High Debt Threatens the U.S. Economy

6 minute read
Kearney is the Neil Moskowitz Professor of Economics at the University of Maryland and and is the Director of the Aspen Economic Strategy Group. She is the author of The Two-Parent Privilege: How Americans Stopped Getting Married and Started Falling Behind (University of Chicago Press)
Portman is a former Office of Management and Budget director, represented Ohio in the Senate as a Republican from 2011 to 2023, and is a member of the Aspen Economic Strategy Group.

The difficulty U.S. Congress has had agreeing on spending for this year and avoiding a government shutdown is an indication of just how hard it will be to deal with our longer term debt crisis. Our rising debt burden is a problem we must confront in order to preserve our nation’s ability to address the many challenges on the horizon and to invest in our nation’s productive capacity.

The nonpartisan Congressional Budget Office (CBO) estimated that there was a $1.7 trillion dollar gap between what the government spends and the revenue it takes in 2023, nearly double the annual budget deficit from last year.  Absent significant policy changes, under even the most optimistic scenarios, the accumulated federal debt held by the public will rise above 100 percent of GDP by 2053, a level well above historical experience.

This fiscal imbalance reduces our capacity to spend on national priorities, in ways that will advance economic growth and shared prosperity. As laid out in our new Aspen Economic Strategy Group policy volume, such a high level of debt threatens the resiliency of the U.S. economy. It will push up interest payments and slow economic growth by crowding out private investment and public spending that could otherwise be used to improve America’s workforce, infrastructure, and productive capacity. As one stark illustration of this fact, the federal government is on pace to spend more paying down the interest on the debt than on all programs serving U.S. children, including early childhood education and public health insurance programs that have been shown to yield large social returns.

In addition, the rising debt makes it much more expensive to raise the funds that would stimulate the economy when the next recession inevitably arrives, or to allocate necessary spending in the face of unforeseen setbacks and geopolitical shocks.

We are seeing this now with concerns being expressed about the country’s ability to fund aid for Ukraine, Israel, and Taiwan at the same time. As national security issues are becoming more challenging, over the next decade the U.S. is expected to spend more on interest payments on our debt than the entire $9.8 trillion projected to be spent on our national defense. We need to get the deficit under control so that we have the funds available to invest in our future and protect our national security interests.

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Over the past 15 years, there had been relative complacency about the large gap between spending and revenue, in part because historically low interest rates made rising debt more fiscally sustainable. But as interest rates reach their highest levels in over 20 years, the American population ages, and the workforce grows at its slowest pace in decades, the imbalance in the federal ledger will grow dramatically wider at the same time our need to boost economic growth and security will grow ever greater.

Putting the U.S. fiscal house in order and rebalancing the federal budget in a way that bolsters our nation’s resilience will require bipartisan cooperation and forward-looking Congressional leadership.

The Aspen Economic Strategy Group has created a bipartisan forum of leading economic thinkers and doers—CEOs, academics, and policymakers—to address our nation’s ongoing pressing economic challenges. Our new policy volume is a collection of eight chapters that put forward actionable approaches to building a stronger, more resilient U.S. fiscal situation and workforce. Our group is committed to the project of bipartisanship and to the elevation of evidence in policy making. Here are three core ideas we’ve put forward.

First, Congress should consider reforms to the financing and benefit structure of Social Security to put the program on a sustainable path. The Social Security program’s trust fund is projected to hit zero by 2033. Under current law, failure to take action before 2033 would force across-the-board benefits cuts of nearly 25 percent. The program faced a similarly dire outlook in the 1980s, when Congress passed a bipartisan series of amendments that put the program on firmer footing. Stanford economist and AESG author Mark Duggan draws on lessons from that period, along with those from 1991 Medicare reform efforts, to propose a package of incremental reforms, such as putting Social Security’s payroll tax base back in line with its historical standard. These changes would preserve benefits for the millions of retired Americans who rely most on the program for income support, while putting the program on a more sustainable fiscal path.

Second, policy makers need to consider ways to rein in public health care spending through efforts that are grounded in evidence and fact, not partisan talking points and wishful thinking. Mandated federal spending on health care, specifically through Medicare, consumes a large and growing share of federal outlays, and spending on pharmaceutical drugs takes up a significant portion of the bill.

Policymakers have proposed several solutions to curb rising pharmaceutical drug costs, but Craig Garthwaite and Amanda Starc warn that simply reducing the price paid for pharmaceutical drugs could lead to less innovation, and thereby lead to less access to helpful drug treatments. They advocate for policy reforms that build transparency and reduce barriers to entry to make markets more competitive and efficient, thereby lowering costs without reducing drug innovation.

Third, politics dictate that any bipartisan effort to address unsustainable spending must be married with new revenue. Congress must consider reforms to the tax code to bring in more revenue while not hurting the economic growth that is critical to addressing the debt challenge. According to academic research reviewed by Owen Zidar and Eric Zwick, there is an opportunity to close certain tax loopholes that lead to inefficient income shifting among high-income business owners and do little to encourage productive activity.

The need to reduce federal budget deficits comes not out of mere principle, but because the country’s rising debt leaves us unable to build a country better prepared for future internal and external challenges. Policymakers face difficult spending and tax policy decisions to bring the country’s budget into better balance and improve our nation’s fiscal capacity. We also support a new bipartisan fiscal commission to address the tough issues Washington has ignored for too long. Identifying areas for commonsense reform are critical to securing the nation’s economic future.

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