On September 1, Phil Smith, the National Field Director of The Concord Coalition, gave us a Zoom presentation that he subtitled “Federal Deficits & Debt: An Unsustainable Future”. He started by emphasizing that the Concord Coalition is a non-partisan, mostly volunteer, organization with established groups all across the country that focus on educating and empowering citizens as to both the drivers and the ultimate results of the U.S. government’s fiscal policies. In his presentation, he tried to show the projected medium- to long-term debt results of the government’s taxing, spending, and borrowing.
First, he gave a high-level overview of the U.S. government’s budget for the 2019 fiscal year (before the advent of Covid-19), comparing receipts of some $3.5 Trillion (57% individual and corporate income tax, 36% payroll tax, and 8% “other”) with expenses of some $4.5 T (61% mandatory, 30% discretionary (including 15% defense), and 8% net interest). Note that some 70% of the federal expenses are on autopilot with little or no congressional input or oversight, leaving only some $1.3 T in expenses where congress has the power to influence the long-term trajectory of the federal expenditures.
A chart of the federal debt as a percentage of GDP for about the last hundred years shows that it rises during times of global war or depression and falls when the economy recovers, but it also shows that there has been a general rise in the last forty years through both good times and bad. Through much of that time, the federal deficits have run around 3% of GDP although the deficits have been on the order of 5% of GDP more recently.
With that background, he started talking about the economic effects of the Covid-19 pandemic and the federal reactions to those effects. His headline negative effects were the dramatic increase in unemployment at the beginning of the Covid epidemic (an increase in some 10% in one month) and the dramatic decrease in GDP (especially the decrease of some 9% in the second quarter of 2020). In response, congress, in a bi-partisan effort, enacted five separate “stimulus” bills (which he referred to, positively, as targeted, timely, and temporary) totaling some $3.1 T. More recently, congress has enacted or is working on other “stimulus” bills totaling some $1.8 T, which he refers to as less targeted, less timely, and potentially less temporary. The net result of these bills is a projected budget deficit greater than $3 T for at least the next two years.
Projecting this into the future, deficits will be up to 13.3% of GDP by 2051. The main drivers behind this increase will be health care, social security (our aging population) and net interest, which is projected to be 6.8% of GDP by 2051 (exceeding cost of social security, even assuming continued low interest rates). Revenue is expected to continue flat with respect to GDP at around 17.5%, whereas expenses are expected to continue to climb. Although growth could influence these projections, growth is constrained by the size of our labor force (with aging population, reduced birth rates, and reduced immigration) and productivity (which may not increase dramatically). Revenue predictions include the assumption that the 2017 tax cuts will expire, as planned, in 2025, although the expirations may become a casualty of the 2024 election. Reduction in this projected deficit will require significant policy changes, but those policy changes will have to become harder and more draconian with each year of delay.
Although there are arguments to suggest that this level of debt won’t be a problem, if conditions change such that debt does become a conspicuous problem, it may already be too late to do anything about it. Also, rising debt, whether manageable or not, reduces the fiscal space needed to respond to crises, and there will be crises. On the world front, the position of the U.S. as a world leader with the world’s most important currency could be jeopardized if the world were to lose faith in the stability of that currency: thus, our fiscal security is closely tied to our national security. One of the issues is that we have been using debt to finance consumption rather than financing investment to expand production capacity. Furthermore, the opportunity cost of our net interest obligation will become more significant. Mitigating against any significant policy changes is the fact that politicians have a strong incentive to leave the debt problem for future generations.
In response to questions:
On the policy front, we need to balance the need to cut spending on “this” or to increase revenue with more taxes on “that”.
Although there are arguments to say that Social Security expenses are not on the budget, the fact that, on the current trajectory, the Social Security Trust Fund will be out of money in the not-too-distant future says that it will certainly be on the budget in a few years.
One of the major issues is that health-care costs continue to rise, with the U.S. spending around 2X more for health care than any other country but getting poorer results – who is going to pay for it? Mr. Smith agreed that this is part of the problem and agrees that part of the answer may ultimately be a single-payer system, although he also mentioned the issue of large health-care systems buying up smaller systems with concomitant increases in costs.
In a brief discussion of tax compliance, he regretted that congress skipped the opportunity to reform our needlessly complex tax code in association with the creation of tax cuts in 2017. He pointed out that, with the increasing complexity of the tax code along with the continued reduction of the capabilities of the IRS, there is a growing incentive to avoid paying taxes, with a resulting reduction in our trust in government. How do we get that trust back?
Most of the discussion centered around public debt, but private debt is a very large part of the overall financial health of the country. He pointed out that, in spite of the economic depredations caused by the Covid epidemic, the savings rate in the U.S. actually grew over the past year. It is unclear whether this trend will continue as we come out of the Covid recession.
A three-phrase summary: we need to reduce health care cost, increase immigration, and reverse the unaffordable tax cuts. Mr. Smith agreed that each of those is valid, but each comes with a series of caveats that makes them more difficult.