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The Fake Fight Over the Debt Ceiling
The debt ceiling forces us to talk about the proper role of government, but nobody wants to do that
The most revealing part of President Biden’s State of the Union address was not the raucous partisan heckling but the moment of bipartisan consensus that emerged from it. At one point, Biden referred to a plan floated by several Republicans to “sunset” Social Security and Medicare, at which point the Republicans in his congressional audience erupted in furious denial. Adeptly turning this to his advantage, Biden concluded: “Social Security and Medicare are off the books now, right? We have unanimity!” By “off the books,” he means that they will not be part of any negotiations over spending.
With this, he exposed the enormous falsity of the current showdown over the “debt ceiling” that limits further federal borrowing. Republicans want to pose as champions of small government, but they don’t want to cut any actual government spending. Democrats, of course, are not even pretending to rein in government and simply propose new spending.
That’s a big problem because our $31 trillion national debt has reached unprecedented levels and does need to be limited and then reduced. Moreover, we need to face up to a crisis specifically over Medicare and Social Security spending, which are 10 and 12 years from insolvency, respectively—just as we have been warned for decades.
But dealing with the national debt requires us to confront basic questions about the role of government, and nobody on either side wants to do that.
Small Government for Thee, But Not for Me
The dishonesty of the Republican debt ceiling fight can be seen in the vagueness of their demands. As The New York Times recently reported:
At a news conference this month to showcase how Republicans will handle their looming debt ceiling showdown with Democrats, Senator Ron Johnson of Wisconsin was asked to explain what specific spending cuts his party would support in exchange for lifting the borrowing cap. “Exactly what those are, we’re not willing to lay out here today,” Mr. Johnson said.
They want real concessions on all of this out-of-control spending. They want a plan to balance the budget. They definitely don’t want any new taxes, which means there are going to have to be spending cuts, so they want to cut—what? They won’t say. They will say what cannot be cut. Not Medicare or Social Security and not the military. The only thing they will say is that we should cut “wasteful spending” and “inefficiencies.” This has been tried before, and it never amounts to more than a small fraction of spending.
One of the more convincing critiques of the Tea Party movement, back when the small-government faction of the right was briefly ascendant, is that it consisted of people who wanted to get the government out of our lives, while making sure they keep getting their Social Security checks. There are a lot of people who want to cut government spending—but only the spending that goes to somebody else, not the spending that goes to them. In other words: Small government for thee, but not for me.
So these voters didn’t show up for Mitt Romney and Paul Ryan in 2012, when Ryan had tentatively maneuvered the party toward reform of the big entitlement programs. Since then, Republicans turned to Donald Trump, who promised during the 2016 campaign not to touch entitlements and then massively increased government spending in every year of his presidency, even before the pandemic. The result is that more than $7 trillion of our current $31 trillion in debt—nearly a quarter of it—was racked up under recent Republican control.
And now they want to stamp their feet about lower spending without actually cutting anything. So from the Republicans, who are supposed to be the party of smaller government, we see only a vague demand to reduce the debt, combined with a rejection of every specific measure that would actually achieve that goal.
The Real Debt Ceiling
Should we just give in, raise the debt ceiling, mint the coin and keep going as we are?
Ah, but there is another debt ceiling we have to worry about, not the one arbitrarily imposed by Congress, but the one imposed by the markets—and by reality.
The United States government has historically high debt, not just by our own standards but also compared to everybody else. Our debt-to-GDP ratio—what our government owes compared to the entire annual output of the country’s economy—hit an all-time high of 129% last year, exceeding its peak at the end of World War II. But in 1945, we were rapidly winding down war spending and moving to pay down that debt. Today we’re just plowing ahead heedlessly. Only a handful of other nations—such as Italy and Sudan—exceed this level of debt, and they are not exactly models of fiscal stability.
We just got a warning about the effects of this runaway spending and debt: the recent bout of inflation, caused by the federal government pouring huge amounts of free money into an economy that wasn’t actually producing more goods.
Why is inflation such an ominous warning? A large debt can seem sustainable for a long time—so long as interest rates remain low. But if all the extra spending pushes prices up and causes inflation, as it has done for the last year, then the interest rate on the debt goes up to compensate. The cost of new borrowing can then increase rapidly, and suddenly interest payments swallow up the whole budget and leave no room for anything else.
The United States currently spends about $400 billion each year just paying interest on our debt. Over the next 10 years, this is projected to increase to at least $1.2 trillion. But all other spending is going to increase, too, particularly on entitlements. Combined spending on Social Security and Medicare is currently $1.9 trillion per year. With the Baby Boomers retiring, that will increase by 2028 to something closer to $3.8 trillion, with no concomitant increase in payroll tax revenue. And all of this will happen within the term of whoever wins the next presidential election. Dealing with it is not a problem for the far-off future. It is a problem for now.
This is the sort of thing that triggers a debt crisis. We have built an entire system based on being able to keep on borrowing spectacular sums of money, year after year. But eventually the debt builds up to an unsustainable level, and we find that we’re borrowing money just to be able to pay the debt on our previous borrowing—and when we can’t keep borrowing any more, we will have to make drastic, slashing spending cuts all at once, plunging the economy into crisis. That’s how it happened in Greece in 2009, for example, and we have all the warning in the world that we are headed in the same direction.
It reminds me of the old Hemingway line about how you go bankrupt: first gradually, then suddenly.
Soak the Middle Class
The solution we are probably slouching toward is to cut Social Security anyway, but to cut it without any politician ever having to vote on it. Just let the program run out of money and begin paying its recipients three-quarters of their usual benefits.
But the solution offered by many Democrats is to raise taxes. Balance the budget by actually extracting from voters all of the money required to pay for their favorite programs. But when you take all of that money directly out of the private economy, you squash economic growth, which of course means less revenue that the government can extract to pay down the debt. Perhaps more importantly for politicians, it also means that voters will rebel against you.
To avoid angering voters, you can—as President Biden proposed at the State of the Union address—only raise taxes on corporations and the rich. But when you raise corporate taxes they pass the cost on to consumers through higher prices. And taxing the rich only gets you so far because they don’t have enough money. Brian Riedl runs the numbers.
Even confiscating all family income above $500,000 would theoretically add just four percent of GDP in revenues. Slightly more plausibly, doubling the 35 and 37 percent income tax brackets to 70 and 74 percent would raise just over one percent of GDP. Other proposals to raise taxes on investors, oil and gas producers, banks, and hedge-fund managers would collectively raise 0.3 percent of GDP.
To put that in context, covering all the extra spending we will need on entitlements and interest on the debt will require an additional 10% of GDP. So, Riedl concludes, “you have to start taxing the middle class.” If the relatively generous Western European welfare state is our model, then we are going to have to impose European tax rates.
Adam Michel of The Heritage Foundation offers a sample of what that would mean:
In the U.S., a single worker earning two-thirds the average wage would be paid about $40,000 in the absence of any taxes in 2018. That worker pays $5,056 in income taxes, $5,968 in payroll taxes, and $623 in sales taxes, leaving her with $28,352 of personal income—71.5 percent of her total earnings. A similar worker in the EU–OECD pays $3,884 in income taxes, $11,344 in payroll taxes, and $2,306 in VAT, leaving her with $22,467—56.2 percent of her total earnings.
In Belgium and Germany, low-wage workers pay average tax rates of 50.6 percent and 50.2 percent, respectively. More than half of every dollar earned by someone making around $40,000 in these high-tax countries is taxed away. If reforming Social Security and Medicare seems too risky for politicians to contemplate, they might want to consider what will happen to them when they propose European-level taxes on the middle class.
As we keep going through these options, we find no way out. We can’t keep borrowing, we can’t tax our way out of debt, and we don’t want to cut any spending. Certainly, nothing in the current showdown over the debt ceiling is remotely attempting to address the basic problem.
Why? We face this dilemma because we have put off resolving the fundamental question about the role of government. Does government exist to protect our freedom—as the Founders intended—or is it here to take care of us? Do we adopt the model of government as a night watchman, or government as a nanny and nursemaid?
The old warning still applies: A government big enough to give you everything you want is also big enough to take everything you have. A generous welfare state provides a certain kind of security, but at the expense of opportunity and prosperity. It also comes at the cost of a heavy dose of paternalism. A government that is here to take care of you will have the power to tell you what to do in the minutest details of your life. The fundamental question is whether we want to live our lives independently or to be permanent wards of the state.
It is easy to dismiss these big decisions as overly broad and ideological, as mere theory to be set aside for the demands of practical politics. But eventually these questions will become concrete, specific and mathematical.
We can put the question off, but in the end there will be, quite literally, an accounting.