With the election upon us, the growing national debt is not the top policy priority for most voters. That’s understandable given that the ongoing pandemic and economic recovery are the most pressing priorities. At this moment, more borrowing is needed.
But there are certain to be continued calls for borrowing long after the economy has recovered. Thus, it’s worth revisiting why excessive deficit spending isn’t wise.
First, even with super-low interest rates, borrowing isn’t free. Sometimes it is warranted, like during an emergency or recession (as we have now) where borrowing helps plug the hole in the economy. But sometimes, it is just a desire to duck the basic policy choice of what is worth doing and how we should pay for it. That abdication of fiscal stewardship leaves us vulnerable on many fronts and basically says to our kids, “Hey, we don’t want to pay for this. You do it.”
Nonetheless, when the economy is strong and the time comes to revert to paying our bills and bringing the debt back down, rest assured there will be calls to cut taxes, spend more, and worry about how to pay for it later. It will take immense political will to ignore that seductive siren song.
In a Trump administration, there will be calls for further tax cuts, with the conversation littered with nonsense (as it was last time) about how tax cuts pay for themselves. They. Do. Not. Despite promises to the contrary, the Tax Cuts and Jobs Act reduced revenue substantially and is on course to add as much as $2 trillion to the debt and deficits, after accounting for additional economic activity.
In a Biden administration, there will be calls to borrow for investments. But as important as these priorities may be, there is no reason to fully shift the responsibility to pay for them to the future. Yes, interest rates are exceedingly low, which means we can borrow more with less risk. But we are already committed to massive amounts of additional debt — if we don’t borrow a single additional dollar for the current crisis, we are still set to run combined deficits of $13 trillion over the next decade. The debt will continue to climb as a share of the economy, reaching 109% by 2030 and 195% by 2050. And that is before the trillions more in borrowing both President Trump and Joe Biden have laid out in their campaign plans.
Furthermore, we are already immensely vulnerable to the possibility that interest rates will go up. With our debt currently 102% of GDP, a mere one percentage point increase in interest rates would cost us about $200 billion more a year — more than the federal government spends on education and transportation combined. For any new borrowing, the average bond maturity is only about five years, so if interest rates go up when the debt rolls over, things could be even worse.
Keep in mind we are heavily reliant on foreign entities to finance our deficit spending. Foreign governments currently hold more than $4 trillion of our debt, exposing us to overseas volatility. Today, they are willing to lend us plenty of money. But at some point, our debt could be the next financial bubble just waiting to pop. Markets move a lot faster than politicians do — interest rates can adjust quickly, while debt takes time to tame.
As politicians will likely continue to make the case that taxpayers can get things for free, even once the economy has settled, our debt trajectory needs a course correction. That was the case even before the pandemic when the debt was already on pace to rise faster than the economy indefinitely. No mainstream economist believes that’s sustainable. The International Monetary Fund noted that while the post-pandemic debt trajectory for most advanced economies would stabilize over time, the United States is an outlier and would require structural budget changes in the medium and long term.
Whoever wins the next election will be faced with a number of hard choices: navigate us through a pandemic and economic recovery, then make sure our debt doesn’t become unmanageable. Their political advisers will tell them to take the easy route: borrowing as much as possible, shifting the costs to the future, and probably making up all sorts of magic fairy dust theories to justify the irresponsibility.
But we are at a crossroads. Our debt will soon reach all-time record highs, and we have literally no plan in place to control it. We have adversaries around the globe who see our debt as a vulnerability. And our kids face many new challenges in a likely much more complicated world, as they deal with climate change and new technological disruption, than the one we grew up in. We should not add trillions more in debt as the legacy we leave to them, no matter how much our political leaders may hope to duck these realities.
Maya MacGuineas (@MayaMacGuineas) is the president of the Committee for a Responsible Federal Budget.
