Debt Digest | $33,000,000,000,000

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts.

• U.S. Debt reaches $33 Trillion. “America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month amid another fight over federal spending,” writes the NYT’s Alan Rappeport. Total federal debt consists of publicly held debt (borrowed from credit markets, including from individuals, state/local governments, foreign entities, and the Federal Reserve) and intragovernmental debt (borrowed from federal trust funds like Social Security). For more fast facts about U.S. government debt, see this handy fact sheet.

• Congress should get serious about a fiscal commission. You might remember House Speaker McCarthy calling for a BRAC-like fiscal commission as Congress was in the final stages of voting for a debt limit suspension. Now with another tough vote, this time to fund the government or face a partial shutdown, the Speaker has resurrected the idea. Congress should get serious about empowering a nonpartisan fiscal commission to stabilize the growth in federal debt before a fiscal crisis forces their hands. As Ernest Hemingway wrote in his 1926 novel, The Sun Also Rises:

  “How did you go bankrupt?” Bill asked.
  “Two ways,” Mike said. “Gradually and then suddenly.”

• Reform federal disaster relief. “The federal government shoulders a substantial share of large disasters’ costs, though it has little influence, and no direct say, in policies such as building codes or local zoning. This cost burden is driven by the disaster declaration process as well as congressional choices about activating and funding other programs,” according to a new Brookings report. “When you dissociate the benefits and costs of an activity, it misaligns incentives. If disaster costs are paid by others, there is less incentive to pay to lower them, even when it would be cost-effective overall.” Read about free market alternatives to centrally-driven disaster relief here and here.

• Pandemic-era unemployment insurance fraud climbs to $100 billion. The Government Accountability Office (GAO) estimates that “the amount of fraud in unemployment insurance (UI) programs during the COVID-19 pandemic was likely between $100 billion and $135 billion. This is about 11 percent and 15 percent, respectively, of the total amount of UI benefits paid during the pandemic.” That’s up at least $24 billion from original estimates. In total, at least $400 billion or 10% of all COVID relief aid was wasted, misspent, or stolen.

• How much do energy subsidies cost? Philip Rossetti of the R Street Institute explains, “The United States spent $29.4 billion on energy subsidies in 2022. Of that, $8.7 billion were “end-use” subsidies, mainly financial assistance for energy in low-income households ($3.8 billion), home energy efficiency subsidies ($2.7 billion) and electric vehicle subsidies ($1.1 billion). Another $481 million went to environmental conservation. That leaves $20.2 billion, 89 percent of which is for tax breaks.” Cutting wasteful and environmentally damaging subsidies could save $274 billion over 10 years according to the Green Scissor Coalition. See the full set of cuts here.

• Deficit up one trillion from last year. The Congressional Budget Office released its first estimate for fiscal year 2023’s deficit: $1.5 trillion. That’s $946 billion up from fiscal year 2022. Running such enormous red ink has severe consequences for short- and long-run fiscal policy. As American Action Forum’s Douglas Holtz-Eakin writes, “Expansionary fiscal policy is contrary to the tight financial conditions that the Fed is using to pull back on overall demand…Sustained high deficits in a full-employment economy crowd out private-sector investments in technologies, business models, labor skills, equipment, and other sources of higher productivity…[High deficits] are the termites in the basement threatening a real crisis in the years to come.”

• Only primary surplus can reverse our current budget crisis. In 2010, CBO projected public debt would reach 90 percent of GDP by 2020. Today, the debt-to-GDP ratio is about 98 percent and projected to get significantly worse. As Arnold Kling of the American Enterprise Institute explained in 2010, the years between 1950 and 2009 which saw dramatic reductions in the ratio of debt to GDP were years in which the U.S. ran primary surpluses (non-interest spending was less than revenue). “The only other chapter in history where the debt to GDP was reduced was the Inflation Shock (1970—1979). Even then, it was not reduced by much, and this chapter was followed by…investors punish[ing] the government for its prior inflationary transgressions. In short, there is no precedent for reducing the ratio of debt to GDP by simply growing our way out of it.”

• The political consensus driving budget-breaking deficits. As the Wall Street Journal’s Richard Rubin writes, “[Democrats] fully ran the government in 2021 and 2022 but couldn’t raise taxes on the rich due to resistance within their own ranks. This all attests to a rarely appreciated but significant dynamic: Just as both parties agree that Social Security and Medicare, the two biggest federal spending programs, must not be touched, they also agree that income taxes on the overwhelming majority of Americans can go down but never up. That tacit, politically popular consensus keeps tax revenue as a share of the economy flat or declining in the long run while spending’s share rises. It also locks in a permanent budget imbalance that both parties bemoan but neither seems eager to change.” See the graphic below for historical context.