Editor’s Note: Maya MacGuineas is president of the bipartisan Committee for a Responsible Federal Budget. The opinions expressed in this commentary are her own.
Few of our political leaders are eager to deal with the national debt. It’s an issue that entails very challenging policy solutions, and thus tends to be used more as a cudgel to stop expensive policies from moving forward, than as an issue in its own right. Even for those who do worry about the debt, when it comes to priorities they really care about, such as tax cuts or additional infrastructure spending, fiscal responsibility tends to take a back seat.
So even with a $21 trillion debt serving as a flashing warning sign, and with no plan to get the borrowing under control once the economy is strong again, there is very little political interest in doing something about it. Throughout the US presidential campaign, both candidates successfully avoided the issue, and each produced plans that would dramatically worsen the nation’s fiscal situation.
Now President-elect Biden will be inheriting the second-highest debt of any American president, second to President Truman who came into office at the end of World War II, and the very worst situation if you look at where the debt is headed long term, with about $5 billion in borrowing per day.
This needs to be addressed or else future generations of Americans will still be paying the price in decades to come.
Debt isn’t always bad, however. There are times when it is useful, and now is one of those times. We need money to fight the pandemic, help the millions of people whose lives have been damaged, support businesses and prop up the economy until things get back to normal. We aren’t out of the woods yet, even with the recent positive vaccine news, and we need to borrow more.
Here then is what the Biden administration should do. First, focus on getting the pandemic under control, helping those in need and supporting the economy. There should be bipartisan support for more borrowing to support vaccine distribution, help the unemployed, support struggling small businesses and avert widespread layoffs by state and local governments.
All other policies unrelated to the pandemic should operate in a pay-as-you-go world where new spending initiatives are combined with offsets elsewhere in the budget. This would include spending on college or long-term infrastructure. These programs can be worth doing, but they should be paid for by raising taxes or cutting less important spending. For instance, new investments in green infrastructure could be paid for with a carbon tax, which would reduce carbon emissions even more.
Just because more debt is necessary right now doesn’t mean it is harmless. We entered the last recession with debt as a share of GDP at 35%. This one is at 80% and we will leave it at well over 100%. US debt is growing faster than the economy and will break the all-time record set just after World War II as soon as 2023.
Even at today’s rock-bottom interest rates, we could quadruple federal education spending or send every family an annual check of $2,200 with the money we are spending on interest.
Interest rates are remarkably low, but that doesn’t mean borrowing is free. We’re simply shifting the responsibility to the future and leaving ourselves vulnerable to other risks. On the economic front, rising debt crowds out private sector investments and slows economic growth. We are vulnerable to the possibility of rising interest rates or inflation.
We are also globally vulnerable to other countries where our economy could be badly damaged if foreigners moved away from lending to the United States at such low rates, or if China chose to dump some of the trillion dollars of US Treasuries it currently owns.
Once the economy is strong enough, as indicated by growth and employment (rather than political whims), the administration and Congress should gradually implement sensible measures to get control of the debt. This could include repealing some or all of the irresponsible tax cuts of the past years, reducing health care costs throughout the economy, cutting some of the near $1.4 trillion of tax breaks in the code and restoring sensible spending caps. One of the best options available is a carbon tax. This policy would accomplish two things at once by helping the environment and the nation’s balance sheet.
We also need to address our major trust fund programs that are facing insolvency in the upcoming years, including Social Security and Medicare. It is time to put in place measures that prevent these benefits and services from facing severe cuts. These could include sensible cost control measures, such as increasing the retirement age and encouraging those who want to continue to work part time into retirement to do so.
To Biden’s credit, his campaign plan included trillions of dollars in revenue raisers and spending reforms, creating opportunities for lawmakers to fund new public investments in a fiscally responsible manner. It is a start, but there will be much more to do. Debt naysayers will want the new administration to opt for the free lunch approach – borrowing rather than paying for new priorities – but that is a dangerous economic plan in the long run that invites serious risk and leaves us vulnerable at a time we should be pursing an agenda of economic strength.
