Will it become clear, then, that the budget showdowns of 2023, including the one looming on Nov. 17, were little more than ridiculous fights over discretionary spending that did nothing serious to postpone the day of reckoning? Will they view with shame the large spending programs of the early ‘20s, from pandemic relief to college loan forgiveness, as having hastened disaster?
If you have wondered just how much debt the nation can absorb before the walls come tumbling down, the University of Pennsylvania's Penn Wharton Budget Model now has an educated answer. About 200% of the nation’s economic output, or GDP, will do it. And we’ve got about 20 years, probably less, until then.
That timeline assumes a lot of things, such as the United States continuing its current policies and the economy continuing along in its current favorable conditions. Those conditions rely on investors continuing to have confidence in the nation’s ability to pay its debts.
Confidence is a fickle thing. We got a small taste of that last year when Sillicon Valley Bank in California failed. The government stepped in quickly to bail out depositors and reassure a public that otherwise might have been a step away from causing runs on other banks.
But once investors begin to believe the U.S. is incapable of paying its debts, “no amount of
future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly,” a Wharton brief authored last month by Jagadeesh Gokhale and Kent Smetters, said. They added, “Unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the U.S. and world economies.”
Investors aren’t stupid. They can see the nation’s trajectory, and they will remain confident only as long as they believe there is a chance politicians will do something to change it.
As the Wharton brief said, “... current fiscal policy is not sustainable and forward-looking financial markets know it …”
Meanwhile, it should go without saying, but Wharton’s models demonstrate that “...the increase in debt ‘crowds out’ private capital formation, which lowers GDP growth and the size of tax bases.” The more debt the nation gathers, the less effective tax increases are in raising funds. “In effect, the economy collapses under the sheer weight of government debt.”
What to do about this?
The Committee for a Responsible Federal Budget recommends convening a bipartisan commission to come up with solutions. That’s not a novel approach. House Republicans are advocating a version of that. Utah Sen. Mitt Romney has such a plan, as well.
The nation even tried it once, using a commission President Barack Obama convened back in 2010. Known as the Simpson-Bowles commission, it came up with reasonable recommendations for a combination of cuts and tax hikes that was immediately dismissed by all sides.
Too bad, because that probably would have kept the nation from its current mess.
Meanwhile, the U.S. Treasury reports that, as of October, interest alone on the national debt has cost $659 billion this year. This, the Washington Post said, is among the nation’s biggest annual expenditures. It’s almost as large as what Washington spent on the military last year.
The Wharton brief says the current debt is about 98% of GDP. That’s a figure that does not include the $6.8 trillion the government owes itself for accounting purposes.
Will today’s politicians, despite the unreasonable wings in each party, come together and signal to markets that they do indeed have the will to avoid this disaster? Will the American people begin to demand it?
That will take some courage at a time when the fiscal sun, at least in regard to unemployment, is still shining. It will take an ability to imagine how we’ll all and feel on the not-so-distant day of reckoning.