Washington's $40 Trillion Debt Problem and the Costs Spreading to American Households

Host Tom Westin opened the segment by noting that debating what to do about America's growing national debt has long been one of Washington's most persistent economic debates. He said that this time around it is hard to find the issue anywhere on the political agenda, even as the national debt has climbed to more than $40 trillion.

Westin said the scale of government borrowing is one of the most likely suspects in the search for why long-term interest rates have climbed to levels last seen during the great financial crisis. He said the segment would examine what is driving the debt higher, how those costs filter through the economy, and why Washington has struggled to change course.

Westin said it has been more than two decades since the federal government last balanced its books. He recalled that under President Bill Clinton in 1998, Washington recorded its first budget surplus in nearly three decades.

According to Westin, the government was in surplus for four straight years, peaking at roughly $236 billion in 2000. He said the picture is very different today, because persistent deficits mean more borrowing each year, prompting some to worry that the economy and markets may eventually suffer the consequences.

A speaker in the segment argued that the main reason real interest rates are so high is secular in nature, and that the cause is the deficit.

Westin said those higher borrowing costs do not stop with the government. He explained that they filter through to mortgages, car loans and other costs that households pay.

Westin said that bringing the deficit down would require confronting thorny issues Washington has largely avoided. These range from raising taxes to cutting spending on programs such as Social Security and Medicare.

He noted that former Treasury Secretary Hank Paulson has tried for years to get the country to focus on these issues, even as he warned about potentially severe consequences.

Paulson argued that the deficit is the ultimate in intergenerational inequity and selfishness. In his account, older people vote for these benefits and do not want to pay for them, leaving the next generation holding the debt.

Westin then said he had spoken with former Speaker of the House Paul Ryan and Yale Budget Lab co-founder Natasha Sarin about what it would take to change the country's fiscal trajectory, and that Sarin began by describing the size of the problem.

Sarin said she wished more attention were paid to the fiscal state of the United States, which she described as not great and deteriorating. She said debt-to-GDP is projected to rise to 130% over the next decade, and that the national debt has crossed $40 trillion.

She added that it is actually $33 trillion if intergovernmental transfers are excluded. Sarin said these numbers may feel meaningless to real people, but they are tangibly connected to the costs households face in the affordability debate that is significantly driving the midterms.

Sarin said that part of the reason the United States is now flirting with mortgage rates above 7% is that the rate at which households can get mortgages is very closely tied to the rate at which the United States can borrow to fund its fiscal position.

Westin asked her to connect the government's ability to borrow, which affects interest rates, with someone buying a house, and to explain the threat of buyers not being willing to buy U.S. Treasuries.

Sarin said there are many factors at play, but one is that when more debt is outstanding, the borrower becomes riskier because there is more debt to repay. She said this is particularly true for a lot of short-term debt, given how the United States has structured its debt in recent history.

She said the country is therefore exposed to having to roll over that debt at potentially higher interest rates as rates move up, as the Fed tries to temper inflation. Based on the work she and colleagues have done, she said the nexus between the interest rate the government pays and car loans and mortgages amounts to thousands of dollars of excess cost for the average family.

Ryan said that before he became Ways and Means chair, he led the House Budget Committee for Republicans for four terms, and that in the 2010s the party believed it could draft budget plans that actually paid off the debt, not just balanced the budget. He said the House passed four budgets in those years that showed how to pay off the debt, addressing Medicare, Medicaid and other drivers of the debt.

Ryan said that at one point Republicans could offer specific plans for debt reduction and survive politically, but the party did not win the presidential election. He said party leaders, including Trump at the top, concluded that the approach was not good politics, and so it was dropped. Ryan said there was a time when Republicans offered coherent debt reduction plans that would have avoided a debt crisis, and in his view the country is heading toward one now.

Asked whether it is too late, Ryan said it is not too late, but he thinks the country is losing wiggle room. He said this is partly a question for the bond markets.

Ryan said that if a plan could be passed that solves the entitlement problem, which he described as massive unfunded liabilities, and showed it would take a long time to get the debt under control, the bond markets might give the country credit for it.

Westin said Ryan had used the magic word, entitlements, and noted that he could not remember the last time a prominent national politician of either party had raised it. He said he had mentioned the word himself but no longer hears it coming up.

Ryan described the country as having a social contract that the parties fought bitterly over in the 20th century, and said it will have to be changed starting with his generation, Generation X, and younger. He said the programs can be made to work better.

Ryan said that if the lessons learned over the last 40 to 60 years about how to fix these programs are applied, the social contract can be fixed, a debt crisis can be prevented, and people nearing retirement can be assured that the promises government made to them will be kept. He added that if the country keeps going the way it is, it will probably face a debt crisis.

Westin said Sarin agrees that addressing entitlements is key to any plan dealing with the debt and deficit. Sarin warned that the country will be forced to act sooner than many people think, and said people are insufficiently focused on the fact that the next president will inherit a Social Security trust fund that will be extinguished within his or her tenure.

Sarin said these are not problems that can be left to wait until a fiscal crisis forces action. Without addressing them, she said, the alternative would be across-the-board benefit cuts of 28% for current Social Security recipients. Westin noted that the next president, along with the senators being elected this time, will have to deal with the problem within their terms.

Westin said that Ryan and Sarin both believe there are realistic ways to address the debt problem without causing too much disruption and in ways that would be fair to all concerned. Westin asked Ryan about his earlier plan, A Better Way, which included substantial tax reform, much of which was implemented, and which led to growth.

Ryan said he thinks the country is on a trajectory toward better revenues, and that more revenue could be collected from the current tax code if it were reformed. He said the tax code currently raises a little over 17% of GDP, while historically it has been closer to 18%. In his view, tax reform could lift the revenue system to about 20% of GDP without sacrificing economic growth, but going beyond that would, in his opinion, damage the economy. He noted that spending is at 24% of GDP and rising, so revenue cannot simply chase the spending line, and he said he is a big fan of the cashflow tax, which he considers more pro-growth and pro-labor.

Sarin said she and her colleague Kim Clausing had just put out a paper with the Aspen Economic Strategy Group that offers a way to raise $15 trillion in ordinary ways to meet an extraordinary fiscal moment. She said the approach would raise the rate for the 2% most profitable companies, often multinationals operating across jurisdictions, to somewhere around 28% or 30%.

Sarin also said that the problem of profit shifting, where companies book profits in low-tax places, should be seriously addressed, as it was attempted in the Biden administration. She said those two measures alone would raise over $1 trillion. Adding the undoing of damage to the tax system, including the depletion of 40% of the IRS workforce, would bring in more revenue, even at current tax rates, because about 3% of GDP, roughly $800 billion of taxes owed to the country each year, is not being collected.

Asked whether he sees a world in which there is political will on either side of the aisle to address these issues, Ryan said he has both pessimism and optimism, and that he is trying to be optimistic. He said recent interventions, such as the Japanese yen intervention or buybacks of some long-dated bonds, are not very meaningful relative to the scale of the problem.

Ryan said the only real response to rising yields is to think seriously about the fiscal problems. He expressed hope that the conditions already appearing in the economy will force conversations that people were not interested in having in a low interest rate environment.