities in the tax code mean that many high-income individuals pay a lower effective tax rate than their middle-class counterparts. Raising taxes on the wealthy, along with increasing enforcement and closing known loopholes, remains a popular solution among the American electorate and should no doubt be a part of any plan to address the US budget shortfall. However, more must be done. In order to truly close the revenue gap, lawmakers will likely have to explore entirely new streams of revenue. These could include a tax on carbon, which would have the added benefit of curbing greenhouse gas emissions, or a value-added tax, a duty already collected in every developed nation but the United States.As a stopgap measure, a group of lawmakers from both parties has recently introduced the Fiscal Stability Act, which would convene a bipartisan fiscal commission to explore solutions to the debt problem. Bipartisan commissions have succeeded in the past, including on areas as contentious as Social Security reform and military base closures, and the proposal is a commendable first step in tackling the debt. But a commission alone will not save the United States from fiscal collapse. If lawmakers want to keep interest payments from taking over the federal budget and avert a lost decade of depressed economic growth, tax increases have to happen, and soon—we simply cannot afford to wait any longer.