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America had a headline-grabbing milestone this summer. Unfortunately, it wasn’t our America 250 celebration. Rather, it was passing the $40 trillion mark on our national debt.
$40 trillion is a number that is very difficult to get your head wrapped around. It’s more than 120% of our GDP, a ratio that sounds more applicable to an emerging market in crisis than the biggest economy in the world.
While the debt in and of itself is a problem, there are two related issues that are critical. One is the rapid growth in debt accumulation. In 2017, we passed the $20 trillion mark, and less than 10 years later, we doubled that to $40 trillion.
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This begets the second issue, which is the cost to finance all that debt.
Warren Buffett, chairman and CEO of Berkshire Hathaway, makes his way to a morning session at the Allen & Company Sun Valley Conference on July 13, 2023, in Sun Valley, Idaho. ((Photo by Kevin Dietsch/Getty Images))
We no longer have the “exorbitant privilege” as it is often referred to of countries adding U.S. dollar reserves no matter what, and that means now, investors in our debt, if we can find them, are price-sensitive. In layman’s terms, they are requiring more of a premium to lend the U.S. government money.
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Not only are we running very high deficits (both in absolute terms of $2 trillion a year and in terms of deficits/GDP) that need to be financed, but in recent years, the Treasury has been financing our debt for short-term durations. While a bit cheaper, this debt is in constant need of refinancing (not to mention financing this way tends to be more inflationary).
The reality is that the interest we are required to pay on the debt — that is, money we are spending to finance things we have already bought — is larger than our spending on the military and, if things keep going the same way, may one day be the government’s largest expense category.
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So, the question that comes up is, what can we do? Is there even a way out of this?
The answer is yes. We obviously have the tools to be able to get a handle on our debt.
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The problem is that we do not have the political will to do so.
This is a “both parties” problem. The federal government takes in more than $5 trillion each year. For scope, that is more than the GDP of every country in the world except the U.S. and China, and about the size of the GDP of Germany.
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Yet, our government still overspends by $2 trillion.
Despite this, many of those in government refuse to address the rampant waste, fraud and abuse in the system, which estimates put at a quarter trillion dollars to $1 trillion per year.
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Congress refuses to take steps to revise our entitlement system in a responsible manner.
The reality is that the interest we are required to pay on the debt — that is, money we are spending to finance things we have already bought — is larger than our spending on the military and, if things keep going the same way, may one day be the government’s largest expense category.
Because Congress has been so irresponsible for so long, no matter what it does or does not do, Americans will pay the price. But, for politicians, it is easier to blame someone else for enduring inflation than it is to take a political hit over real reform that will have short-term consequences but long-term benefits.
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And that comes to the lack of political will. Nothing changes until Congress changes, and if they are not accountable, they have no incentive to do anything other than pass the buck and the blame.
Warren Buffett once said, “I could end the deficit in five minutes. You just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for reelection.” I would suggest two changes to this plan. First, change the 3% of GDP deficit target to “any time the budget isn’t balanced,” and second, state that it must be done on the cost side, not via raising taxes.
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Incentives drive outcomes, and right now, Congress is incentivized in a way that drives bad outcomes for Americans.
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If we want to be able to spend on things that matter (like the defense of our nation), stop the erosion of purchasing power and reset the U.S.’s fiscal and national strength, political will must change or political incentives must be better aligned with outcomes that benefit Americans instead of the politicians themselves.
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