As we near June 1, the date at which Treasury Secretary Janet Yellen claims that the federal government will default on the federal debt if the debt ceiling is not raised, there’s a lot of discussion about the debt, as well there should be. Republican House Speaker Kevin McCarthy has managed to corral enough votes in the House of Representatives to pass a bill that would allow an increase in the federal debt limit and roll back discretionary spending to the 2022 level and then allow it to rise by 1 percent annually for the next ten years. What that means, since inflation is likely to average over 1 percent, is that discretionary spending would fall slowly in real terms. So far, President Biden has refused to negotiate any cuts in the rate of growth of discretionary spending. But even if he goes along with Speaker McCarthy, the slower growth in discretionary spending will be only a small down payment on a huge and growing problem: the massive and growing federal debt.
If the federal debt continues to grow at the rate predicted by the Congressional Budget Office, then, to avoid default in the 2030s, Congress will have to pass a package of spending cuts and tax increases. On the tax side, though, Congress is constrained by one of the few constants that we ever see in macroeconomics: the size of federal tax revenues as a percent of gross domestic product. If that constant holds up in the future, the only choices would be large spending cuts or a default on the federal debt.
These are the opening paragraphs of David R. Henderson, “Slouching Toward Debt,” Defining Ideas, May 17, 2023.
And:
But the really big deal is the projected spending, deficits, and debt beyond 2033. In its Table 4, the CBO projects that from 2034 to 2043, federal spending will average 26.3 percent of GDP and, from 2044 to 2053, 29.0 percent of GDP. Deficits are projected to average 8.0 percent of GDP from 2034 to 2043, and a stunning 10.2 percent of GDP from 2044 to 2053. By 2043, the CBO predicts, federal debt held by the public will be 152 percent of GDP and, by 2053, 195 percent.
Budget cuts would work:
The bad news is that there appears to be zero appetite among congressional Democrats and only a slight appetite among congressional Republicans for large cuts in the growth of spending. The good news is that if they ever decided to take spending cuts seriously, they could see a major US example after World War II and more recent experiences in Canada and the United States in which spending actually fell in real terms (post–World War II United States) or spending as a percent of GDP fell substantially (Canada and the United States) with apparently few bad effects and some major good effects.
And finally:
In response to economists Lawrence Summers and Jason Furman, who minimized the danger of large budget deficits, I wrote two articles on this site: “Who’s Afraid of Budget Deficits? I Am,” February 20, 2019, and “Furman, Summers, and Taxes,” May 1, 2019. I wonder what they think of federal budget deficits and debt now. Of course, they could argue that no one expected the gush of federal spending that came with COVID-19 and lockdowns under both Presidents Trump and Biden. But that suggests yet another reason not to be so calm about deficits and debt: we need to keep our powder dry. My guess is that Summers and Furman are at least a little more worried than they were.
Read the whole thing.
