The 119th Congress has begun with a newfound sense of urgency around the federal debt, which is nearing a record high relative to the size of the economy. This newfound concern is not limited to Republicans, as progressive economists and budget analysts are also ringing alarm bells. The shift in tone is driven by a combination of factors, including the likelihood of long-term interest rates failing to recede as quickly as expected and the proposed extension of the 2017 tax cuts, which would cost trillions of dollars if not matched by spending reductions.
Historically, the stock of debt as a share of the economy has risen sharply during wars and recessions. However, Congress has not managed to bring the debt back down during times of peace and economic growth. Furthermore, the issue of debt has receded from the public consciousness, according to polling by Gallup.
Economists are now warning that the federal government’s debt burden is nearing a tipping point. The concern is that as the government borrows more and more, it may need to offer a higher rate of return on Treasury bonds, which could undermine growth. Some economists believe that a sudden and catastrophic adjustment could occur if the fiscal house catches fire, leading to default, forced bank holdings, high inflation, or reduced spending.
The Congressional Budget Office forecasts that debt will continue to increase, forcing higher interest payments and creating an upward spiral. This has led to concerns that interest rates (r) will eventually outpace growth (g), causing debt to explode.
Prescriptions for dealing with the debt differ radically. Republicans have proposed spending reductions, including cuts to Medicaid, while progressives, such as Senator Elizabeth Warren, have suggested targets for savings, including defense contracting and Medicare drug prices. However, many Democrats argue that the government simply needs more revenue to support the growing number of people becoming eligible for retirement benefits.
As the debate rages on, the stakes are high: if the tax cuts pass and the debt continues to grow, the consequences could be catastrophic. The question is, can policymakers find a way to address the debt without sacrificing economic growth or social programs?