Lawmakers in the United States are debating options for the country’s national debt, or more specifically, the debt ceiling. It goes like this.
Imagine you’re in high school and you’re already committed to going to the spring dance. Unfortunately, it costs $50 to go, the money helping to pay for the punch, decorations, and chaperones. However, mom and dad are fighting about where the $50 will come from so they can ask their financial advisor to approve the purchase.
Mom — in this case, the Democrats — argues that you should go to the dance because it’s an important part of your upbringing. Dad — the Republicans — responds by saying that lots of things are “important” parts of your upbringing, but they should choose just one: Either you go to the dance or you play spring ball, but not both.
If they can come to an agreement, they can then talk to their financial advisor — the Treasury — to approve the spending and set a new path forward, at least until the same conversation arises next year.
This analogy isn’t entirely one-to-one, but that’s basically what we’re looking at.
This week, members of Congress have been meeting to assess the debt ceiling issue currently plaguing Capitol Hill, the effects of which can be seen in capital markets. That’s because Congress holds the keys to setting a new debt ceiling for government spending.
Remember, Congress comprises two parts: the Senate and the House. Democrats currently control the Senate, while Republicans control the House (hence that fighting between mom and dad).
Yesterday, the House passed a bill to raise the debt ceiling and cut spending. Led by Speaker Kevin McCarthy, Republicans want the government to get its spending in order. This plan includes clawing back some of the monies set aside for COVID relief as well as many of the grants and subsidies within the Inflation Reduction Act (IRA). It also includes scrapping President Biden’s student loan relief plan.
Senate Democrats, led by Majority Leader Chuck Schumer with Biden backstage, said this Republican proposal “has no chance of moving forward in the Democratic-controlled Senate,” according to the Journal.
Still, without an agreement between the two, the Treasury, led by Secretary Janet Yellen, can’t raise more debt to pay all the government’s bills. That is, not raising the debt ceiling or reining in spending will result in the government defaulting on its debt, an unprecedented event that could have enormous consequences for financial markets and the economy as a whole.
Why it matters
The debt ceiling debate is important for many reasons, but the most crucial reason is that the outcome of the debate helps us understand, and respond to, our future.
Last year, the U.S. government spent about $9 trillion. About half of that went to Medicare, Medicaid, Social Security, and other benefits often called “entitlements.” Most of this is mandatory spending — the government is obligated to make these payments to beneficiaries. Another 13 percent went to the military, and eight percent went to paying the interest on Treasury debt.
As you know, interest compounds. The more debt we have, the more interest we have to pay, creating a vicious cycle that’s hard to break. Government debt held by the public currently stands at around $31 trillion, or 119 percent of our $26 trillion GDP and 616 percent of revenues from taxes. Much of that debt came from government rescues during the financial crisis of 2007–2008 and pandemic relief programs during the last two decades. That debt amounts to an annual interest payment of nearly $800 billion.
The Congressional Budget Office (CBO) estimates that net interest outlays “more than quadruple” over the next 30 years. Of course, these are merely estimates, and you know how I feel about projecting our guesses decades into the future. But one fact the CBO notes that’s a fairly safe bet: rising healthcare costs due to an aging population.
Demographics don’t easily change. As boomers continue to retire, grow older, and seek additional medical help, they’ll draw on monies set aside for Medicaid, Medicare, and Social Security, the very categories of spending that eat up a large part of our national budget. Here’s how the CBO phrased it: “Rising interest costs and growth in spending on the major health care programs and Social Security — driven by the aging of the population and growth in health care costs per person — boost federal outlays significantly over the 2025–2052 period.”
The current debt ceiling debate is like many that have come before it. Just about every year it seems lawmakers are bringing it up again. However, kicking the can down the road can only last so long. At some point, we’ll all have to pick up that can, stare at it, and collectively decide what to do with it. Or else, our children and grandchildren will be born into a very different economic world.