President Joe Biden is insisting on a rubber stamp for increasing the debt ceiling from its current level of $31.4 trillion, which U.S. Treasury Secretary Janet Yellen is warning Congress will come due on Jan. 19 as so-called “extraordinary measures” to refinance the debt up to the current limit continue.
On Jan. 13, White House press secretary Karine Jean-Pierre suggested, “There’s going to be no negotiation over it. This is something that must get done… It is one of the basic items that Congress has to deal with, and it should be done without condition.”
Except that’s not how it actually works. We have a bicameral legislature in Congress, which means nothing can pass unless the House votes on it.
Certainly, Congress has always treated the debt ceiling as must-pass pieces of legislation, which is why House Republicans and their newly minted House majority led by Speaker Kevin McCarthy (R-Calif.) are demanding spending cuts in exchange for increasing the nation’s borrowing limit, telling Fox News, “Let’s sit down together. Let’s look at the places that we can change our behavior … Why would we sit back and be so arrogant to say, ‘No, there’s no waste in government?’”
McCarthy and House Republicans are holding out with good reason.
Since 1980, when the national debt was $907 billion and just 31.7 percent of the Gross Domestic Product (GDP), the debt has grown by an average of 9 percent a year, to its current level of more than $30.7 trillion — 124 percent of GDP — according to the latest data by the U.S. Treasury and the Bureau of Economic Analysis.
The problem is that nominal GDP — that is, before adjusting for inflation — has only grown by a little more than 5.3 percent annually since 1980, such that the debt has been growing much, much faster than the economy ever could, even with inflation.
As a result, if the debt keeps growing at the average, annual 9 percent pace, while the economy continues nominally growing on average at 5.3 percent a year, the national debt will more than triple to $103 trillion by 2036, or a whopping 201 percent debt to GDP ratio.
That would put the U.S. in territory of Japan (236 percent), Venezuela (233 percent) and Sudan (200 percent), the countries with the highest debt to GDP ratios in the world presently.
At this time, $6.67 trillion of the debt is held by the Social Security and Medicare trust funds, or what is known as intergovernmental holdings. We owe it to ourselves, or so we think.
A recent Congressional Budget Office publication underscores this analysis, not counting intergovernmental holdings as a part of the debt to GDP ratio, stating, “By the end of 2022, federal debt held by the public is projected to equal 98 percent of GDP.” The office carries that estimate forward: “In CBO’s projections, debt as a percentage of GDP begins to rise in 2024, surpasses its historical high in 2031 (when it reaches 107 percent), and continues to climb thereafter, rising to 185 percent of GDP in 2052.”
But why wouldn’t we count the trust funds? They’re going to be drawn down anyway, and the U.S. will have to borrow publicly to offset the drawdown. As of now, the Social Security trustees project that the Old-Age & Survivors Insurance Trust Fund will be depleted of its treasuries by 2034. And Medicare’s Hospital Insurance trust fund will run out of money in 2028.
When the trust funds go negative, that will mean instead of cashing in treasuries in order to pay out Social Security and Medicare benefits, the money will simply be taken from the Treasury’s general fund, thereby initiating treasuries auctions and adding that money to the publicly held debt in the end anyway.
Anyone realistically considering the alternative scenario, that Congress and a sitting president would actually repudiate and cut promised entitlement benefits, should look no further than Dan Rostenkowski being chased by little old ladies from a townhall meeting after proposing increasing taxes to pay for catastrophic health coverage under Medicare in 1989.
Such a plan might not be politically sustainable, and so the more likely outcome is Congress will simply allow benefits to continue to be paid out from the general fund.
In 2021 alone, entitlement or so-called mandatory spending — that is, spending that occurs because outlays are mandated by law rather than being voted upon annually by Congress via appropriations like Social Security, Medicare, Medicaid, unemployment, interest on the debt, etc. — accounted for $5.1 trillion out of $6.8 trillion of spending, according to the White House Office of Management and Budget. That’s more than 75 percent of federal spending, a large jump from its usual levels of about two-thirds of spending or so.
Fortunately, with Covid spending coming to an end, so too are the benefits that were handed out during the Covid recession, including the one-time checks to families. Now, OMB projects mandatory spending will decrease to $4.1 trillion this year.
The problem right now is the government borrowed and printed more than $6 trillion to combat the pandemic and keep the economy afloat amid the lockdowns. And this is what usually happen as the debt experiences its greatest growth during recessions, especially since the inflation of the 1970s, when simultaneously, revenues slow down because of the economic contraction and the federal government counter cyclically spends more money. Double digit increases the growth rate of the debt occurred in the mid-1970s, the first half of the 1980s, the early 1990s, during the Great Recession of 2008-2009, and during the Covid recession of 2020 and in 2021.
In other words, even though the debt does not growth at 8 or 9 percent every year, recessions will ultimately occur on a cyclical basis, even if government budget offices do not project that they will. And when they’re particularly severe, and as soon as the unemployment rate starts rising, even as mandatory spending starts picking up again all by itself, Congress will invariably seek more stimulus spending, exacerbating and perpetuating the deficit-spending cycle.
Which is why now is the time to get spending under control, before the ill effects of the recession set in, unemployment begins rising and Biden continues push deficit-spending as the U.S. fiscal house of cards begins to wobble.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.