NOTE: I started this essay before President Biden and Speaker McCarthy negotiated a debt ceiling compromise and the bill passed Congress this past week, signed into law over the weekend. But make no mistake; federal spending is on an unsustainable course, and a day of reckoning could be devastating to our economy.
From a recent update from CBO:
The Budget From 2024 to 2033. In the agency’s updated projections, annual deficits nearly double over the next decade, reaching $2.7 trillion in 2033. (Deficits have been adjusted to exclude the effects of shifts that occur in the timing of certain payments when October 1, the first day of the fiscal year, falls on a weekend.) The projected cumulative deficit over the 2024–2033 period—$20.2 trillion—is about the same as the shortfall CBO projected in February. Measured in relation to the size of the economy, deficits grow from 6.0 percent of gross domestic product (GDP) next year to 6.9 percent in 2033—well above their 50-year average of 3.6 percent of GDP.
As of Dec. 2022: "The current level of the debt to GDP ratio as of December 2022 is 120.21.:"
Now turning to studies that explore the existence of a debt threshold, Caner, Grennes, and Koehler‐Geib (2010) examine 99 countries between 1980 and 2008 and find that the threshold level of the average debt ratio on GDP growth is 77 percent for all countries in the sample. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage point of annual real growth.
I still recall reading at a late surreal point in the Clinton Administration (John Roberts of FNC mentioned 1999), we were in the midst of a rare string of federal budget surpluses under a GOP House, the first surpluses in decades. It seems ludicrous now, but the piece was worried about US debt getting paid off by surpluses: what alternative would investors have to the presumably safest investment on earth?
Except for a brief period under President Jackson, the USG has generally financed a debt. Until the 16th Amendment tax/revenue was limited to support a small central government, chiefly by tariffs and certain excise taxes. If revenues were insufficient to cover expenditures Congress on a routine basis would directly authorize debt issuance (or authorize the Treasury) until the Second Liberty Bond Act of 1917, which set a statutory debt limit
The debt ceiling construct enables a more flexible, proactive approach for the Treasury to issue debt within There are a number of relevant points:
- Has federal debt payment lapsed in the past? Yes: during the War of 1812, and a word processing error in 1979 caused a delay in processing 4000 payments. Another former Treasury official has listed 4 others: (1) the greenback crisis in funding the Civil War; (2) the USG defaulted on gold bonds in 1933; (3) in 1968 the USG refused to redeem silver certificates; (4) in 1971, Nixon refused to back dollars with gold, breaking Bretton Woods.
- Debt priotization? We take about $4.8 T in revenues and CBO expects a $1.5 T deficit. Net interest expense is roughly $640 B. So clearly, we could cover debt service and defer other expenses. (I myself have been sympathetic to this argument.) Certainly, the Obama Administration decided to close down high PR things like national parks and monuments. There are some issues like prioritization of debt service isn't written into law and apparently our IT processing of transactions isn't designed to facilitate prioritization.
- Then there are the progressive gimmicks, like Biden invoking the 14th Amendment over the national debt not being questioned or cashing in a trillion dollar coin. Basically, the POTUS does not hold the constitutional power of the purse and a debt limit is constitutional. And the gimmick of the platinum coin has to do with commemorative coins, not lawful money. If you gimmick your way out of debt, why bother with raising taxes in the first place?
