just who are we in debt to ......and who are we borrowing from
Former President Donald Trump once declared himself “the king of debt.” President Joe Biden will resoundingly dethrone him.
The Congressional Budget Office published its semiannual economic forecast on Feb. 11, and the numbers are astonishing. CBO estimates the federal budget deficit this year will hit $2.3 trillion, which believe it or not wouldn’t be the biggest ever. The deficit last year was $3.1 trillion, the largest in U.S. history.
But the 2021 estimate doesn’t include the $1.9 trillion “American Rescue Plan” Biden and his fellow Democrats in Congress are drafting. Add in that measure, and the 2021 deficit could hit $3.7 trillion, according to the Committee for a Responsible Federal Budget.
Deficits will stay near or above $1 trillion for the foreseeable future, with the national debt likely to rise by at least $7 trillion through the end of Biden’s term. The debt rose by about $5.6 trillion during Trump’s four years, with more than half of that coming in 2020.
The salient question: Does it matter? Economists have changed their views on this during the last decade, because the predicted ravages of massive debt have never materialized. In theory, too much government borrowing can crowd out private borrowing, pushing interest rates up, slowing growth and causing inflation. Rising rates make it more expensive to borrow money, worsening the problem. A government caught in this trap can either print more money—exacerbating inflation—or impose painful spending cuts and tax hikes that pummel living standards.
None of that has happened since the Great Recession ended in 2009, despite many rumored sightings of the “bond vigilantes.” Economists now think it’s more important to flood the system with money during a downturn such as we’re in, and deal with the debt later. One lesson from the Great Recession was that there wasn’t enough government stimulus, which is why the recovery was painfully slow.
If the Biden bill passes, fiscal stimulus this year and last will be roughly 7 times what the government pumped into the economy during the Great Recession. A faster recovery ought to put people back to work faster and boost output, increasing tax payments on the other side and bringing in more federal revenue eventually than would come in without massive stimulus.
The total national debt is now about $28 trillion, which is about 30% more than annual GDP. No sweat, say many economists. Harvard’s Jason Furman, who was President Obama’s top White House economist, argues that real interest payments on the debt as a percentage of GDP are well below the historical average, because of super-low interest rates. That would be the case with the Biden relief plan as well.
“We have substantial fiscal space, in fact more than we’ve generally had in the past,” Furman wrote in Feb. 11 a Twitter thread. “We can afford the additional debt associated with the American Rescue Plan plus substantial additional debt thereafter.”
Biden will love to hear that, because he’s got big spending plans after Congress passes the relief plan. Biden is reportedly developing an infrastructure program, including a green-energy onslaught, that could run from $1 trillion to $2 trillion. Since it wouldn’t be “emergency” spending, Congressional rules say there would have to be tax hikes or spending cuts to cover the cost. But there are ways around those rules and a sanguine debt outlook would ease the path toward passage.
None of this changes the fact that America has an entrenched habit of spending beyond its means. For years, health care spending on Medicare, Medicaid and other programs has been growing faster than the funding that supports it. The Medicare trust fund will probably run short of money at some point during Biden’s term. Social Security is solvent until the early 2030s, but that problem might arrive sooner given the plunge in tax revenue during the coronavirus downturn.
Trump made the problem worse. The 2017 Trump tax cuts slashed government revenue and sent the annual deficit higher, when it should have been falling amid solid economic growth and full employment. Trump and other Republicans promised the usual “trickle-down” magic, with more spending by those paying less in taxes fueling growth and tax revenue rising to new highs. It never happened.
Then coronavirus hit, and the spending spree was on. Where it ends, nobody yet knows. What we do know is a gargantuan deficit won’t be the thing that stops it.