By Quin Hillyer
What should be one of the two or three most pressing matters of this year’s presidential campaign is being ignored by both major candidates. It is admittedly a tough subject to address, but it can be simplified by thinking of an ocean liner and an elephant.
The issue is that of federal debt. The ocean liner and elephant come from somewhat hoary aphorisms, and you can choose whichever one works best for you. We all know that “it takes a while to turn a ship around,” and more so for a huge ocean liner — or for a dangerously indebted government. And, of course, the way one eats an elephant is one bite at a time. In the case of the dangerously large federal debt, the job is so big that it will take one bite at a time for an elephant, plus a hippopotamus, too.
Forgive the dual metaphors, but they each apply. Before applying these aphorisms as part of a federal debt-management plan, let’s understand the nature of the problem. Most economists look at government debt less in terms of raw numbers than as a percent of the entire economy, or GDP. The higher the debt-to-GDP ratio (I’ll henceforth just capitalize it as the “Ratio”), the more worrisome. The World Bank once advised that a Ratio higher than 77% for an extended period could be a “tipping point” into a bad economy, and most economists long have believed that anything above 100% starts to raise the specter of major systemic upheaval.
Because the dollar is the world’s reserve currency, the United States enjoys a bit more leeway, but the principle remains valid. The big danger is the possibility of a financial panic that causes creditors, including foreign entities that hold well over a quarter of U.S. government debt, to demand suddenly that their own credit be repaid in full, causing a cascading series of bank failures and government default. Like a giant Ponzi scheme, a federal debt, if called in, can lead to a major collapse. The primary goal, then, is to avoid conditions for panic.
Except for the massive but obviously temporary debt caused by World War II, the U.S. government always stayed well within debt limits. Once President Dwight Eisenhower paid down the World War II hangover, the Ratio never rose above 50% from 1956 until, in the wake of the financial crisis, 2010. But Presidents Barack Obama, Donald Trump, and Joe Biden have been profligate beyond belief. The Ratio now stands at a scary 99%. (Including something called “intergovernmental debt,” which I believe is of long-term importance but many economists discount, the Ratio now is an astonishing 124%, but for today’s purposes, we’ll keep using the statistic of 99% of “debt held by the public.”) For seven straight years, we’ve been above the 77% “tipping point,” and for four straight years, we’ve been right around the 100% danger point. The wealthy U.S. now ranks among the 10 worst Ratios in the entire world.
Even worse, the unfunded future liabilities of the federal government, including statutory promises for Social Security and Medicare, will push the Ratio to more than 230% within 30 years. Even for the world’s reserve currency, that’s insanely beyond unsustainable.
That’s why the situation is so grave. The Ponzi scheme could collapse in a panic, perhaps not long after Social Security goes insolvent, which is now projected to happen in less than 10 years, in 2033.
On the other hand, because the problem is so massive, it can’t be solved quickly. Indeed, for the long term, it will take major systemic reforms not to solve it fully but merely to manage it well enough to avoid panic and collapse. Even if reforms and spending restraint of that size can be designed to avoid a devastating direct shock to the economy, reforms that large could themselves catalyze a nervous public into just such a panic as the reforms are supposed to forestall — unless large majorities of the public emotionally and politically buy in to the changes.
Right now, the public, for good reason, distrusts the government, believing it to be horrendously inefficient at best and, in many ways, corrupt. In a representative democracy, there’s no way for enough public support to accrue for the necessary sorts of massive changes, sending the ship in an almost diametrically opposite direction, unless the public sees that the ship can first start to turn without capsizing. Public trust must be earned at the same time the directional shift is managed safely from an economic standpoint.
All of which is predicate for a series of interim policy changes that won’t even come close to solving the problem but would buy an extra five or six crucial years before the debt ratio explodes into panic-inducing territory. To switch back to the other metaphor, we can’t eat the elephant unless we start with the first few bites. Here, then, are some helpful, time-buying bites.
First, Congress and the president can bite into the part of government they most readily control, namely the domestic discretionary appropriations they must pass each year. (Entitlements such as Social Security and Medicare take more work, while defense-related spending, even though it too should be targeted for savings, must be able to respond to conditions abroad.)
Since the mid-1990s, when a Republican Congress temporarily brought domestic discretionary spending within intelligent limits, this category of appropriations has exploded without good reason. Still, as a baseline, we can use not a conservative era but the liberal Obama one as a guide for reasonableness. Using a category called “budget authority” as the measure (Table 5.6 here), the first normal Obama budget, meaning one without accounting for special measures to counter the 2008-09 financial crisis, featured domestic discretionary spending for 2011 of $511 billion. Adjusting for population growth since then, the equivalent amount would be $564 billion. In turn, that $564 billion adjusted for inflation would be $806 billion today.
Instead, the expected domestic spending level this year will be $902 billion. Apples to apples, that is a $96 billion single-year hike, or 8.4% more profligate than the already-liberal Obama. There is no good reason why a wealthy country with a historically low unemployment rate and inflation running less than 3% can’t do a slow ratchet back down toward Obama-level spending rather than today’s extravagance.
The method would be this: While allowing some funds to be transferred within accounts as needed (from energy to health, for example, or from water projects to housing), lawmakers should impose a hard freeze on the domestic discretionary total for two years, followed by four years of allowing the total to rise by inflation minus one-half of one percent. The public probably wouldn’t notice any difference, but the cumulative savings, compared to six years of allowing full inflationary increases, would reach about $360 billion while still providing far more real-value social spending than even Obama was satisfied with.
Next, fiddle mildly with the taxes and formulas for Social Security and Medicare. Again, the short-term goal is to extend the life of each program before insolvency by a few years each to buy time and rally public support for more major reforms that would, in turn, push off the reckoning by decades. The idea is to gain more revenue for both systems without deterring economic growth.
Right now, the combined payroll tax for both programs is 15.3%, half each paid by the employers and employees. Why not raise that to an even 16%? Big changes in taxes clearly affect economic behavior, but tiny changes go virtually unnoticed except to accountants. In a dynamic economy, almost nobody would change economic behavior due to a change in payroll taxes of just seven-tenths of one percent. But that’s all it would take over six years to raise an additional $650 billion in current dollars, or more than a trillion dollars after mild inflation, to push back insolvency for both retirement funds.
So, with those two steps alone, namely mild restraint in domestic discretionary spending and a tiny hike in payroll taxes, the total future debt would be some $1.3 trillion less than it would be under current law, while Social Security and Medicare would each have a few more years of full solvency.
There: That’s how to digest the first bites of the elephant.
Moreover, wisely pro-growth corporate tax policies (read: more rate cuts of the sort passed in 2017 that actually led to substantially increased corporate tax revenue) would more than counter any deleterious growth effects from the tiny payroll tax increase. Another few small tweaks in entitlements would, over six years, save, mostly on the government spending side, hundreds of billions of dollars more, again with almost nobody but accountants noticing.
And then would come the last, small but crucial, immediate change. On both the tax side and the spending side, almost everything in government except discretionary spending is “indexed” for inflation. While lawmakers in recent years have adopted some fixes related to what policy wonks call “chained CPI,” many or probably most economists still believe that the overall indexing for the past 40 years has overstated inflationary effects. This means that the automatic formulas have led to the government taking in less money, while doling out more, than actual price changes warranted. Former Texas Sen. Phil Gramm has written repeatedly that the overstatement is significantly larger than government numbers-crunchers measure.
A one-time, temporary fix, one toward which every single person in one way or another would contribute without the slightest noticeable sacrifice, would subtract half a percentage point from the indexing of measurements, governmentwide, for three straight years, followed by a two-tenths of a percentage adjustment for another three years. Again, the cumulative gain for the federal bottom line would run into the hundreds of billions of dollars.
In all of these suggestions, what’s most at work is the vaunted “magic of compound interest,” whereby small savings multiply over a longer time window.
By putting that magic to good use, lawmakers would buy time not just in terms of raw dollar amounts but in reinvigorating public trust in the system. During that time period, much larger reforms could be studied, proposed, and adopted. Special bipartisan commissions on the budget, on entitlements, and, most importantly, on the structure of government could rally support for creative and effective changes.
The biggest reason people distrust the government is that it is sclerotic, unresponsive, overbearing, and unaccountable. All of those features also add to its costs because much more money is needed to operate a sclerotic system than a nimble one. That’s why a commission on the structure of government, as I proposed back in 2019, could lead the way to longer-term solutions that the public would buy into.
In sum, I wrote that “Congress and the president must enact complete rewrites, top to bottom, of the Administrative Procedure Act of 1946, the provisions still in force from the Pendleton Civil Service Reform Act from way back in 1883 (!), and the Civil Service Reform Act of 1978. These laws set rules governing the processes by which federal regulations are issued and enforced and governing the standards, job protections, and expectations for federal employees.”
A structurally more sensible, efficient government would allow astonishing savings down the line.
None of that can happen in a year or two. But if the day of debt reckoning is pushed off by five or six years, if the ship is given time and space to turn around safely, then this slow-moving representative democracy can build up steam for the more major, systemic reforms necessary to keep the entire country solvent and, more importantly, panic-free.
Deputy Commentary Editor Quin Hillyer served two years on the staff of the House Appropriations Committee.
