October 27, 2024 - 6:00pm
During Donald Trump’s recent shift at McDonalds, a $35-trillion burger was not on the menu, but that is precisely what the United States will be feasting on regardless of who becomes president in January.
Long on an upward trajectory, federal debt has exploded since the Covid-19 pandemic, from about $23 trillion at the end of 2019 to around $35 trillion today. Turning to the debt as a percentage of the national economy reveals how the shocks of the 2008 financial crisis and the pandemic have caused a fiscal spiral. Since 2007, the federal debt has soared from 34% to 95% of GDP.
These debt pressures represent not just heartburn around the corner but real fiscal challenges today. For example, the interest rate hikes rolled out to tame inflation have made interest payments on the debt explode. According to the Office of Management and Budget, interest payments on the debt have jumped from 1.5% of GDP in 2021 to an estimated 3.1% of GDP in 2024. The OMB projects that the United States will soon spend more on servicing the national debt than on defence. Interest payments risk crowding out other spending priorities, with potentially major implications for domestic and international policy.
Throughout his presidency, Joe Biden has managed the tensions of his coalition through a series of trillion-dollar annual deficits, and his administration projects sky-high deficits for as far as the budgetary eye can see. However, the 2025 expiration of many of the individual tax cuts from Trump’s Tax Cuts and Jobs Act means that Biden’s successor — whether Trump or Kamala Harris — will immediately be dealing with a ticking fiscal time bomb. If those tax cuts are allowed to lapse, many families could see their taxes jump, but extending them could put further pressures on federal coffers. The debate over the renewal of the Tax Cuts and Jobs Act could lead to a bigger showdown about the budget itself.
Coping with the national debt could expose fractures in both coalitions. As part of the party’s play for upper-income voters, Democrats have pledged to wall off an increasing portion of the population from any tax increase. Harris has promised that voters making under $400,000 annually would not see any net tax increases under her presidency. Yet she has also rolled out a number of expanded social programmes and subsidies. Trying to do both means either increasingly onerous taxes on upper-income earners or adding even more to federal deficits. Certain policies proposed by progressives to fund this new spending, such as a tax on unrealised capital gains, could prove very disruptive.
The Tax Cuts and Jobs Act was one of the signature policies of Trump’s administration, and he has made tax cuts the centrepiece of his 2024 campaign, too. He has run on exempting tips as well as Social Security benefits from federal taxes, and he is considering exempting police, firefighters, and active-duty military from federal taxes. In a decisive break with the GOP of Paul Ryan’s day, Trump has dismissed concerns about the deficit and the looming exhaustion of the trust funds for federal entitlements. That rejection of austerity politics has been crucial for redefining the GOP as a working-class party.
However, dollars and cents eventually claim their due. Some congressional Republicans remain concerned about the debt trajectory, and even some “realignment”-minded wonks have called for a return to some kind of fiscal restraint. To combat deficits, Trump has said he would anoint Elon Musk to lead a commission to identify inefficiencies in the federal government, but it remains to be seen whether those savings would be enough to right the fiscal ship. Trump has also mused about using tariffs to address the federal deficit, but Republicans likely cannot rely on tariffs alone.
Theoretically, a politics that empowered working-class voters could help address these fiscal challenges. That upward mobility would generate more tax revenue as well as lighten demands on the social safety net. A renewed sense of economic optimism could also help make it easier for policymakers to forge a grand bargain on federal entitlement programmes. However, if the United States cannot put its fiscal house in order, it risks more disruption at home and abroad.
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SubscribeBring on Trump. As I understand it, he wants to introduce tariffs and reduce tax to stimulate growth. This would be helped in no small measure by deregulation which strangles businesses and growth currently. Cutting back on government departments and size of departments would also be on the cards. Bring on Musk. Afuera!
I wonder if Musk will agree to cut the subsidies Tesla gets for EVs and batteries , I doubt it, it’s easy to through around the word regulations, but many businesses rely on subsidies, tax credits, interest free loans, special tax provisions for R&D , etc etc. There is alot of more corporate welfare out there than most people realize.
It is a huge debt which probably neccessitates on going money printing to devalue the repaymentd ( on real terms). It is possible the covid “crises” was largely fabricated/exagerated to allow money printing to this end. The “green new deal” aldo pumps money in to the system.
Basically government debt is toxic and noone wants it. Gold/stocks/real estate/bitcoin are in demand.
All this points to an era of government shinking thatnis badly needed but accompanied by a shrill, hysterical media class indoctrinated in leftist ideas.
Ignore the hysteria, buy some assets and better to work in private sector for foreseeable future
The author states that Trump has no plan. Out of curiosity, is he aware that Congress holds the purse-strings of the Republic, and that the president has little say?
Congress has no plan either. and the president has veto power. The president makes recommendations to congress, he can refuse to sign the budget and veto it if he disagrees. So the president has alot of say in the process.
About 45 percent of the entire US debt was incurred during the years when Nancy Pelosi was speaker of the House.
If I’ve learned anything from watching the first two-thirds of the MC Hammer Behind The Music, it’s that the money never runs out.
Perhaps MC Hammer could be appointed Treasury Secretary.
Would that be McHammer of the clan McHammer?
Welcome to the United States of debt and deficits. The public notices little day to day pain with our high debt, and probably will not until its too late (like the frog in the pot of water set to boil). Solving this problem will require cuts in things people like or rely on, such as social security, Medicare and Medicaid, as well as tax increases. Watch out for lower standards of living. Its great to say that the national debt is a problem, however, when asked what individual sacrifice you will make, people go silent (its often they want some other person’s taxes that will be raised or funding cut).
Look at how the US society functions, with high levels of student debt (which the Biden Admin was to “forgive”), auto loan debt and credit card debt. Perhaps we are used to instant gratification and the idea of thrift, such as saving up for what you want (rather than enjoying something now and paying for it later) is sadly gone from many people.
Assuming no other major wars or catastrophes, watch out for the mid 2030s when the US Social Security Trust Fund will no longer be able to pay benefits at the formula amount.
The national debt is just one balance sheet. It makes no sense to obsess about national debt while ignoring private debt and the central bank balance sheets. Especially because the real economy has been sluggish and – with the exception of the current post-pandemic economy – had very low inflation. When inflation is low there is little reason not to stimulate the real economy. Meanwhile the ‘asset economy’ has been getting trillions from central banks producing bubbles everywhere. So if anything, the restriction has to be there.
Perhaps the focus should shift from deficits to total money creation and who gets that money.
I am going on record that there will be no cuts in Social Securtiy or Medicare. Tweeking benefits to future retirees, yes, but not current recepients/
400+ federal agencies with hundreds of thousands of well paid bureaucrats would be a starting point.
David Sacks (one of Trump’s Silicon Valley supporters) has said on the all-in podcast that it would be not so much a question of raising taxes but to reduce spending and to inrease income by boosting the economy. To me, that sounds like a reasonable plan.
We sure seem obsessed by the national debt lately: the UK, US and France have all been covered on this website, sometimes more than once.
In my opinion, journalists, politicians and even many specialist only tell half the story when it comes to deficits. Deficits do not mean all that much without also considering the actual role of central banks, their balance sheets and – often completely ignored – private debt in relation to deficits. This might be an important reason why prophesies of doom about deficits never really seem to come true. But then when many economists and rating agencies say everything is fine we get 2008.
In most cases deficits simply mean money creation. Treasury bonds are bought by the private industry. However, with more national debt we typically see the amount of money in the private sector increase. Since companies cannot create money that money has to come from central banks and private banks eventually. If the governments runs a surplus we often simply see that private debt increases and credit bubbles have arguably shown to be much more dangerous. But this is often ignored.
So paying back national debt does not really mean the same as when you and I pay back our debts. It typically means there will be less money in circulation, which, of course, is something we want to do when inflation is high. In that sense the high interest to fight inflation is a bit of a paradoxical method because it slows down the economy but also adds additional deficits. Moreover, central banks buy and sell bonds from their balance sheets as well (e.q. quantitative easing/tightening). This plays a big role in the amount of money in the economy.
But here is another thing often ignored. Since 2008 and 2020 central banks have indeed added a huge amount of money and even though we had recently had inflation, generally it has been low since 2000. However, since 2008 we do have the biggest asset bubble of all times, so that’s where the money flows apparently. Now, most people don’t notice this because they don’t own a significant amount of assets. Until one wants to buy a house for the first time. Or rent one for that matter. Many Western housing markets are severely disrupted, in my opinion, because of monetary and fiscal policies. Not to mention that bubbles in the stock market usually also pop at some point.
Prediction : national debt will be close to 50 trillion by 2030, regardless of who is president.
” the federal debt has soared from 34% to 95% of GDP”
UK debt is currently 100% of GDP.
France has about 110%
Germany has 63.7%
Japan has 263%
China has around 70%
It doesn’t look like the debt ratio has held back any of these countries or been especially beneficial either, although France is of course screwed.
Do you think Germany or the UK are in enviable positions?
Depends. Germany is probably in a worse position than the UK since GDP doesn’t accurately reflect the UK economy’s income and output. I wasn’t offering a qualitative assessment of those figures but merely pointing to the fact that disparate figures seem to have no effect on whether economies are a success or not. Japan’s 263% is probably fine due to their very high rate of saving.
The most important appointment the next President will make will be Treasury Secretary. It will have to be somebody of the stature of the late Paul Volcker. S/he will also need people like George Shultz and Caspar Weinberger in his/her Cabinet and if s/he has any sense will hold weekly Cabinet meetings.
“As the government has the right to issue fiat money, government debt is safe from danger of default of either interest or principal when due.”
– H.P. Minsky (economist), 1959
“The United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”
– Alan Greenspan
“We’ve got the right to print our own money. That’s the key.”
– Warren Buffett
“This is the United States government. You never have to default because you print the money, OK. I hate to tell you.”
– Donald Trump
Stephanie Kelton, economist:
“It’s the word debt that makes people afraid. This number is just keeping track of our savings. Over the arc of U.S. history, the government typically spends on an annual basis more dollars into the economy than it taxes away from us. It’s adding dollars, and over time, we keep track of how many dollars have been added. So what that $34T is telling you is that over the long sweep of history, the government has put that many dollars into our hands without taxing them away. It is our after-tax savings being reported.
‘When you think about it like that, it changes your perspective. Then you ask, should I be worried about this large savings that has been accumulated? I think that leads us in a very different direction.
“We should avoid using terms like ‘borrowing’ and ‘debt’ to refer to what the federal government is doing. These are household analogies that make little sense when applied to the currency issuer. The government’s spending is self-financing.
“When the government spends more than it gets in taxes, a ‘deficit’ is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy.
“Policy makers are looking at this picture with one eye shut. They see the budget deficit, but they’re missing the matching surplus on the other side. And since many Americans are missing it, too, they end up applauding efforts to balance the budget, even though it would mean erasing the surplus in the private sector.
“Because there is so much misunderstanding, we are vulnerable to scare tactics that warn of foreign debt, relying on foreigners to pay our bills. But there’s no reason to worry about China (or any other entity) refusing to finance our deficits. We should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.
‘Since 1817, there have been 7 times in U.S. history when government has run budget surpluses and paid down national debt. Each time it led to depressions and recessions, driven by households spending more than income and incurring unsustainable debt.”
“Government pays interest (as well as for everything else) by the electronic version of writing a check. This actually doesn’t cost anything: Again, money is created when you deposit the check. You can’t do this, but governments can.”
Fadhel Kaboub, economist:
“The countries that can’t handle debt have weak productive capacity, must import their own food, their own medicine, their own energy, and they borrow and promise to pay back in a foreign currency. They face hyperinflation if they have large debt and bankruptcy. They have to earn the foreign currency, like a household or state or municipality. To borrow them & make the interest payments they have to earn them through trade or other means. So when the interest rate goes up, they’re literally broke. None of that is valid for the United States.
“When they say the deficit is too big, agree: the infrastructure deficit, the healthcare deficit, the education deficit, the green/renewable energy deficit – these are the deficits that matter, not the federal gov’t deficit. We can afford all of these things; what we can’t afford is the status quo. Private sector deficit matters, like household credit card & loan debt, these are the debts that matter, not the national debt.
“Since the 80s, wages have gone flat, while productivity continues to go up. Where are the gains from productivity going? To the top 1%.”