Americans have gotten used to hearing big numbers from the federal government since the 1960s, when Sen. Everett Dirksen (R-Ill.) supposedly uttered his famous quote, “A billion here, a billion there, and pretty soon you’re talking real money.” But a much bigger number caught people’s attention in the last week.
That was the revelation that the national debt had reached $40 trillion. The news provoked vigorous hand-wringing across the partisan spectrum and multiple hives of economists.
News columns and cable programs featured lengthy discussions about how this happened and what to do about it, all presented against an apocalyptic backdrop. CNN, for example, called it a “grim milestone.”
Yet much, if not all, of this is needlessly overwrought. We know why the national debt has mushroomed, doubling over only the last 10 years. The most commonly cited scapegoats are the social insurance programs Social Security, Medicare and Medicaid. They’re costly, no doubt, but their cost is manageable within the confines of federal fiscal policy.
Social Security, in particular, is fully funded today by payroll taxes and interest on the program’s trust fund holdings of Treasury bonds, which have been purchased with payroll tax receipts. There may be a shortfall around the middle of the next decade, but that can be resolved largely by raising the payroll tax on the wealthiest Americans, who currently get an exemption on much of their income.
The high-water mark of partisan panic over government debt came in the early 2010s, after Harvard economists Kenneth Rogoff and Carmen Reinhart published a paper asserting that higher levels of debt were associated with lower economic growth. The tipping point, they wrote, was when debt reached 90% of gross domestic product. At that point, they stated, GDP growth reversed.
Congressional Republicans, led by then-Speaker Paul Ryan (R-Wis.), used that finding to push for austerity — cutting food stamps and Medicaid, throwing tens of thousands of children out of Head Start, etc., etc. He didn’t achieve all he wished, but the impasse that he and his cohorts forced on the Obama administration gave us the sequester, an enormously damaging package of program cuts and freezes that fell, unsurprisingly, on the most vulnerable Americans.
As it happened, Rogoff and Reinhart were wrong. A team from the University of Massachusetts established in 2013 that their inflection point was the product of bad math and a data coding error that excluded several countries that had experienced growth during high-debt periods; once the flaws were resolved, it turned out that no such growth reversal existed.
Rogoff and Reinhart disdained that finding as an “academic kerfuffle,” arguing that the errors had minimal effect on their own conclusions.
Other economists already had pointed out more fundamental flaws in Rogoff/Reinhart. One is that debt and GDP have an attenuated relationship to one another — debt is paid off over a period of decades, while GDP is measured as a snapshot in time, extrapolated to a year. More to the point, slow economic growth can force the debt ratio higher, rather than debt forcing economic growth lower. Thriving national economies, after all, don’t need to borrow so much.
Yet the imaginary connection between these two metrics still gets cited. Economist Robert Shiller explained why in his own response to Rogoff and Reinhart: “A lot of what happens in markets,” he wrote in 2011, “is driven by pure stupidity — or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.”
The currently circulating story is that blame for the federal budget deficit and consequently the national debt belongs to our “entitlements,” specifically Social Security and the public medical programs, perhaps because they are the largest budget expenditures — about $1.6 trillion on Social Security and $1.2 trillion on Medicare in 2025. The Associated Press, for instance, listed “defense costs, social programs like Social Security and Medicare and interest on the burgeoning deficit.”
Yet that addresses only one side of the federal ledger — the spending side. It ignores the revenue side, which has failed to keep up with spending. That’s because the most significant “achievements” of the George W. Bush and Trump presidencies were massive tax cuts, most of which flowed to corporations and the wealthiest Americans. Those cuts far outstripped the cost of the safety-net programs that have been shouldering most of the blame.
Start with the Bush cuts. These encompassed major tax cuts in 2001 and 2003, and smaller cuts in 2004, 2005 and 2006, reducing expected federal revenue by as much as $2.5 trillion over 10 years.
The principal beneficiaries of those cuts were the top 1%, who saw their after-tax income rise by 6.7% in 2010, as the Center on Budget and Policy Priorities calculated in 2017. Those in the middle of the income range saw after-tax gains of less than 3%, and those in the bottom 20% saw gains of only about 1%.
Trump’s major fiscal policy move came in 2017, with a massive tax cut aimed, again, at corporations and the rich. The 2017 cuts cost as much as $1.5 trillion over 10 years by the reckoning of the Committee for a Responsible Federal Budget, a hive of conservative budget hawks.
But its cost was swamped by the tax cuts in the deceptively labeled “One Big Beautiful Budget Act” enacted by a Republican Congress and Trump last year. By the CRFB’s reckoning, that measure encompassed as much as $7.2 trillion in deficit-increasing provisions over 10 years, counterbalanced by only $2.5 billion in deficit-reducing provisions, for a net loss to the Treasury of $4.7 trillion over a decade. (Those figures include the cost of extending some of the tax cuts enacted in 2017.)
Notably, most of the deficit reduction comes from cutbacks in social services, such as $1.1 trillion in cuts to healthcare programs and subsidies, cuts to education programs ($295 billion), and cuts to programs such as food stamps ($206 billion).
Put it all together, and new light gets shed on the federal debt. Without the Bush and Trump tax cuts, estimates the left-leaning Center for American Progress, federal debt would amount to only about 60% of GDP this year, not the 100% estimated by budget hawks. More to the point, it would decline over time, reaching less than 48% by 2055.
The Bush and Trump tax cuts are only the most recent giveaways to the upper crust embedded in our tax structure. In general, “tax expenditures” — budget wonk talk for tax breaks — “disproportionately benefit higher-income filers,” in the words of the Peter G. Peterson Foundation, which was funded by the late eponymous donor, a hedge fund tycoon.
The top 20% of income earners, the foundation calculates, receive more than half the value of major tax expenditures, chiefly a preferential tax rate on capital gains and dividends (and the extinguishment of tax liabilities on assets held at death), and deductions for charitable contributions and mortgage interest.
In other words, America’s rich get the lion’s share of tax breaks and pass the cost on to everyone else.
As for the cost of America’s borrowing more generally, that has been rising even outside the growth in the debt load. That’s because the interest rate on Treasury securities has been rising: The government paid an average of 1.57% annually in interest on the $20 trillion in debt held by the public in 2016, but it’s now paying an average of 2.59% on its $40 trillion outstanding today.
What’s driving that increase? To a significant extent, it’s Trump. The cost of his Iran war and of his unpredictable and asinine tariff policies has forced interest rates higher. They are likely to keep rising, partly due to intensifying borrowing demand from AI startups.
Those secular pressures explain why the administration’s efforts to bring down rates have failed. Trump’s efforts to jawbone the Federal Reserve Board to lower rates have been falling on deaf ears — even his handpicked new Fed chairman, Kevin Warsh, mentioned at a recent investment gathering that rates may yet have to go higher to combat Trump-caused inflation.
That may explain why the attempt by Treasury Secretary Scott Bessent to bring rates down by stepping up purchases of Treasury securities failed miserably. Bond investors didn’t see Bessent’s effort as sustainable in the long term and in any event not big enough to move the needle on Treasury prices.
It’s true that there’s reason for all of us to be concerned about the size of America’s debt. Rising rates mean higher costs for home mortgages, car loans and credit card balances, increasing the strain on household budgets. But it doesn’t pay to be mistaken about what’s driving those costs. It’s not Social Security or Medicare. It’s ignorant and incompetent policymaking in the White House.
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