(CNN) If it feels like we’re dedicating a lot of recent What Matters editions to the national debt, we are.
It’s a top political story as Republicans and Democrats square off over raising the debt limit and paying the nation’s bills.
But the larger issue of the government spending more than it collects in tax revenue — and whether or when that will become an existential threat to the way Americans live today — should not be so quickly bypassed.
In recent weeks, we’ve:
- Talked to an academic who argues the debt is not as much of a problem as we presume.
- Looked at the looming insolvency of key Medicare and Social Security trust funds.
There’s more this week:
- The annual bottom-line financial report of the US released Thursday by the Treasury Department showed the country’s current path to be “unsustainable.”
- A separate Congressional Budget Office report released Wednesday confirms interest rate hikes will make the ballooning national debt much more expensive to finance. In a matter of years, just paying interest on debt will eat up a significant portion of tax revenue.
More plainly put, that means the portion of every tax dollar going to interest on the debt will grow from:
- 13 cents of every tax dollar spent on interest in 2023 to
- 20 cents of every tax dollar spent on interest in 2033.
I talked to Michael Peterson, CEO of the Peter G. Peterson Foundation, a nonpartisan organization that tries to raise awareness about the debt and spur Congress to act to fix the problem.
Excerpts of our phone conversation are below.
Wake-up call
WOLF: People are talking a lot about debt right now, because Republicans in Congress are talking about using the debt limit as leverage to force spending cuts. We also got some new information yesterday from the Congressional Budget Office about the US balance sheet. What information from that new projection sticks out for you about the direction the country is headed in?
PETERSON: Unfortunately for us, there weren’t a lot of surprises because we’ve been well aware of these trends that we’re seeing. But I think the report was a wake-up call to much of the country who had not been paying attention.
A key part of the report was the growth in interest costs. As you know, CBO puts out 10-year projections, which is the budgetary window, on an annual basis, and in about 19 months, America’s projected 10-year total interest costs rose by 93%.
(Note: 10-year interest costs were listed as $5.4 trillion in the July 2021 CBO report, $8.1 trillion in the May 2022 report and $10.5 trillion in the report issued this week.)
A lot of that is driven by the increase in rates as a result of the inflationary challenge we face. But some of that is also due to the continued borrowing, the trillion-dollar-plus deficits that we keep running year after year.
We have a major structural deficit problem in this country. We’ve known about it for a long time. Much of it is driven by demographics and the baby boomer generation entering retirement, which is a very predictable fact pattern.
But unfortunately, Washington has neglected these issues for so many years that now our debt is topping $32 trillion, and the trillion-dollar deficits continue. And now we’re in a difficult period of interest rate increases, which exacerbate the problem and compound the problem.
Raise the debt ceiling, but deal with the debt
WOLF: How do you feel about the immediate problem, which is dealing with raising the debt limit, versus the long-term problem, which is kind of righting the ship? Are those things that should be separated?
PETERSON: The debt ceiling must be raised. Risking or challenging the full faith and credit of the United States would be totally unacceptable. So that must happen, and everyone knows that must happen.
At the same time, we have to focus on the reason why we keep hitting that ceiling, and that is that our fiscal outlook has structural, significant, growing imbalances. We can’t just ignore that time and time again.
There are many appropriate measures that can be taken now, either beginning a process to address our structural deficits — for example, the TRUST Act that’s achieving bipartisan support in both the House and the Senate to create a bipartisan process to begin to address some of our structural deficits. That would be one example.
There are other decisions that can be made at the budgetary level to address these problems.
Frankly, the answer is we need to do both. We need to raise the debt ceiling, but we also need to address the reason why we keep hitting the debt ceiling.
Think in terms of intergenerational justice
WOLF: I’m starting to hear, more and more, the argument that the debt doesn’t really matter that much. The US controls its own currency. The stability of the dollar is what makes it an attractive investment, and we should view debt as a promissory note and an investment for the public. What’s your answer to that argument?
PETERSON: If you think that that doesn’t matter, just ask the next generation and tell them what they’d be facing if we don’t deal with it.
In a few decades, interest costs will take up 50% of federal revenue. Imagine living in that time period. You’re a young person starting their career and half of their tax dollars are going to pay for things that prior generations refused to pay for themselves.
To me, it’s actually an intergenerational justice issue and a moral issue, which is: How do we want to leave America to our future generations?
This is not a fictional thing. A billion dollars a day in interest today is not a fiction — the CBO report, I think, it’s $9 trillion in interest over the next 10 years.
(Note: It’s actually more — $10.5 trillion).
That’s several Build Back Better programs, for example.
(Note: As originally proposed by President Joe Biden, the Build Back Better agenda was a massive $2 trillion spending bill that would invest in multiple parts of the economy. Democrats passed a much slimmed-down version last August.)
So no matter what you care about, whether it’s climate or investing in the future, or the safety net, or national security, or keeping taxes low, having $9 trillion of required obligations is very damaging.
It’s true that we can kick the can down the road because we’re a strong country and we have a Federal Reserve, but that doesn’t mean it’s good for the future.
This debt load is not unprecedented, but there’s reason to act now anyway
WOLF: The size of the interest payments is large but not unprecedented. They were a similarly large portion of spending in the ’90s. The size of the debt as a percentage of the gross domestic product is not unprecedented. It was the same size in World War II. It’s much larger in Japan. Why do we have to act now if the debt is not yet in a historic place?
PETERSON: I don’t think hitting the record should be the only reason you deal with a problem, and we’re close to hitting the record for the United States.
Secondly, I would say World War II was an unprecedented global security situation, and addressing that security question gave benefits to the future for decades continuing through today.
One of the things about debt that people tend to forget to ask is, what are you doing with the money?
If we were borrowing money to invest in the future, you could argue that there’s benefits that accrue to future generations, and it may be useful to borrow for certain things that are investments.
But unfortunately, the vast, vast majority of our budget and our borrowing is going toward consumption, so we leave nothing to the future.
Just because we’ve had periods where we spent more on interest or had more debt as a share of GDP doesn’t mean it’s actually a good decision or a sound decision.
The parties will have to come together
WOLF: We hear Republicans talking about this as an important issue right now, but we know under the last president they cut taxes, which contributed to the debt just as much as spending enacted by Democrats. Parties are moving away from each other in terms of taxes and spending, and they’re both moving in equally opposite directions. How do you bring them together on this?
PETERSON: It’s true that both parties bear responsibility for our current dismal fiscal situation. There are many examples of fiscal irresponsibility on both sides. I think what needs to bring them together is the reality of the situation and the urgency of the situation.
Social Security and Medicare are critically important programs to tens of millions of Americans, and they should be rock solid. However, on our current path, they’re at risk. They each have trust funds that are on their way to depletion — over the next few years in the case of Medicare, in about 10 years in the case of Social Security.
It’s a situation that is staring us in the face, that is not far in the future. And we elect these leaders to help the country on its path forward, and they should come together and show leadership to address it as soon as possible.
The recipe to solve this
WOLF: We have models for how this can be done. In the 2010s, lawmakers essentially forced themselves into cuts that Congress then undid. We had a plan to control Medicare spending in the ’90s that Congress undid because it was too painful. So what is the recipe? What are the specific things that should be done?
PETERSON: There’s no shortage of solutions to our national debt problem. The good news about this problem is that it’s entirely within our control. So we control our own destiny here. We don’t need other countries to cooperate on this.
And secondly, the solutions are sitting here right in front of us. And they’re reasonable and achievable. It can be done in a way that’s gradual and protects the people who need the services the most.
On the revenue side, there’s a range of options to adjust, gradually, the tax code in ways that are fair, and will help shore up these programs.
And on the benefit side, there’s a range of actions that can be taken in a compassionate, gradual manner that are not only achievable but are totally necessary to ensure that the programs remain solvent.
What that really means
WOLF: That’s seems like a nice way of saying there will have to be tax increases, and there will have to be benefits cuts.
PETERSON: It’s up to Congress as to what methods they choose. And the most durable solution would actually be a bipartisan one that would include both.
There’s a history of one party or another implementing something that the next future Congress gets rid of, and that’s not productive or durable. And it’s not a great way to run a great country like ours.
So the most durable solution would be a combination of revenue increases and benefit adjustments over time, that shore up these programs so that they’re certain for the people that need it.
Debt has a role to play
WOLF: Do you feel like there should be no debt? Or is there a healthy amount of debt?
PETERSON: There are certain times where debt can be very important. We just went through two very acute crises — one, the financial crisis and then the Covid crisis — and the US was very, very fortunate that it was in a position where it could borrow money to help the country through these crises.
Those are examples where actually having a low amount of debt is a good thing, because you have the ability to borrow in an emergency to help citizens in the country get through something difficult.
A second example where debt could be a good thing is if we’re making important investments in our future. A lot of people are focused on climate as a long-term challenge, and it’s a critical one. But letting the debt grow out of control is not good for our ability to deal with climate problems in the future or our ability to invest in new technologies to prevent the worsening of our climate.
Unfortunately, fiscal irresponsibility is damaging to a wide range of issues, and no matter what you care about, having a mountain of debt is not helpful to your cause.
Why this is not fearmongering
WOLF: The last time I wrote about this — I was talking about the insolvency in the Medicare trust fund — I was accused online of fearmongering. How urgent do you think this is? What is the timeline by which the US absolutely must act?
PETERSON: I think the time to act, ideally, was yesterday.
When you have a debt problem, the sooner you begin to address the problem, the easier it is. The longer we wait, the more painful the solutions are. The sooner we act, the more palatable and gradual and compassionate the reforms can be.
The answer is, the sooner the better. And, you know, burying our heads in the sand and pretending everything’s gonna be just fine in two of the most important programs in the entire federal government is not an appropriate way to run a country.
