Over the past two weeks, we have examined the massive budget deficits and growing national debt that threaten the financial security of American families and imperil U.S. global leadership.
We also looked at how we turned a 2001 budget surplus into a $2 trillion deficit despite a booming economy, historically low unemployment and a raucous stock market.
There are plenty of responsible proposals from various organizations across the political spectrum to tackle the debt. All require compromise, and none would be easy or popular, but delay will mean more draconian steps or, if we fail, the end of American geopolitical and economic dominance.
It is not necessary to eliminate the national debt. While the current level of nearly 100% of gross domestic product leaves little room for fiscal response to the next pandemic or financial crisis, America can continue to prosper by stabilizing the debt and beginning a gradual reduction over the next 30 years. Experts differ over the exact tipping point beyond which the U.S. economy is pulled into a downward spiral, but all agree there is a relatively short-time horizon to begin turning the ship.
And while it appears we can manage our current debt load for now, this assumption depends critically on the continuing primacy of the U.S. dollar. If the world loses confidence in America’s commitment to trade and defense alliances or our willingness to exercise fiscal discipline, the current migration away from global dependency on the dollar will accelerate. Once the dollar loses reserve status, the tipping point is behind us.
Amassing so much debt has been a truly bipartisan accomplishment. Since 1981, fiscal year deficits have totaled $12.8 trillion under Democratic presidents and $15.3 trillion under Republicans, including $8.3 trillion in new debt under Trump and $5.8 trillion for Biden’s first three years. There is also a bipartisan lack of urgency. The Democratic Party platform for the 2024 election calls for reducing the deficit by $3 trillion over 10 years, barely even a down payment, while the Republican platform doesn’t even mention the deficit or debt.
Tackling the debt bomb will require far more cooperative effort. Assuming American voters demand action (which so far, they have not), the question arises: where to begin?
First, a little math. According to the Congressional Budget Office, government spending for fiscal 2024 will equal 24.2% of GDP, with tax revenue at just 17.2% of GDP, adding an additional $2 trillion to the debt this year alone. Balancing the budget (which would stop adding to the debt) will require some combination of slowing outlays and raising taxes.
The political process must first work out just where spending and taxes should meet, say around 21% or 22% of GDP. Then Congress must get to work on closing the gap over the next decade.
We previously reviewed the history of tax policy since 1964 and observed that there is no plausible scenario for stabilizing the debt in which taxes are not increased and entitlement programs are not addressed. The discussion should center on proposals with the least negative impact on middle- and lower-income households and U.S. global competitiveness.
Despite the urgency, it is difficult to imagine Congress stepping up to the plate amidst the current polarization. However, history suggests one possible route to reform that offers at least a fighting chance: a bipartisan commission tasked with producing a comprehensive debt reduction plan.
The House Budget Committee crafted a bill in January to do just that. The Fiscal Commission Act would create a committee that includes 12 members of Congress equally apportioned by party among the House and Senate, plus four outside experts who would not have a vote on a final recommendation. The commission would draft proposed legislation to stabilize the debt and establish a long-term path to solvency that would then be voted up or down by Congress with no amendments.
The idea has worked before. The 1983 Greenspan Commission extended the solvency of Social Security for 50 years, and the 2005 Base Realignment and Closure Commission provided members of Congress the political cover necessary to close redundant military facilities. A similar process could provide at least a fighting chance of tackling the debt in time to avoid a crisis.
Yet even this approach requires a modicum of political courage that is seldom in evidence. In 2010, a commission appointed by President Obama co-chaired by Republican Alan Simpson and Democrat Erskine Bowles created a responsible framework for bending the debt curve. Had the Simpson/Bowles recommendations been adopted, the national debt today would be half as large, Social Security and Medicare would not be facing bankruptcy, and the U.S. would have resources to invest in critical infrastructure to support economic expansion.
In the end, however, the political will was lacking, and the plan was abandoned. Today, the debt has more than doubled to $28 trillion, and the pain will be twice as great, even assuming we act now.
While a bipartisan commission offers a feasible path to taming the debt monster, even this route requires a commitment to placing the interest of the country above personal ambition, a tall order in a very dysfunctional Congress. The speaker of the House initially supported the 2024 Fiscal Commission Act, noting that the consequences of delay were “unbearable.” But reflexive partisan opposition from both ends of the political divide quickly mobilized to kill the effort for the remainder of the 118th Congress. Another wasted opportunity, another $2 trillion in debt.
With each year and each additional delay, the odds of a sudden and dramatic loss of confidence in U.S. global leadership and the stability of the dollar increase. The impact of that would be catastrophic.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
Christopher A. Hopkins