The federal deficit is expected to pass $1 trillion this year and keep rising over the coming decade, the Congressional Budget Office projected this week. By 2030, the debt held by the public is expected to grow to 98 percent of gross domestic product, up from just under 80 percent today. The culprit? President Donald Trump’s tax cuts and spending increases, as well as growing entitlement spending.
Is all this debt something to worry about? As far as the economy goes, no, not really. Washington may be borrowing a great deal of money, but we can probably handle it just fine. The U.S. is not on the verge of a fiscal crisis, and it’s hard to imagine what circumstances would cause one in the foreseeable future.
But is it fair to be mad about the debt, given the way Republicans spent years calling for spending cuts when we were still fighting our way out of the recession? Given the way Trump has added to the red ink in large part by slashing taxes for the wealthy? Given that the debt will inevitably be weaponized as an excuse to attack spending on important government programs the second a Democrat is in office? Absolutely. You should be furious about it.
Here’s an easy way to think about how much the White House’s policies have widened the deficit. Around the time Trump entered office, the CBO projected that the budget gap was on pace to hit $775 billion by this year, or 3.6 percent of the economy. Capitol Hill’s forecasters now think it will reach $1.015 trillion instead, equal to about 4.6 percent of GDP. That extra percentage point is what we should probably think of as the Trump bump. It’s a result of both the GOP’s 2017 tax bill (no, it did not pay for itself) and budget deals that have increased military as well as domestic expenditures. Going forward, rising Medicare and Social Security costs will add to the debt as well, as we run trillion-dollar deficits from now ’til eternity.
The CBO may even be underestimating the size of future deficits, since its forecast assumes that many of the tax cuts Republicans enacted will expire on schedule in 2025, when it’s likely that at least some of them will survive.
There are many people in Washington who believe that all of this borrowing is setting us all up for a reckoning—that unless the U.S. changes course, we’re in for a fiscal catastrophe. The CBO, a bastion of conventional wisdom on these things, puts it dryly: “To put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies.”
I don’t particularly share that concern. The main reason economists have traditionally warned governments against borrowing too much is that doing so could slow down the economy by pushing up interest rates and “crowding out” private investment. In theory, a country could also end up trapped in a debt spiral, where it can no longer meet its interest payments and is forced to default. But for developed nations that print their own currencies (sorry, Greece), those aren’t really serious concerns these days. As Olivier Blanchard, the former chief economist of the International Monetary Fund, has explained at length, we live in an era of rock-bottom interest rates that have made it easier for governments to sustain even high levels of debt. In the United States, interest payments as a percentage of GDP are just over half of what they were in the mid-1990s. The signs of crowd-out are also all but nonexistent: Borrowing is cheaper for companies now than at any time since the 1950s. There are also signs that advanced countries can carry vastly higher debt loads than we do and still be just fine: Japan’s debt-to-GDP ratio is more than double ours, and yet it’s currently borrowing money at negative interest rates, meaning investors are essentially paying Japan to hold their money.
It’s possible that all of this could change one day, and interest rates could surge. But I wouldn’t bet on it. As Blanchard has pointed out, low interest rates actually seem to be a historical norm.
So if the debt probably isn’t an imminent threat, why care at all about it?
First, there’s the matter of political hypocrisy. After the Great Recession, Republicans spent years fearmongering about the deficit, demanding that the government slam down austerity measures at a moment when the country badly needed more stimulus. Their successful efforts to eventually cut spending were one of the reasons our economic recovery was so slow. The fact that, the moment they were back in power, they passed a massive, deficit-financed tax cut for the wealthy and leaned into deficit spending shows how much of their rhetoric about the dangers of debt was in utterly bad faith.
Second, debt doves like me could be wrong. In the end, all predictions about the economy are informed guesses, and it’s possible that, down the line, circumstances might change in unexpected ways. As Evercore ISI economist Ernie Tedeschi put it to me, the fact that rising deficits seem to be having almost no impact on the U.S. economy “seems to be a perfect storm of several extraordinary factors.“ We’re the world’s reserve currency, there’s massive demand to buy our debt from countries like China and Japan, other advanced countries like Germany aren’t borrowing enough to meet the world’s appetite for safe assets, and issues like demographics seem to be weighing on interest rates. “Those factors aren’t likely to all change overnight,” he said, “but some might gradually change.” Given that there’s always a chance, no matter how small, that debt could be a problem in the future, you have to weigh that danger versus the value of what you’re borrowing for. And in the case of the Trump tax cuts, much of the result was pretty worthless, if not outright harmful, given that it handed even more power and resources to the very rich. If passing a tax cut for real estate guys, car dealership owners, and Walmart shareholders raised our chances of a fiscal disaster in 20 years by even .01 percent, I’d argue it was a bad deal.
Finally, there’s the inevitability that, as soon as a Democrat becomes president again, Republicans will almost certainly rediscover their old-time faith in fiscal prudence and start shrieking about how the U.S. is on the road to becoming Argentina or Zimbabwe. Given what we saw in the 2010s—when you regularly saw headlines like “Is the U.S. Like Greece?”—there’s a good chance much of the media might just go along with them, too.
This isn’t to say there haven’t been some advantages to Trump’s deficit binge. It has helped the economy, though he’s undone much of the positive effects with his trade war. By cutting taxes on corporations and the rich now, he may have made it easier for a Democrat to fund much of their next domestic program just by raising rates back up to where they were previously.
But the actions that got us here were also pointless, hypocritical, and counterproductive. In other words, classic Trump.