Campaign promises would increase the national debt

Rock-bottom interest rates allowed political leaders to stop worrying and learn to love debt. But those days are gone. Rising borrowing costs threaten to consume the federal budget, eliminating funds for national and military programs and raising debt even higher.

Economists of all political stripes—from N. Gregory Mankiw, who chaired the White House Council of Economic Advisers during the George W. Bush administration, to Jason Furman, who served in the same position during the Barack Obama administration—are raising the alarm about the endless flow of red numbers. . The national debt, excluding what the government borrows from the Social Security Trust Fund, is about $28 trillion, almost equal to the output of the U.S. economy.

If the trend continues, the national debt will exceed 150 percent of economic output by mid-century, according to projections. It’s hard to know when the national debt becomes unsustainable, and economists say they can’t predict what will happen when we surpass that 150 percent threshold. But, they add, it is not something we really want to discover.

A tree falls in the forest: The nonpartisan Congressional Budget Office projected this month that the federal deficit for fiscal year 2024which ended on September 30, reached $1.8 trillion, up from $1.7 trillion in fiscal year 2023 and $1.4 trillion in 2022.

“If you had told me there was a headline saying the deficit was $1.8 trillion,” Furman said, “I would think people would have freaked out.”

They didn’t do it. But maybe they should have.

this time it’s different: Policymakers followed a Keynesian playbook during the pandemic, running the largest deficits since World War II to support the economy until the private sector recovered. It worked.

But legendary economist John Maynard Keynes had a second part to his theory: debt accumulated in bad times is paid off in good times.

Throughout American history that was the case. Mankiw charted the national debt from the beginning of the Republic and found that the debt (measured as a proportion of the economy) soared during times of war and recession, then retreated when peace and prosperity returned.

Not anymore.

In the 21st century, we only increase debt, cut taxes, and increase spending during war and peace, in good times and bad.

At this rate, the CBO forecasts, debt will exceed economic output by 66 percent in 2054, assuming Trump’s tax cuts expire after 2025, as planned, and none of the benefits promised by candidates becomes law.

So what? The idea that deficits don’t matter, that we can accumulate debt infinitely without consequences, defies logic. It reeks of the dot-com boom, when various know-it-alls concluded that technology would reverse the business cycle, or the subprime lending craze, when the masters of the universe assured us that they had conquered risk.

I know that public finances are complicated. Smarter people than me might argue that borrowing and spending drives economic growth, generating income to pay off debt. But it seems to me that if you keep running down your credit card and increasing your debt limit while making only minimum payments, the debt will eventually crush you.

It is difficult to predict when the day of judgment will arrive. But it comes, as less developed countries from Argentina to Greece have learned, from the collapse of their economies, rising unemployment and rampant inflation.

For those who say that can’t happen here, think about the UK two years ago. Then-Prime Minister Liz Truss proposed big tax cuts that led to bigger deficits, but financial markets had had enough. Interest rates soared and the pound plummeted, forcing the UK central bank to prop up British bonds and Truss to abandon her plan and resign.

“We are not on the brink of a crisis,” said James Poterba, an MIT economics professor and president of the National Bureau of Economic Research, a nonprofit research group. “But will problems arise in 20 or 30 years? Yeah.”

For starters, we can expect slower growth and higher inflation, said Harvard economist Kenneth Rogoff. Their research shows that, on average, countries with a lot of debt grow more slowly than countries with less debt because large debt burdens limit the ability to invest in education, transportation, and other initiatives that promote economic growth.

Which raises another question: If we accumulate debt when the economy is strong, will we have the ability to fight the next financial crisis, pandemic or war?

Final word: It’s easy to dismiss deficit naysayers as the boy who howled at the wolf. We have been hearing about a coming debt crisis for over 30 years and it seems like it will never come.

But remember a crucial part of the fable: the wolf finally appeared.

You can contact Rob Gavin at [email protected].