Deficit reduction in the United States

Based on Wikipedia: Deficit reduction in the United States

Here's a number that should make you pause: by 2053, the United States federal debt is projected to reach 195 percent of the entire economy. Not 50 percent. Not 100 percent. Nearly double the value of everything America produces in a year.

That's the trajectory we're on, according to the Congressional Budget Office. And understanding how we got here—and what, if anything, can be done about it—requires grappling with one of the thorniest debates in economics: when should a government tighten its belt, and when should it open its wallet?

The Basics: Deficits, Debt, and Why They're Different

Before diving deeper, let's clarify some terms that politicians and pundits often muddle together.

A budget deficit is what happens when the government spends more than it collects in taxes during a single year. Think of it like overspending your monthly paycheck—the difference has to come from somewhere, so you borrow.

Debt, by contrast, is the accumulation of all those deficits over time. It's your total credit card balance, built up over years of spending more than you earn.

The United States has run deficits in 36 of the past 40 fiscal years. The only exceptions? A brief golden window from 1998 to 2001, the final four years budgeted by President Bill Clinton. Those surpluses emerged from an unusual confluence: a roaring economy fueled by the dot-com boom, tax increases enacted in 1993, deliberate spending restraint, and a gusher of capital gains tax revenue as stock prices soared.

Since then, it's been red ink all the way down.

Measuring the Problem

Raw dollar figures for government finances quickly become meaningless. A trillion dollars sounds catastrophic until you realize the American economy produces over twenty trillion dollars worth of goods and services each year. Economists therefore prefer to measure deficits and debt as percentages of Gross Domestic Product, or GDP—the total value of everything the country produces.

Historically, the federal deficit averaged about 3 percent of GDP before 2008, with the government collecting roughly 18 percent of GDP in taxes and spending about 21 percent. The gap was manageable, if not ideal.

Then came the Great Recession. In 2009, the deficit exploded to 10 percent of GDP as tax revenues collapsed alongside the economy while spending on unemployment insurance, food stamps, and stimulus programs surged. Over the next five years, it gradually shrank back to about 2.8 percent by 2014.

But that improvement proved temporary.

The Pandemic Changed Everything

In fiscal year 2020, the United States recorded a budget deficit of nearly four trillion dollars—17.9 percent of GDP. That's the largest deficit relative to the economy since World War Two, when the nation was building fleets of aircraft carriers and arming millions of soldiers to fight across two oceans simultaneously.

The cause this time wasn't a global military conflict but a global health crisis. The coronavirus pandemic triggered an economic shutdown unprecedented in its speed and scope. Congress responded with massive stimulus packages: direct payments to households, enhanced unemployment benefits, forgivable loans to businesses, and emergency healthcare spending.

The question that haunts fiscal policy debates is simple: was that the right call?

The Keynesian Paradox

John Maynard Keynes, the British economist whose ideas reshaped how governments think about managing economies, offered a counterintuitive insight during the Great Depression of the 1930s.

"The boom, not the slump, is the right time for austerity at the Treasury."

In plain English: when the economy is humming along nicely, that's when governments should raise taxes and cut spending to pay down debt. When the economy is in recession, the opposite applies—governments should spend more and tax less, even if it means running larger deficits.

Why? Because during a recession, private businesses and consumers pull back. They spend less, invest less, hire fewer workers. If the government also cuts back at the same time, the economy spirals further downward. Someone needs to keep spending to prevent collapse, and the government is the only entity big enough to fill that gap.

This logic explains why several economists argued during the 2020 pandemic recession that deficits and debt simply weren't priorities. The house was on fire; worrying about the water bill could wait.

But here's where it gets complicated. Keynes's prescription assumes governments actually do practice austerity during booms. In practice, they rarely do. Tax cuts and spending increases are politically popular; their opposites are not. The result is deficits during bad times and deficits during good times, with debt ratcheting ever higher.

What's Driving the Long-Term Problem

Three forces are pushing federal finances toward crisis, and none of them have quick fixes.

First, Americans are getting older. The baby boom generation—those born between 1946 and 1964—began reaching retirement age around 2011. Every day, roughly 10,000 Americans turn 65. This demographic wave will continue for years, swelling the ranks of Social Security and Medicare beneficiaries while shrinking the relative size of the working-age population that pays into these programs.

Second, healthcare costs per person keep rising faster than the overall economy grows. Medical technology keeps advancing, which is wonderful for patients but expensive for insurers and government programs. An MRI machine costs more than an X-ray. Targeted cancer therapies cost more than older chemotherapy drugs. Gene therapy can run into the millions per patient.

Third, interest payments on the existing debt are growing. This creates a vicious cycle: the more debt you have, the more interest you pay, which adds to the deficit, which increases the debt, which means even more interest payments. When interest rates were near zero in the years following the 2008 financial crisis, this was manageable. As rates rise, so does the pain.

The Trump Era: A Natural Experiment

The period from 2017 to 2020 offers an interesting case study in fiscal policy—what happens when a government cuts taxes and increases spending during an already-healthy economy.

When President Trump took office in January 2017, he inherited a budget trajectory from the Obama administration. The Congressional Budget Office had projected that debt held by the public would rise from about 14 trillion dollars in 2016 to roughly 25 trillion by 2027, driven primarily by the aging population and healthcare costs.

Then came the Tax Cuts and Jobs Act of 2017, which slashed corporate tax rates from 35 percent to 21 percent and reduced individual income taxes across most brackets. Separate legislation increased federal spending on defense and domestic programs.

The results were predictable to anyone familiar with arithmetic. In fiscal year 2018—the first year fully budgeted by the Trump administration—the deficit jumped to 779 billion dollars, up 17 percent from the previous year. Revenue fell short of projections by roughly 275 billion dollars, almost entirely due to the tax cuts.

By April 2018, the Congressional Budget Office was projecting that the sum of deficits over the following decade would total 11.7 trillion dollars—1.6 trillion more than previously forecast. Under an alternative scenario where the individual tax cuts were made permanent rather than expiring in 2025, the additional debt would reach 3.6 trillion dollars.

Defenders of these policies pointed to stronger economic growth. Real GDP—meaning growth adjusted for inflation—hit 3.3 percent in 2018 and 2.4 percent in 2019, above the roughly 2 percent trend rate. Unemployment fell to historically low levels. The economy added about 1.1 million more jobs than previously projected.

Critics countered that these gains were modest relative to the fiscal cost, that they primarily benefited wealthy shareholders and corporations, and that running large deficits during an economic expansion was precisely the opposite of sound fiscal policy. When the next recession hit, the argument went, the government would have less room to maneuver.

That recession arrived sooner than anyone expected, in the form of a pandemic.

The Risks of High Debt

Why does any of this matter? Is government debt actually dangerous, or is it just a number on a spreadsheet?

The Congressional Budget Office has identified several risks that rise alongside debt levels.

When the government borrows heavily, it competes with private businesses for available savings. Investors buying Treasury bonds are not investing that same money in new factories, software, or equipment. Over time, this "crowding out" can reduce the economy's productive capacity, leaving everyone poorer than they otherwise would be.

High debt also constrains future choices. As interest payments consume a larger share of the federal budget, less remains for everything else—defense, education, infrastructure, scientific research, social programs. Eventually, the interest bill alone could exceed entire cabinet departments.

There's also the risk of sudden crisis. Financial markets are famously willing to lend to governments until the moment they're not. Countries that lose investor confidence can find themselves shut out of credit markets almost overnight, forced into emergency austerity measures that devastate their economies. Greece learned this lesson painfully during the 2010s. The United States, issuing debt in the world's reserve currency, enjoys considerable protection—but no protection is absolute.

Perhaps most troubling, high debt limits the government's ability to respond to future emergencies. The massive spending during the pandemic was possible in part because the United States entered the crisis with relatively manageable debt levels by international standards. What happens when the next crisis arrives with debt already at 150 percent of GDP?

The Case for Worry—and the Case Against

Not everyone agrees that current debt trajectories represent a genuine crisis.

Some economists point out that interest rates on U.S. government debt have remained remarkably low despite decades of deficit spending and dire predictions. The dollar's status as the world's reserve currency creates constant demand for Treasury securities. As long as the government can borrow cheaply, debt service remains affordable.

Others note that deficit spending on productive investments—infrastructure, education, research—can pay for itself over time through higher economic growth. The Interstate Highway System, the internet (which emerged from Defense Department research), and the vaccines that ended the pandemic lockdowns all trace their origins to government spending. Cutting deficits by reducing such investments would be counterproductive.

Still others observe that households and businesses don't operate like governments. A family that constantly spends more than it earns will eventually go bankrupt. But a government that issues its own currency and can tax the world's largest economy operates under fundamentally different constraints. The comparison, they argue, is misleading.

Yet the skeptics have their own concerns. At some point, even the most creditworthy borrower runs out of willing lenders. Japan, often cited as an example of a country that has sustained very high debt levels, has nonetheless experienced decades of economic stagnation. And while the United States may be able to sustain debt levels that would sink smaller nations, that doesn't mean such levels are optimal or without cost.

What Would It Take to Fix This?

The Congressional Budget Office has run the numbers on various deficit reduction scenarios. The math is straightforward, even if the politics are not.

To bring debt down to roughly 70 percent of GDP by 2038—still high by historical standards but stable—would require reducing deficits by about two trillion dollars over a decade, and maintaining that reduction afterward.

To bring debt down to 30 percent of GDP—roughly the average of the past forty years—would require deficit reductions of four trillion dollars over a decade.

Those numbers can come from three sources: higher taxes, lower spending, or some combination of both.

On the spending side, the big-ticket items are Social Security, Medicare, and defense. Together, they consume most of federal spending. Meaningful deficit reduction that avoids these programs is essentially impossible—there simply isn't enough money in everything else. But cutting benefits for retirees or reducing military spending are both politically toxic propositions.

On the revenue side, the United States actually collects less in taxes relative to GDP than most other wealthy nations. Raising rates, closing loopholes, or adding new taxes like a carbon levy or value-added tax could generate substantial revenue. But tax increases face fierce opposition, and every loophole has beneficiaries who will fight to preserve it.

The honest truth is that stabilizing the debt would require either significantly higher taxes than Americans have historically been willing to pay, significantly lower benefits than Americans have come to expect, or both. No amount of cutting foreign aid or eliminating waste, fraud, and abuse will close a gap measured in trillions.

The Political Economy of Doing Nothing

Given all this, why hasn't Congress acted?

Part of the answer is that the costs of high debt are diffuse and long-term, while the benefits of spending and tax cuts are immediate and concentrated. A politician who votes to cut Social Security benefits faces angry seniors at the next election. A politician who votes to run up the debt faces... nothing, really, until years or decades later when the consequences arrive.

Part of the answer is ideological gridlock. Republicans generally want to reduce deficits through spending cuts alone; Democrats generally want to reduce them through tax increases on the wealthy. Neither side has the votes to impose its preferred solution, and neither is willing to accept the other's approach. The result is stalemate.

Part of the answer is genuine economic uncertainty. Economists disagree about how dangerous current debt levels actually are, when a crisis might arrive, and what the best remedies would be. Politicians who want to avoid painful choices can always find experts to reassure them that delay is acceptable.

And part of the answer is that the American political system wasn't designed for long-term planning. Representatives face election every two years; presidents every four. The incentives all point toward short-term thinking. Someone else will deal with the debt problem—someday.

A Final Thought

The debate over deficits and debt is ultimately a debate about values and priorities. How much should current generations sacrifice for future ones? How should the burdens of government be distributed between taxpayers and beneficiaries? What role should government play in the economy at all?

These aren't questions that spreadsheets can answer. The numbers can tell us the size of the gap and the paths available to close it. They cannot tell us which path to choose.

What the numbers do tell us, with uncomfortable clarity, is that current policies are unsustainable. Something will change—either by deliberate choice or by crisis. The only question is when, and whether Americans will have any say in the matter.