The net interest on the U.S. Federal Debt is roughly 3 percent of Gross Domestic Product (GDP), amounting to $882 billion. What does this percentage and the absolute number mean? If they were to increase, does it mean that the U.S. is becoming weaker? That its ability to borrow necessarily diminishes? That the debt must be cut?
The 3 percent number does not offer insights into these questions. It shifts the debate from assessing the output Americans get from the federal government spending to a meaningless comparison between interest payments on the accumulated borrowing and the statistics bureau’s estimate of what the country produced during the year. The numerical exercise is similar to a farmer comparing interest paid on his borrowings over the years to revenues from his harvest one particular year. Such a number does not shed light on either the farmer’s future harvests or the interest rates on his future borrowing.
What does, as shown below, is a close look at spending and interest rates rather than the aforementioned ratios.
Long-term interest is now at 5%. Raising taxes, ensuring that revenues from them are not translated into additional spending but pay down debt at 5%, assumes that people could not expect higher than 5% yearly return over time, if they kept the money. The solution is then to take a close look at taxes, laws and regulation that would significantly increase expected returns above 5%.
Assume now that the government raises taxes, and it also announces that the additional revenues would be spent on “investment” rather than paying down the debt. “Investment” means having more future assets down the line. The expected returns must be more than 5% yearly returns over time - otherwise the spending could not be called “investment.” Note that the backward-looking GDP number is irrelevant for this consideration too. What matters is how the government would spend the money, and whether a more than 5% return would be achievable.
The mere fact that governments may label the spending as “investments” does not make it so. Now consider the following disaggregated data to see what organizational, legal and institutional changes options there are to expect the higher than 5% over time. Let’s go from the smaller to the larger items in the budget.
The Federal Highway Administration’s (FHWA) most recent 2018 assessment is that chronic underinvestment has led to $1.1 trillion needed now to address the backlog of highway and bridge investments, and system rehabilitation for bridges requires another $191.3 billion. Approving such spending may sound like a good “investment” at 5% - but only if managed differently than in the past.
Much-in-the-news spending on schools, colleges and universities built over the years nice real estate, large bureaucracies, and faculties supplying certifications. But the dire statistics about the decline in literacy and elementary mathematical know-how at schools, and the hundreds of billion dollars in student debt not expected to be paid back, since the certified students are being offered low-paying jobs, suggests that much such government spending was no “investment” in monetary terms either.
In the 2024-25 school year, the interest rate for federal student loans is roughly 6.53% for undergraduates. For graduate or professional students, the interest rate is 8.08%. The default rate for federal student loans was 4.86% as of 2024's fourth financial quarter. Over the past 17 years, the federal portfolio of outstanding Title IV loans increased from $516 billion in loans made on behalf of 28.3 million students, to $1.6 trillion in loans made on behalf of 42.7 million students. The 6.53 percent return on loans with a 4.86 percent default rate, borrowed at 5 percent, is not an investment, 1.53% unlikely to cover administrative costs for managing this portfolio. Recent evidence shows that the spending did not bring much in the way of intangible returns either, such as civic education and civil debates.
Federal spending on health programs and service in FY 2024 amounted to $2.3 trillion. According to the National Center for Health Statistics, during August 2021–August 2023, the prevalence of obesity in adults was 40.3%, with no significant differences between men and women. Life expectancy the last 25 years went from about 79 to 81. These numbers tell us what “outputs” taxpayers get for the tens of trillions spent on “health.” No matter how medical research rationalized the massive spending, the returns are not there. MAHA is trying to find solutions, such as focusing preventive care. Time will tell if there’s a quick impact on behavioral patterns to the betterment of health.
This brings us to military spending. Excluding health and disability benefits to veterans (which are included in the above-mentioned federal support for health programs), the spending is estimated at $800-900 billion. We know how much is spent, but what about the “defense output”? The 1993 Somalia event, turning a humanitarian into a military operation, was not a success. The recent withdrawal from Afghanistan was surely not. The brief military encounters with the Houthis, cheap drones having imposed damage on aircraft carriers, and losing two expensive planes, does not seem to be a big success, as attacks on shipping continue.
According to the Ukraine government, cheap drones incapacitated 19 of the 31 highly sophisticated Abrams tanks that the United States provided it with in 2023. The question is whether more spending on the military borrowed at 5% will bring more security without requiring a drastic change in the defense sector, and in a 40% obese population that the military selects from, one deficient in literacy and numeracy, or whether massive organizational change would be needed first. The latter happened when Hyman Rickover, the father of the U.S. nuclear navy, had to fight the military's bureaucratic inertia, many decorated generals included, to build up the program in short time.
Finally, much discussion focuses on Social Security, another massive component of the budget. The debate has been focused on solving this problem by raising retirement age and diminishing benefits. The debate did not raise another option, drawing on the aforementioned education data. Accelerating education based on either apprenticeship after grade 8, or cutting time for completing degrees, would bring about more skilled, disciplined generations who would start working perhaps three, even 5 years earlier, contributing massively to solving the problem of pensions. Indirectly, this change could even reverse the decline in fertility rates. Men and women got certified in their twenties, carrying student debts, but a large percentage offered low incomes and having no savings – conditions unfavorable to starting families.
Briefly, the debate about the budget should focus on the fact that the “outputs” from the various spending categories are just not there. Whether the inputs created “assets” or represented just redistribution rationalized by ranges of jargon - we do not know. The increasing debt suggests that not many assets were created - not even at zero rates. The spending appears to have brought divisions and weakened the countries’ institutions that made the U.S. exceptional, attracting brains and capital from around the world.
