The big deal with a big debt

- The national debt just hit $40 trillion. The federal budget deficit is nearing $2 trillion. Those numbers are increasing. Today on the pod, what it means for you and why today's political dynamics are working against a solution. (upbeat music) - It's the NPR Politics Podcast. I'm Tamara Keith, I cover politics. - I'm Eric McDaniel, I cover Congress. - And our friends Scott Horsley, NPR's Chief Economics Correspondent is with us. Hey Scott. - Great to be with you. - And Scott, you're here because we need to do some economics 101. What is the budget deficit? - Well, if you think about this kind of like your own personal budget. Let's say you make $45,000 a year, but you spend $62,000 a year. The difference between those two is your deficit. And that's basically what the federal government's been doing except instead of thousands substitute trillions. The federal government is collected about $4.5 trillion in tax revenue and it spent $6.2 trillion. So it's got a deficit of about 1.8 trillion. And by the time we get to the end of the fiscal year in a couple of months, we'll probably be over the $2 trillion deficit figure. If you do that year after year after year, then all those accumulated deficits become your federal debt. And this month, the federal debt for the United States taught 40 trillion knowledge the first time. - Which is just a giant number. Eric, what are these numbers, these big abstract giant numbers mean in practice? - Yeah, I had the same question. I mean, I had to do a lot of calling to figure that out. Like what is the difference between 39 trillion and 40 trillion and what does it make a difference? And I talked to Jessica Riedel, a conservative economist at Brookings and here's what she told me. - This year, 19% of all tax revenues will go to interest on the debt. Within a decade, it's gonna be one-third of all tax revenues. And within 30 years, depending on interest rates, it's gonna be between 54 and 83% of all tax revenues paying interest on the debt. - So the reason that matters here, and the reason it's related to that top line number is the bigger year overall that the larger the annual interest rate payments you have to have on it. So if 20% of your tax payment every year is going toward paying down that debt, you can think of that as one-fifth of the way through the year every dime you've paid toward the government is going to service interest payments and she made other points. The debt is going at three times the rate the U.S. economy is that the only other time the U.S. debt has been bigger than the economy as a whole is back during World War II. And Scott, I know we talked earlier, like having that much debt can make other things more expensive to do, right? - Yeah, the government's now having to pay more to finance its debt and as a consequence, every private borrower is also having to pay higher interest rates whether it's somebody going out trying to get a mortgage right now or someone trying to get a car loan or someone trying to get a loan to build a business. All that debt is becoming more expensive. I was kinda trying to put this in individual terms. Obviously, if you were making $45,000 a year and spending $62,000 a year after a year, your credit card company might bankroll that for a while but at some point they'd cut you off. And we may get to a point where the lenders are not willing to extend that kind of credit to the United States. Hasn't happened yet and it may not happen down the road but what is happening is the lenders are saying, if we're gonna give you that much money, we're gonna demand a higher interest rate. - Okay, so we owe a lot of money. Who do we owe it to? Who are the lenders? - Well, it's a whole lot of different people. It's individuals, it's pension funds, it's foreign entities. There's been a huge pool of excess savings around the world. What our colleagues over at Planet Money call the giant pool of money. And for a long time, that's allowed the federal government to borrow vast sums of money at very low interest rates but now there's more competition for that vast pool of money. You've got a lot of high tech companies that are borrowing a lot of money to build out data centers. You've also got, as I say, a little bit more skepticism about the federal government's solvency down the road. US government hasn't necessarily been behaving in a fiscally responsible way. And so that giant pool of money which now has other places to park and more suspicions about the responsible behavior of the policy makers in the United States, that's why they're demanding higher interest rates. - And Eric, what does the country get for all of this money? What do we have to show for it? - Yeah, that's such an important question. I mean, if I borrow money and I start a business, I'm investing in myself. This is a thing that's going to earn me money down the line. College works the same way, right? In theory, you can borrow money, hopefully not too much. You go to college and it increases your lifetime earning potential, meaning you end up with more money than had you never taken out those loans and gone to college. In theory, if the government is going to spend a lot of money on a big project, that could pay dividends down the line. I talk to labor economist Catherine Ann Edwards about how she thinks about the amount of debt we're carrying right now. She says, essentially, we're not investing in the interstate highway system. We're not getting ourselves out of a pandemic. We're not making a generational investment in children. We're focused on basic just everyday spending. So one way to think about this is that all of the money that Congress chooses to appropriate every year, that's all of the executive branch agencies, not counting things like Social Security and Medicaid and Veterans Benefits, but just the core business of the government, that's about $2 trillion. Like Scott mentioned earlier, the size of our deficit every year is also about $2 trillion. So all of the regular business of the US government is getting done on debt spending. So that's not like investing in your college education or starting a business if we're gonna make a personal finance comparison. It's much more like needing to pay for your groceries on a credit card because you need to eat. And just covering the interest on the federal debt now cost more than a trillion dollars a year. So that's a trillion dollars that has to come off the government's books before we can spend $1 on education or health care or defense or any of the other priorities that the government might have. Yet the debt is expensive, it's expensive to have this much debt. So we have now multiple times used a personal finance comparison or analogy as we've been talking about this. And politicians love to compare the nation's budget deficit to a family's debt. So is this an apt comparison or is it flawed? I mean, I do think it's useful in so far as like the government, we all have bills to pay and you can think pretty readily about how much you have going in and how much you have coming out of your wallet. And like we've talked about a lot, debt can be an investment or it can be just a general liability. But the government is also different in that in part, it has control over its own income, right? It can decide its own salary by setting tax rates and really tailoring its spending levels much more than say I can do that. But it also has times that it has to spend way more money than I might need to as a private citizen, like on pandemics or recessions or wars and you know, those are pretty distinct. And the government's also been around for 250 years and we hope it's going to be around for many centuries to come. So there's a long horizon to deal with this debt. But we've doubled the size of our debt just in the last nine years, just since 2017. So we're really accelerating the level at which we're piling up red ink and that's a challenge. All right, we're going to take a quick break and when we come back solutions, are there solutions, maybe, and we're back. And I think when people hear these numbers, there is some alarm, $40 trillion in debt is a very big number. Is this a problem requiring a solution? Or is this just a fact of American economic and political life? I think it is a challenge. It may not be a challenge this week or this month or this year. But there's going to come a time when the federal government's ability to borrow this much money is going to either get so costly that it crowds out all the other things the government wants to do. Or it's going to push interest rates so high that it's going to really saddle the rest of the economy. All the would-be private borrowers with a lead weight around their neck. Or we're actually going to reach a point where lenders don't want to extend that kind of credit to the federal government anymore. I don't know which of those scenarios is going to happen and we're win. But I don't think it's something we can just close our eyes to and drive blindly on. And do you think that people will make the connection? Will it be obvious that it is because of the national debt that these things are happening? Or will it just be like, gosh, interest rates sure are stubbornly high? Well, the federal debt's not the only reason that interest rates are high. It is also because inflation is elevated and it is because there is more competition from private borrowers. But certainly a $40 trillion debt is one of the factors that's pushing interest rates up. And that is a handicap for anyone who's trying to buy a home or buy a car or build a business. So I want to turn to the politics of this and the potential political solutions. But I want to tell you a story. I'm going to go back in time to when I was a reporter covering Congress from like 2011 to 2013. And it was. right after the big Tea Party wave that saw all of these fiscally conservative Republicans elected to Congress and they came in and they were like, we need to bring fiscal sanity to America. And one of them was Mick Mulvaney from South Carolina and he went on to be President Trump's Budget Director and Chief of Staff. But I remember going to his district and watching him do a town hall where he did this lengthy slide presentation all about the debt and the deficit and the drivers of it, Scott, you and I covered a series of fights over government spending in those years. We did and it used to be the case that the government sort of ran up big deficits in tough times. It was the great recession of 2007, 2008 that led to a lot of borrowing and led to a big expansion of the deficit, but then it would whittle away at the debt during relatively good times. During the years after the Great Recession, the Obama administration with some push from Republicans in Congress did whittle down the debt as a share of the economy down below 3%. Now, we build the debt in good times and bad and it's just been sort of moving in one direction ever since 2017. So, one example of that is President Trump's signature domestic policy achievement, the One Big Beautiful Bill Act. So this was widespread tax cuts that Republicans now call the Working Families Tax Cut Act. And as a whole, it cut 4.5-ish trillion dollars in projected tax revenue and it only cut about a trillion dollars in spending, the bottom line is this bill adds to the overall deficit. So this is a thing that you'd think of and is branded as kind of a fiscally responsible move by Republicans, but in the end, it contributes to the overall debt problem. Now, they might say that, okay, well, the economy is going to grow faster because these taxes are no longer, you know, restricting business productivity, but, you know, over the last 25 years of tax cuts since the last time we had a more or less balanced budget, we've never seen these kinds of tax cuts achieve enough growth in that way to offset the loss to government income. Yeah, and it's often argued that we can either grow our way out of these big debts and we're not going to get out of these debts merely by cutting waste fraud and abuse. We are currently growing the U.S. economy at an annual rate of about 2%, and we're adding to the debt at an annual rate of about 6%. That's what Eric said earlier, we're growing our debt three times faster than our economy. And that's not a recipe for success. Yeah, so I called Mick Mulvaney. He comes to mind whenever the debt and deficit come up because, you know, I probably because I spent quality time watching him give his slide presentation. I was like, Mick, what do you think is going on here? Why isn't anybody shouting from the rooftops like you used to do? And this is what he said. You know, the Republicans will always want to spend more on defense than Democrats will always want to spend more on social programs. And the sort of unholy alliance was that, you know, we do both. You could get your tax cuts and you could get your increase spending because we could always borrow it. In 1981, I don't see anybody yet really clamoring for spending less. The voters just don't care. As I was wrapping up my call with Mick Mulvaney, he was like, here, I've got a story to explain this all. And he told me when he was budget director for President Trump in 2017, he got called into the Oval Office. He was about to put out the president's first budget. And there was a very senior senator there in the office who was not happy with the budget that Mulvaney had come up with. And so the president turns to the senator and says, well, why don't you tell Mr. Mulvaney what you just told me? And the senator said, sure, he says, Mr. President, we all know Mr. Mulvaney. We know he's one of the best guys in town with the numbers. We know how fiscally conservative he is. He's got credibility on that. And he always has. But Mr. President, he's not elected anymore. And you are. Let me make one thing perfectly clear to you, sir. No one has ever lost his or her job in this town for spending too much money. They have lost it for not spending enough. And that senator was Mitch McConnell, the top Republican in the Senate. And George H.W. Bush famously lost his job for raising taxes. But I will say, in the 1990s, we had a Democratic president. We had, for much of that decade, a Republican Congress. And they did manage to balance the budget, whittle away the deficit to zero. We actually had a surplus. There was a period in the late 90s, where revenues were eclipsing spending. And it looked as if we were on track to actually start chipping away at the debt. And then that was squandered by the George W. Bush tax cuts and the Trump tax cuts. And then lots of spending during the pandemic and during the recession. And of course, it's important to keep in mind that the bulk of the U.S. government spending is on autopilot for things like Medicare and Social Security. And the demographics there are not our friend when it comes to chipping away at the debt. Right. Scott mentioned there. I talked about earlier $2 trillion annually being what Congress has discretionary appropriations. It's much more than that for all of the automatic spending, the Social Security, the Medicare, the Medicaid, et cetera. And those things are political third rails. That's exactly right. You know, the Democratic argument here, and Scott, we talked about this a bit earlier before the podcast, was like, there are some kinds of investments you can make on the government level, much like we've talked about investing in college or a business that can ultimately they hope grow the tax base. Catherine Ann Edwards, the labor economist, I talked to, cited Universal Child Care as one of those options, right? In theory, if you don't have to pay out for childcare and your kids are occupied during the day, it will increase your potential to earn more at work or find a more productive job or any of those things that might grow the overall size of the economy through increased taxes. It's certainly possible that that kind of investment in Universal Child Care will pay long-term dividends and will grow the economy down the road. But there was a time when we believe that things worth investing in were worth paying for. And that means if we feel like that's a valid investment, we should raise the taxes to finance it. Well, Scott Horsley, thank you as always for making us smarter. Oh, I'm in your debt. Oh, Scott, oh, and it also took me like five seconds to get your bad joke, which is even worse. So, all right, pod listeners, come back and join us tomorrow. I'm Tamara Keith. I cover politics. I'm Eric McDaniel. I cover Congress. Thank you for listening to the NPR Politics podcast.