America just took on trillions in debt and we need a plan to pay it

The White House and Congress quickly authorized more than $2 trillion debt-financed spending in response to the emerging recession. No clear explanations of the long-term costs or principled limit on emergency borrowing could be heard among the voices claiming credit and promising relief. Treasury Secretary Steven Mnuchin summarized the prevailing attitude: “we’ll deal with [the debt] later.” This week Congress and the White House agreed to borrow and spend almost half a trillion dollars more.

In contrast, prior generations of federal leaders highlighted the costs of extraordinary debts incurred during national crises. Their candor set the stage for the hard choices that produced budget surpluses dedicated to debt retirement following each of the first four major spikes in federal debt: in the wake of American Revolution, the War of 1812, the Civil War, and World War I.

During the fifth spike in federal lending, during the Great Depression and World War II, national leaders repeatedly committed to restore budget discipline once those emergencies had passed. President Franklin Roosevelt described the financial sacrifices ahead: “Taxes and bonds and bonds and taxes.” Leaders in both parties for two decades following World War II agreed to the principle of budgeting annual spending based on the level of expected tax revenues, and the burden of debt receded as the economy grew.

Today’s emergency borrowing occurs on top of America’s sixth and most severe spike in federal debt. By last year, debt had grown to 11 times annual tax revenues legally available for debt service, principally from income taxation — a far higher level than at any time since the nation’s founding.

The current spike in debt, which began in 2001, accelerated with borrowing for traditional emergency purposes — two wars and relief during the severe downturn beginning in 2008. Yet when those wars wound down and the economy recovered, the federal borrowing went into high gear following the 2016 election.

In the last three fiscal years, federal general fund spending grew by $590 billion, almost five times faster than general fund revenue. Annual federal borrowing approached $1 trillion a year before the pandemic and now should exceed $2 trillion annually in at least the current and next fiscal years. For context, $2 trillion amounts to $15,000 per household and exceeds all federal income tax collections last year.

The non-partisan Congressional Budget Office identifies three long-term costs of higher federal debt: slower economic growth as public borrowing competes with private investment; increased transfer of U.S. wealth to foreign creditors; reduced tax revenue available to support essential federal services or tax relief. Those costs were not abstract, even before the current crisis:

-Federal debt will soon be four times greater than the total debt securities issued by U.S. non-financial corporations, pushing rates higher than they would be otherwise.

-Foreign creditors now receive two out of every five dollars paid annually in federal interest, a transfer almost equal in scale to annual corporate income tax revenues.

-Interest on federal debt is growing far faster than any other major category of federal spending.

The Federal Reserve can mitigate a portion of these costs by buying and permanently retaining federal debt on a larger scale than once considered possible without excessive consumer price inflation. Yet a persistent subsidy of the discount rate inflates the value of financial assets, one root cause of the wealth gap that threatens social stability and Americans’ sense of fair play. And monetization of debt simply to facilitate federal borrowing exceeds the Federal Reserve’s legal mandate and destroys its valuable independence from fiscal policy achieved after World War II.

While writing the Constitution, Thomas Jefferson worried that some future U.S. administration might buy short-run popularity by using debt to disguise the cost of spending, shifting the burden to the next generation. James Madison sought to reassure him: while the government must retain the flexibility to borrow during emergencies, the future debt burden could be restrained so long as the nation’s leaders made the cost of debt so widely understood so as to be “visible to the naked eye of the ordinary politician.”

It may seem naïve to expect incumbents to both claim credit for stimulus spending while highlighting the ultimate costs. But failure to do so will pose untenable future political dilemmas for mainstream leaders in both parties. Why not borrow to pay for universal access to health care and higher education as well as guaranteed employment? Or why not cut federal taxes by half or entirely?