In less than 20 years, the US public national debt has grown from 36 to over 100 percent of GDP and is set to grow even more in the coming years. David W. Wise writes that Congress’ mechanisms for dealing with increasing levels of debt are largely ineffective, and that, if not dealt with, the $80 trillion in unfunded liabilities which are on the horizon will make the US’ debt problems even worse.

While it dominates the media landscape in the US and overseas, the 2024 election is irrelevant to the greatest crisis facing the nation: the national debt. The dysfunction of the US political system has the country on a crash course with excessive debt. This time bomb will not be solved through the electoral process (the policy plans of both Trump and Harris would increase the national debt); the political process is the source of the problem. This problem will be resolved through a severe financial crisis at some future date unless something is done.

There are, of course, those who dispute this debt scenario. Three major lines of dispute are that the bond market is functioning smoothly, that past warnings about excessive debt are deemed to have been alarmist and that its debt does not matter if issued in a country’s own currency.

Should we worry about the state of the national debt?

John Tamny, editor of RealClearMarkets has made a forceful case that, “Treasury bonds are the deepest, most informed markets in the world. The most owned assets in the world are US Treasury debt. Do they show a crisis out five, 10, or 30 years? No, interest rates on those are very low, which is a market signal saying that there is no debt problem.” In response, the Amundi Investment Institute, the research arm of the large European asset manager of the same name, counters: “Despite high domestic and external demand for US debt, relying on this demand amid such significant debt increases is risky.”

Markets can turn rapidly when risk perceptions change. As an example, serving just 45 days in office former British Prime Minister Liz Truss’ economic plan so spooked the market that the interest rate on the GILT, the UK’s long-term bond, skyrocketed  from 2.92 to 5.06 percent. “Bond vigilantes, a term created by Edward Yardeni at the time of the “Great Bond Massacre” in 1993, demonstrated that the bond market is quick to convey displeasure when the government fiscal situation is getting out of hand. PIMCO, the large US investment manager, among others, believes that the worsening picture on national debt will require interest rates on Treasuries to rise in the future in recognition of the US debt situation.

The position that past warnings have not come true has all been based on times when the level of debt to GDP (a common measure of level of a country’s debt) was far less than where public debt is projected to be in thirty years. As Figure 1 shows, the US survived a comparable debt burden to today coming out of the Second World War but this was followed by an extended period of peace and economic growth.

Figure 1 – Federal debt held by the public, 1940–2054 (projected)

Source: Congressional Budget Office

The confluence of a commanding economy, a long period of high growth and the end of wartime expenditures led to the paydown of a large portion of the national debt as a percentage of GDP. Those are not the conditions today. Instead, in addition to high levels of spending by the Federal government, the rising cost of servicing the debt and unfunded liabilities coming down the road will make current debt levels look tame by comparison.

The proposition that debt does matter if issued in a country’s own currency, so called Modern Monetary Theory, is the subject of ongoing vigorous debate. While making no attempt to resolve that debate here, it would seem that any debt incurred that does not produce a net positive gain in GDP would be destructive. The potential rapid increase in money supply which is consistent with this approach would also create a nightmare for foreign exchange markets and to the status of the US dollar as a reserve currency.

The United States does not operate within a closed system. The US economy is the largest in the world. The US dollar is the currency most used in international trade. The United States also perennially runs the largest current account deficit in the world. As a result, those trading partners acquire large dollar reserves which they often reinvest back in securities of the US government, almost out of necessity. 33.5 percent of US public debt obligations are owned by foreign entities or foreign individuals. Those investors are quite interested in whether the US runs large deficits or increases the money supply that depreciates their holdings. This is also true of offshore investors who invest in the United States for its stability and desire it to remain so.

How did the national debt get this high?

The US national debt total was $5.7 trillion at the beginning of George W. Bush administration in 2001. Since then, across the administrations of four presidents with terms evenly divided across the two major parties, it now stands at over $35 trillion. That number is 122 percent of GDP, compared to 113 percent after the massive mobilization of World War Two, and a long-term average of about 65 percent.

The current budget deficit of the US government is 7.0 percent of GDP compared with a thirty-year average of 2.2 percent  (1.6 percent  average of the fifty years since the Nixon administration). Spending and interest payments are now increasing faster than GDP. The cost of servicing the national debt, according to the Federal Reserve, is now over $1 trillion a doubling in just four years and now larger than spending by the Pentagon on US defense which accounts for 46.4 percent of US discretionary spending. The rating of US debt was downgraded in both 2011 and 2023, and the trajectory is not favorable.

The ratio of debt held just by the public to GDP is 102 percent, and the Congressional Budget Office estimates that this could rise as high as 166 percent in thirty years. To put this into some context, the median public debt to GDP ratio for the five most troubled countries during the Eurozone debt crisis of 2009, the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain), is currently at 107 percent.

Some portion of this higher debt attributable to the measures undertaken to confront directly the COVID-19 pandemic, but large programs to address the pandemic desensitized politicians to the effect of large spending on other programs after the pandemic was in the rearview mirror. That the most recent deficits have occurred during a period of growth in GDP and low unemployment is alarming.

Photo by Alice Pasqual on Unsplash

Both parties’ plans will lead to expanding debt

The Democrats’ emerging economic policy is based on the theory that the government has free license to run up deficits and print money without repercussions. This theory is a political agenda dressed up as fiscal and monetary policy. It rests on the view that top-down decisions on resource allocation will always be positive and always better than functioning markets.

Over time, the Republican Party has jettisoned the idea of limited government and budgetary constraint, their lip service to the contrary. Republican economic policy is based on the flawed view that tax cuts always pay for themselves.

Both paths lead to higher deficits and debt.

Congress’ ineffective tools

The gimmicks contrived by Congress to address excessive spending are about as effective as most New Year’s resolutions, the pretense of acting, but with no follow through. Measures such as the 1987 Balanced Budget Act and the PAYGO process have essentially advanced the principle that new spending be offset by reductions elsewhere. The flaw in all of this is that it shifts around what might already be an excessive level of spending in the first place.

The most ineffective of these measures is the so-called debt ceiling which has never, in practice, placed any actual ceiling on debt. Predictably, from time-to-time, Congress subjects itself to a Kabuki dance as the “ceiling” approaches. When agreements to kick the can down the road by raising the ceiling are made, these can actually build in a higher level of future spending.

In fact, the concept of a debt ceiling is invalid. Since it is fraud to incur debts without intention to repay, any expenditure authorized through the Constitutional appropriations process are due for payment when due; any theoretical ceiling is irrelevant. This fact is bolstered by the Fourteenth Amendment which makes it unconstitutional to question any debt of the United States. What is needed are not meaningless gimmicks, but rather discipline.

The long-term threats of debt

The real long-term threat, however, is the $80 trillion in unfunded liabilities, primarily entitlements like Social Security and Medicare, that loom as storm clouds on the horizon. When taken together with US debt held by the public the combined number is $115 trillion, four times US GDP.

What then is to be done? Increasing the projected growth rate of the economy with unrealistic assumptions necessary to close the gap is easy to insert into spreadsheet models but gives a false sense of security. Congressional action or a bipartisan debt commission, such as Simpson-Bowles, would be subject to incredible pressure from interest groups and Social Security recipients. Running massive inflation works on paper but would destroy the fabric of society. That then leaves default as the “default” option. Default requires nothing from the political system, other than inaction.

Although the US government can never technically go into default as it borrows in its own currency and therefore can print unlimited dollars to repay its debt, placing the United States in a position where its debt is unsustainable is a “default” on its implied promise to holders of its debt and currency to, as the largest economy and reserve currency (if that is still the case at that time), run its affairs prudently and responsibly. Such a calamity as the approaching financial crisis would require massive restructuring with losers on both sides.

A lesson from recent history

Final note. Any debate on national debt must take into account the administration of Bill Clinton and his Secretary of the Treasury Robert Rubin. During those times financial discipline was restored with bipartisan support, such that the national debt was reduced and a budget deficit was actually turned into a budget surplus. The Clinton administration put up arguably the best economic performance of any president with an unprecedented 116 straight months of positive GDP growth and stellar performance on virtually every major criterion: inflation, growth, employment, homeownership, and per capita income. Prosperity does not require unsustainable debt.

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• Note: This article gives the views of the author, and not the position of USAPP – American Politics and Policy, nor the London School of Economics.
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