Election 2024: Will Washington Address Its Debt and Deficit Problem?
from The Water's Edge

Election 2024: Will Washington Address Its Debt and Deficit Problem?

Each Friday, I look at what the presidential contenders are saying about foreign policy. This Week: The United States may come to rue its failure to get its fiscal house in order. 
The National Debt Clock in New York City on November 30, 2017.
The National Debt Clock in New York City on November 30, 2017. SHANNON STAPLETON/ Pool via REUTERS

The United States has a debt problem.

The total debt of the U.S. government now stands at just under $35 trillion. That is $103,000 for every person in the United States and is equal to 99 percent of the country’s gross domestic product (GDP). That’s a level of indebtedness the United States hasn’t seen since the end of World War II when the national debt hit 106 percent of GDP.

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The fact that the United States has taken on lots of debt in the past and lived to talk about it might suggest that all is fine. But there is a major difference between where things stand today and where they stood eight decades ago. Debt as a share of GDP fell in the three decades after World War II, bottoming out at 23 percent in 1974. In contrast, U.S. debt as a percentage of GDP is on course to hit 155 percent by 2050.

The U.S. national debt is rising because Washington is spending more than it takes in as revenue. Last month, the U.S. government added $347 billion to the deficit. Current projections show the government outspending its revenues by $1.2 trillion this fiscal year.

The U.S. government covers its deficit by borrowing money. That seemed less worrisome a few years ago when interest rates were so low that the fear was that they would turn negative. But as everyone knows, interest rates have jumped since early 2022.

Rising interest rates have consequences for the U.S. government just as they do for companies and individuals. Perhaps the most vivid factoid that makes that point comes from a recent post by my colleagues Benn Steil and Elizabeth Harding. They showed that the United States now spends more each year on interest on the national debt than it does on defense. And that gap is set to grow larger in the coming years.

The problem with all this red ink isn’t that Washington won’t be able to pay back its borrowers. When governments borrow in their own currency, as the United States does, they can always print more of it. The problem is rather, as Steil and Harding argue, that continually running large deficits will lead “toward lower living standards. As the government borrows more and more, the cost of money across the economy increases, crowding out private investment, reducing supply, increasing prices, and lowering growth. In the worst-case scenario, the country enters a debt spiral in which government borrowing and interest rates each keeps pushing the other up.” It’s for this reason that a senior International Monetary Fund official last week urged the United States to take the current moment of strong economic growth to slow down, if not reverse, its accumulating debt.

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The solution for red ink is less spending, higher taxes, or a combination of the two. But Washington has little appetite at the moment for belt-tightening. Donald Trump wants to make the tax cuts he got through Congress in 2017 permanent. He wouldn’t stop there. He has vowed to cut corporate taxes further and to end taxes on tipped wages. Trump has floated using tariffs, which are a type of tax, not just to pay for his proposed tax cuts but to replace income taxes entirely. (Tariffs were a major source of federal revenue along with excise taxes in the nineteenth century, when the federal government’s size and reach were far smaller.) However, the magnitude of the tariff hikes needed just to offset new tax cuts would likely hurt economic growth, and with it, federal tax receipts. More broadly, despite the frequent claims that tax cuts pay for themselves by spurring higher economic growth and thereby generating offsetting tax revenue, they don’t.

President Biden has said he would let the 2017 tax cuts lapse when they expire next year. He would also raise capital gains and corporate taxes, and impose a minimum corporate tax rate, while not raising taxes on anyone earning less than $400,000 a year. (That is more than 90 percent of U.S. taxpayers.) Those moves, if enacted, would slow the flood of red ink. But they wouldn’t put the U.S. government in the black—and whether they will help or hurt the economy in the long run is debated. Whatever your position on that question, unless Democrats win control of both the White House and Congress in November, Biden’s tax package won’t become law. At the same time, neither Biden nor Congress is eager to cut spending. That is especially true when it comes to programs like Social Security and Medicare that make up roughly half of federal spending. They remain the “third rail” of American politics.

But while the national debt isn’t an issue on the campaign trail, it could prove a challenge to whoever wins in November. As the saying goes, things that aren’t sustainable tend not to be. Optimists will respond that deficit hawks have been crying wolf about the debt for decades as the U.S. economy continues to set new records. But as anyone who has read Aesop’s fable knows, the wolf eventually did arrive. The results weren’t pretty.

Campaign Update

Trump turns seventy-eight years old today. Earlier this week, he sat for a pre-sentencing probation interview. It’s one of the required steps in the lead-up to his sentencing on July 11. Pre-sentencing interviews usually are done in person and the subject isn’t allowed to have their lawyer with them. Judge Juan Merchan cut Trump slack on both counts. He permitted the former president to do his interview over Zoom from his Mar-a-Lago beach club and to have his attorney with him. And if you are wondering why Trump hasn’t already appealed his conviction, New York state law only allows appeals after someone has been sentenced.

A Delaware jury on Tuesday found Hunter Biden guilty on three gun-related charges, making him the first child of a sitting president to be convicted of a felony. President Biden issued a statement shortly after the jury handed down its verdict stating that he “will accept the outcome of this case and will continue to respect the judicial process as Hunter considers an appeal.” The president added yesterday that he will not use his pardon power to commute his son’s sentence. The Delaware jury’s verdict is unlikely to affect the outcome of the presidential election.

Robert F. Kennedy Jr.’s campaign asserted this week that CNN will violate federal law if it excludes him from the June 27 presidential debate. Kennedy has until next Thursday to meet the threshold that CNN has established for the debate: polling at least 15 percent in at least four recognized national polls and being on the ballot in enough states to able to win at least 270 Electoral College votes. Kennedy has hit the 15 percent polling threshold in three polls. But he is well short of the Electoral College vote threshold. The New York Times calculates that he is only one-third of the way there.

What the Candidates Are Saying

Biden said yesterday that he is pessimistic that a cease-fire between Israel and Hamas is within reach. However, he added that “I haven’t lost hope.”

In a bid to “Trump-proof” U.S. support for Ukraine, Biden extended security guarantees to Ukraine for the next decade. According to Politico, “the 21-page agreement includes plans ranging from how to defend Ukraine today to building a future force capable of deterring future incursions by Russia. A key element is the U.S. will further train Ukrainian troops so that Kyiv’s military further complies with Western standards needed to officially join the alliance.” The weakness of such agreements is that what one president commits with a signature another president can undo with a signature.

What the Pundits Are Saying

The New York Times’s Michael C. Bender explored Trump’s possible short list for a vice-presidential nominee. Bender argues that “Trump has an unusual amount of freedom with this choice. He believes voters will cast their ballots based on the top of the ticket, so he needn’t pick someone from a battleground state to help win it. People already know him, so he doesn’t need someone to woo a particular constituency, as Mike Pence did with evangelicals in 2016. But he worries that a running mate can create unwanted distractions. As a result, Trump has tightened his V.P. list to dependable and loyal campaigners.” Bender puts former North Dakota Governor Doug Burgum, Florida Senator Marco Rubio, and Ohio Senator J.D. Vance in the top tier of candidates.

The Canadian government established Policy Horizons Canada to “empower the Government of Canada with a future-oriented mindset and outlook to strengthen decision making.” Translation: to think about challenges that Canada might face in the future. The latest Policy Horizons report listed “civil war erupts in the United States” as one of the “underappreciated disruptions” Canada might face. That is a sentence I never imagined typing.

What the Polls Show

Biden got some relatively good news on the polling front this week. A CBS/YouGov poll found that while he is trailing Trump 50 percent to 49 percent nationally, he leads Trump 50 percent to 49 percent in the top seven battleground states. A Financial Times/Michigan Ross poll found that Biden has cut into Trump’s lead on who can better handle the economy. Trump had an eleven-point lead on that question back in February. Now it’s four points. And a poll by the Minneapolis Star Tribune, MPR News, and KARE 11 Television found that Biden has a 45 percent to 41 percent lead over Trump among likely voters in Minnesota. Not surprisingly, Biden polls best in the Twin Cities and their nearby suburbs.

538 released its first forecast of the 2024 presidential race, and the result qualifies as a dog-bites-man story. Drawing on polling and historical data, the group ran one hundred simulations of the race and Biden won 53 times and Trump won 47 times. In other words, the race remains a toss-up less than five months out from Election Day. The Economist’s prediction model disagrees. It gives Trump a two-in-three chance of winning.

The Campaign Schedule

The first presidential debate is in thirteen days (June 27, 2024).

Donald Trump’s sentencing hearing is in twenty-seven days (July 11, 2024).

The Republican National Convention opens in Milwaukee in thirty-eight days (July 15, 2024).

The Democratic National Convention opens in Chicago in seventy-three days (August 19, 2024).

The second presidential debate is in ninety-five days (September 10, 2024)

The first in-person absentee voting in the nation begins in Minnesota and South Dakota in 105 days (September 20, 2024).

Election Day is 151 days away.

Inauguration Day is 227 days away.

Shelby Sires assisted in the preparation of this post.

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