The federal debt will soar in the coming decades. The previous truth can be found in the monolithic nature of the proposed debt solutions.
Harvard’s Greg Mankiw is hardly alone in saying posssible debt fixes include enormous amounts of economic growth, government default, so-called money creation, sizable reductions in government spending, and substantial tax increases. None will reduce the debt, but a majority will grow it.
Starting with growth as the way out, in 1980 total federal debt was $900 billion. Since 1980 the U.S. has enjoyed unprecedented economic advance, during which total federal debt has increased 41 times what it was in 1980.
Which isn’t surprising. Whether it’s individuals, businesses or governments, the capacity to borrow is an effect of market confidence in the incomings of the present, but much more importantly, expectations of future incomings. In other words, the U.S. has lots of debt not because Treasury hasn’t taken in enough tax revenue, but precisely because it takes in substantial amounts of tax revenue now, and much more perilously, it’s expected to take in quite a bit more in the future.
Treasury markets are a look into the future, as is the case with all markets. And the mostly declining rates on Treasury income streams since 1980 indicate that tax revenue in 2025 will be small relative to what it will be in 2035 and 2045. Evidence? All the federal debt. Money is ruthless.
What about default or so-called “money creation”? If we ignore that the U.S. has periodically defaulted as evidenced by substantial declines in the value of the dollar (FDR, Richard Nixon, Jimmy Carter, George W. Bush, Barack Obama, Donald Trump) versus foreign currencies and gold, Treasuries are the most owned income streams in the world. They’re priced to reflect total U.S. debt, unfunded liabilities, along with the possibility of further default and/or money printing. Not only would default or money printing not pay off the debt as is, falling Treasury yields in concert with soaring amounts of Treasury debt since 1980 signal confidence that the deepest markets in the world think the possibility of either fix is very slim.
Spending cuts? It brings to mind DOGE. No chance. Elon Musk failed before he began simply because DOGE ignored, and spending cut advocates ignore, a problem of too much tax revenue now, and much more tax revenue in the future.
Which means spending cuts won't shrink government or the debt short of Congress literally burning the savings. What’s not spent will be directed toward existing and new programs, thus propelling their growth. No act of government spending restraint or rising government revenue ever shrinks government. If anything, it expands it. Medicare began as a $3 billion program…
That’s why entitlement reform is such a bad idea. Instead of reforming what consumes so much federal tax revenue, it’s better to contain the waste in Social Security and Medicare, all the while containing the growth of new programs more broadly with interest paid on the debt itself. In other words, the billions born of reform would give Congress fresh powder. No thanks.
Tax increases? See above. They’re the clearest path to more debt. Debt hasn’t soared since 1980 due to insufficient taxation, but precisely due to excessive taxation (of the rich most notably) that has made the U.S. Treasury one of the surest loans on earth.
The federal debt is set to grow and grow. Bank on it. The latter will be an effect of a near uniform unwillingness of deficit hawks to concentrate on the causes of debt (too much tax revenue), while perilously distracted by the symptoms.