$34 trillion? Unimpressive.
Every time the gargantuan national debt rises above a round number, there is a surge of attention before we return to borrowing and spending more. The national debt recently reached $34 trillion for the first time ever, prompting worried Americans to look at each other with arched eyebrows and say: Really?
But honestly, $34 trillion is nothing. By Election Day, 10 months from now, the U.S. national debt will reach at least $35 trillion, which is a rounder number than $34 trillion since it is halfway between $30 trillion and 40 trillion dollars. After that it will increase by a few billion dollars a year unless someone does something (hahaha).
When the next president leaves office in 2029, the national debt will almost certainly exceed $40 trillion, and will approach $50 trillion in the event of a recession or anything else that reduces revenues or requires stimulus. budgetary.
How much is too much? No one really knows when the national debt will become so large that it chokes the U.S. economy, but it’s probably a safe bet that the current $34 trillion in debt is too high, and $50 trillion the will definitely be too much.
Some economists believe the debt crisis that budget hawks have been predicting for years has finally arrived. Mark Zandi, chief economist at Moody’s Analytics recently told Yahoo Finance “We are there” when asked if the public debt crisis has finally arrived. “I fear that at some point we will see a freeze in the Treasury market,” Zandi said.
Between last summer and fall, long-term interest rates have increased more than expected given market conditions, including the end of the Federal Reserve’s short-term rate hike cycle last July. A likely explanation was the excess supply of U.S. Treasury securities entering the market to finance government spending. The Treasury Department has since changed the composition of the securities it auctions to address what it sees as market concerns.
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But no one should assume that the problem is solved and that there won’t be future disruptions in which market demand simply won’t be enough to handle the massive amount of U.S. government debt flowing into the markets. . If there is insufficient demand for debt, lenders must pay more through a higher interest rate, and the rate on U.S. government bonds largely determines the rates on all other types of consumer and business loans. So a real debt crisis would involve rising rates on mortgages, auto loans and everything else, along with the slowing or contraction of growth that normally accompanies it.
There’s a double whammy for American taxpayers: Rising interest costs make the debt problem even worse, since the government would have to pay more to borrow from an ever-expanding pool of debt. The United States now pays as much interest on the debt each year as it does to fund the entire Pentagon, and it will get progressively worse.
So who is doing anything about it? No one exactly. In general, it is possible to reduce deficits and bring overall debt to more manageable levels, provided two things: spending cuts and tax increases that end the privilege many taxpayers have obtained from a government much more generous than the government. his income would normally allow it.
Spending cuts don’t have to be drastic, but there will need to be changes to Medicare, Medicaid and Social Security, involving benefit reductions for the wealthiest, higher retirement ages, paradigm shifts for young taxpayers and other limits. Taxes will have to increase, first on wealthy Americans, then perhaps on lower incomes. A federal value-added tax, similar to a national sales tax, would generate significant revenue quickly. This is not going to please the voters and the politicians know it.
President Biden has some sort of plan to solve the problem, largely by raise taxes on corporations and the rich. But Biden couldn’t get anything like that in Congress during his first two years in office, when his Democratic colleagues controlled both chambers of Congress. If Biden is re-elected, perhaps he will dust off this plan in the second half of his second term and see if there might be more appetite for tax hikes.
Republicans in the House of Representatives are making a it is very serious to reduce expenses, and they could even shut down all or part of the government in the coming weeks to make their point. But they are playing small ball by attacking funded programs year after year that account for less than half of all spending. They leave the biggest programs, including Medicare, Social Security and defense, untouched.
Donald Trump, the Republican Party’s likely 2024 presidential candidate, also has no plan. He calls himself the “king of debt” and he wants to cut taxes even more than he did in the 2017 tax cut law he signed. At the time, Trump and other Republicans promised that lower taxes would actually create more tax revenue because it would spur economic growth. This trickle-down logic has always been a myth, but that probably won’t stop Trump from resorting to it again by invoking the magic of ever-lower taxes.
Voters, for their part, are disgusted by America’s fiscal follies — but that doesn’t make them willing to take on tax hikes or benefit cuts. So we keep moving, until the growing national debt finally reaches a number that the markets cannot support, whether it is round or not.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman.
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