9 steps toward digging out of the national debt crisis

The national debt crisis is intensifying as interest rates increase and recession looms. A group of policy analysts discussed why high levels of debt can diminish economic growth, as well as why a change of course is necessary, during a recent webinar by the Committee for Economic Development, the public policy center of The Conference Board.

Federal government debt as a share of gross domestic product has risen to 98% — a level not seen since World War II — and may expand to 195% or more by 2053, said Lori Esposito Murray, CED president.

“This is one of the biggest threats to our economy and this debt burdens our economy,” she said.

CED released a brief, “Why Debt Matters: A Road Map for Reducing the Outsized U.S. Debt Burden to 70% of GDP.” In that brief, CED looked at the reasons behind the growing debt and outlined a plan for reducing the debt ratio over a period of 20-30 years.

How and why did we get here?

The federal debt as a percentage of GDP hit around 100% during World War II, as the U.S. financed the war through debt that was later paid off as the economy boomed in the post-war years, said Phillip Swagel, director of the Congressional Budget Office. That debt-to-GDP ratio slid downward into the mid-1970s, then began to rise sometime in the 1990s before taking off during the 2008 financial crisis and continuing its upward trajectory as the COVID-19 pandemic spread.

The CBO recently released its 2023-2033 Budget and Economic Outlook. In that outlook, CBO projected that the debt-to-GDP ratio would reach 118% by 2033 – which would be the highest level ever recorded. Debt would continue to grow beyond 2033 if current laws generally remain unchanged. Swagel cited several findings in the outlook that describe the factors leading to CBO’s prediction that the debt-to-GDP ratio would soar to these unprecedented heights.

Outlays: In CBO’s projections, rising spending on Social Security and Medicate boosts mandatory outlays. But total discretionary spending falls in relation to GDP. As the cost of financing the nation’s debt grows, net outlays for interest increase substantially, and, beginning in 2030, reach their previous peak.

Revenues: Receipts from individual income taxes reached a historic high in 2022. But CBO projects individual income tax revenue to fall in 2023, because tax collections on capital gains and other sources, which have been strong in recent years, are predicted to decline. As certain provisions of the 2017 tax act begin to expire in 2025, CBO expects income tax revenue to begin rising again.

Interest rates: CBO projects the Federal Reserve will further increase the target range for the federal funds rate in early 2023 to reduce inflationary pressures in the economy. That rate is projected to fall in 2024, as inflation slows and unemployment rises. The interest rate on 10-year Treasury notes, however, remains at 3.8% from 2024 to 2033.

Inflation: CBO projects inflation will decline in 2023 as pressures ease from factors that caused demand to grow more rapidly than supply during the pandemic. That decline is projected to continue until 2027, when the annual rate of inflation reaches the Fed’s long-run goal of 2%.

Growth of real GDP: CBO projects that output growth will come to a halt in 2023 in response to 2022’s sharp rise in interest rates. As falling inflation allows the Fed to reduce the target range for the federal funds rate, the growth of real GDP will rebound, led by the interest-sensitive sectors of the economy, such as housing.

Unemployment: CBO projects the unemployment rate will rise through early 2024, reflecting a slowdown in economic growth. The rate is projected to fall in subsequent years as output returns to his historical relationship with potential output.

Why does it matter and what should we do about it?

The amount of money paid servicing the interest on the debt is money not available for other programs, said David Finkelstein, CEO and chief investment officer at Annaly.

“It has an impact on the real economy,” he said. “Private citizens and businesses who are borrowing pay more in interest.”

He suggested slowing down the rate of economic growth to pay down the debt, but he referred to that as “a double-edged sword.”

“There would be an immediate impact to the economy by raising taxes, but long-term it would mean higher productivity and great output. But there must be a careful balance so it doesn’t hae a catastrophic effect on the economy but also encourages more investment in the economy.”

“Almost everyone agrees [the debt] is a serious problem and something should be done about it but no one says to increase taxes or cut spending or both in order to get us on a good path,” said Joseph Kasputys, CEO at Economic Ventures.

“We are adopting too high a level of risk by using all our financial capacity to fund programs we would like to have but cut taxes at the same time. Our country is in a state where we are taking an unacceptable risk because we don’t know what the next crisis will be. I think it’s unacceptable for a country our size to keep pushing the envelope as we have.”

A 9-step plan

With the goal of bringing down the debt ratio to 70% over 20-30 years, CED’s report included several recommendations that would decrease the debt ratio without throwing the country into a recession.

Those recommendations include:

1. Avert a debt ceiling crisis and build consensus with a bipartisan commission on fiscal reform/debt reduction. Congress must remove consideration of the debt ceiling from a last-minute, volatile political battle that will threaten economic recovery. The current impasse should be resolved by agreeing to pay debts already incurred and linking that decision to the commitment to immediately convene a bipartisan commission on fiscal reform and debt reduction with a road map to putting the U.S. on a binding path to reducing the debt-to-GDP ratio from 98% to 70%.
2. Make fiscal restraint a priority. Spending must be cut where possible. It must avoid stimulus and it must be focused to promote work and productivity; that is, investment in research and development, education, lifelong workforce training, infrastructure, support for private investment, etc.
3. Reform Medicare/health care policy. The health care sector would benefit from broader reforms. These reforms could include simplifying the system for exchange subsidies; challenging the fee-for-service model of medical pricing where possible; sharpening the focus on wellness and prevention programs in at-risk populations, and increasing the use of technology and data analytics to provide opportunities for greater efficiency.
4. Save Social Security. An alternative potential approach for Social Security includes the consideration of a higher retirement age, a broader payroll tax coverage for workers with higher wages/generous fringe benefits, and a reduction in benefits for more well-off workers.
5. Remove budget gimmicks and pay for new initiatives. When Congress passes additional legislation, it should be fully paid for. Further, the budget reconciliation process should be restored to its intended purpose, which is to reduce deficits.
6. Reform tax policy.  Tax reform can yield higher revenue if based on the principles that taxes should generally be consistent in their treatment across all kinds of economic activity, paring back the use of preferential tax breaks and applying to as broad a base as possible.
7. Streamline regulation. Regulation should achieve the purpose for which it was imposed at the lowest possible cost and with the maximum possible benefit,
8. Segregate the debt. Given the debt burden’s overwhelming size and the dedicated time needed to reduce it, Congress should also consider addressing it in segments and paying it back over a long-term, separate, dedicated funding mechanism.
9. Develop a realistic energy transition policy. The transition to clean energy will require additional investment and transition costs that will need to be compatible with the deficit and debt reduction goals.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

© Entire contents copyright 2023 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].