Debt, Deficits, and Default in President Biden’s State of the Union

How to protect the full faith and credit of the United States of America

Photo by Daniela Mangiuca on Getty Images

President Biden devoted quite a few lines in his State of the Union address to making various claims about deficits, debt, and the debt limit. President’s Biden’s statements are block quoted below, my reactions follow.

“In the last two years, my administration cut the deficit by more than $1.7 trillion - the largest deficit reduction in American history.”

This claim is untrue. Deficits declined due to COVID-19 emergency spending waning, not because “the administration cut the deficit.” President Biden is claiming victory over deficits when his administration’s policies significantly increased deficits for the next decade and beyond. From the American Rescue Plan, to the infrastructure law, to new subsidies for a range of industries from clean energy and climate to semiconductor manufacturing, to student loan forgiveness, the administration has increased deficits by several trillions of dollars.

Important context lacking from President Biden’s claim is that deficits are still historically high. At current levels, the deficit compares to deficits during the Great Recession—the first time in U.S. history that deficits exceeded $1 trillion. Deficits reached unprecedented levels of $3.1 trillion in 2020 and $2.8 trillion in 2021. It’s only from such excessive levels and due to COVID-19 waning as a public health emergency that the $1.4 trillion deficit concluding 2022 looks small in comparison.

The Congressional Budget Office projects deficits will average $1.6 trillion each year over the next decade and grow from there. Instead of a misguided victory lap for being President at the tail-end of a historic pandemic during which spending skyrocketed, President Biden should work together with Congress to put federal spending on a sustainable path, rein in deficits, and stabilize debt as a share of the economy.

“Under the previous administration, America’s deficit went up four years in a row. Because of those record deficits, no president added more to the national debt in any four years than my predecessor. Nearly 25% of the entire national debt, a debt that took 200 years to accumulate, was added by that administration alone.”

President Biden is correct. Spending is a bipartisan problem. Republicans in Congress tend to push harder against government spending when a Democratic President occupies the White House. Which might explain why deficits tend to be higher under Republican presidential administrations than under Democratic ones.

When President Trump left the White House, the deficit had reached the largest peacetime level as a share of the economy, in U.S. history, as the federal debt exceeded 100 percent of the economy for the first time since World War II. Brian Riedl with the Manhattan Institute offers a comprehensive assessment of President Trump’s fiscal legacy, writing:

“President Trump signed legislation and approved executive actions costing $7.8 trillion over the decade—compared to $5.0 trillion for President Obama and $6.9 trillion for President Bush, and he enacted these costs in just a single four-year presidential term, compared to his predecessors’ eight years in the Oval Office. The largest drivers were pandemic relief legislation ($3.9 trillion), the 2017 tax cuts ($2.0 trillion), and legislation raising the discretionary spending caps ($1.6 trillion).”

“How did Congress respond to all that debt? They lifted the debt ceiling three times without preconditions or crisis. They paid America’s bills to prevent economic disaster for our country. Tonight, I’m asking this Congress to follow suit. Let us commit here tonight that the full faith and credit of the United States of America will never, ever be questioned.”

While it’s true that Congress suspended the debt ceiling three times during President Trump’s term in office, these suspensions did not occur without preconditions. Each debt limit suspension was tied to a bipartisan deal that determined spending levels for discretionary programs (defense and domestic programs governed by annual appropriations) or provided natural disaster relief funding.

Both Democrats and Republicans regularly use the debt ceiling to negotiate government policy. Ryan Lizza writes about the first debt limit suspension under Trump in the New Yorker:

“For weeks, Chuck Schumer, the Senate Minority Leader, had been plotting a strategy to use the debt-ceiling vote to extract concessions from Donald Trump and his fellow-Republicans. Over the weekend, the White House and Senate Republicans indicated that they wanted a debt-ceiling increase attached to a bill to provide immediate aid for areas of Texas and Louisiana affected by Hurricane Harvey.”

They made the deal. The subsequent two debt limit suspensions were tied to discretionary spending deals, namely the Bipartisan Budget Acts of 2018 and 2019.

The debt limit is an important lever in Congress’ fiscal toolbox. It presents Congress with a focused legislative opportunity to re‐​evaluate unsustainable deficit spending. Debt policy has been a divisive issue since the beginning of American government and debt limit measures are often informally or formally linked to other fiscal issues.

Brian Riedl examined 14 major deficit‐​reduction negotiations since 1980 and identified that: “The debt limit had been tied to every major deficit deal between 1985 and 2011.” In some cases, the debt limit prompted a deficit reduction deal. In others, Congress tacked a debt limit increase onto a deficit reduction deal that was already in the works.

The responsible choice at the debt limit is to pair any increase with spending reforms that slow the growth in the debt. If the debt continues to grow rapidly, it will bode ill for the U.S. economy, business investment, and government policy. High and rising debt slows growth, crowds out private investment, limits the government’s ability to respond to unforeseen emergencies, and elevates the risk of a sudden fiscal crisis where investors would lose confidence in U.S. Treasury bonds and the U.S. dollar.

The way to ensure “that the full faith and credit of the United States of America will never, ever be questioned” is not by raising the debt limit without preconditions, as President Biden demands. But for legislators to adopt a concrete fiscal plan that will stabilize U.S. debt as a percentage of GDP—with spending reforms that address the unsustainable growth in federal entitlement programs and adopt credible fiscal restraints to limit discretionary spending.