America’s large public debt seems poised to again become an electoral issue as we gear up for the 2024 election cycle. Though we are a long way from real debt reduction, it is helpful to gather a few facts to ponder the challenge of balancing the budget. I must say up front that balancing the budget will require both significant tax increases and benefit cuts. To pay off the debt will require even more of both.
The first step to a reckoning on debt is to determine who is at fault. The short answer is all of us; the longer answer is every one of our federally elected officials. It’d be nice to blame one party or the other, but facts are sticky things. Since the budget was last balanced, we’ve had 12 years of GOP presidencies and 10 years of Democrat presidencies-every one of them a budget blowout.
There were lots of little budget blowouts from both parties, and a couple of really behemoth ones. The CARES Act was the largest deficit-producing legislation in history. Every Hoosier federal legislator voted for it, and Donald Trump signed it into law. They should have, but in a world of even minimal public honesty, that should silence criticism of anyone else on the deficit issue. In fact, I have developed a very useful shorthand way of judging seriousness of folks talking about the deficit. If they blame the other party, they aren’t serious.
Last year the U.S. government collected $4.9 trillion in taxes and spent $6.3 trillion. That added to the debt by $1.4 trillion (note: these figures don’t add due to rounding). This year’s budget is a little better, maybe running only a $1.2 trillion deficit. That’s about $3,600 per citizen.
There are legitimate reasons to engage in deficit spending. Wars, natural disasters, pandemics and investment in durable structures all argue for spreading the cost over a long period of time. There’s no magical size of deficit that trips us into national decline. The issue is that high deficits require debt payments. These debt payments slowly crowd out spending on other items that would boost economic growth.
If we spent a budget deficit on things that boosted growth, this could offset the negative effects of the debt service costs. Some things obviously boost growth, like infrastructure and education spending. Some things indirectly boost growth, such as defeating Hitler, Saddam Hussein or Vlad Putin. But, the economic effect of much of this is in the distant and uncertain future. None of this is easy and there are good faith disagreements about the right types of spending.
However, much of our national budget has little to do with improving productivity. In fact, last year we spent $2.2 trillion on Social Security, veterans benefits and Medicare-programs that pay people not to work. If we add in Medicaid and income maintenance (e.g., unemployment, TANF, etc.), we spent another $1.8 trillion dollars. Interest on our debt was another $0.475 trillion. Thus, the grand total of these six big budget areas are close to $4.5 trillion of the budget.
All told, 62 percent of our spending last year was on budget items that Congress made mandatory. But, 91 percent of taxes collected last year were allocated to mandatory programs like Social Security and Medicare. In order to balance the federal budget, we’d need to eliminate almost everything else we spend money on. It should be obvious why that won’t work.
We could entirely eliminate the Department of Defense, all the armed services combined, and that would only cut the deficit by half. Or, we could eliminate all educational spending to cut the deficit by 40 percent. There’s just no magical pot of money to cut to fully balance the budget.
We could make government more efficient. Of course, we’ve been trying to do so since late 1776. For example, we could eliminate all veterans’ healthcare and give them Medicare vouchers. If that’s wildly cost efficient, it would save $25 billion a year, or 0.21 percent of the deficit. This disabled veteran supports that in theory, but it won’t meaningfully affect the budget.
Any sort of cost cutting effort will need to significantly reduce benefits like Social Security or Medicare. Practically, that could be done in several ways. We could extend the age at which benefits are collected, or means test benefits. These changes would take decades to implement, so they will have no effect on our current deficit or debt. Politically, these types of actions have real challenges. For example, means testing Social Security reveals it to be simply a transfer from working to non-working people. It has never been a ‘fund’ that you pay into, that’s just political rhetoric. Few elected officials would wish to say this aloud.
Any sort of revenue-raising effort will likewise need to be broadly focused. Even if it were constitutional to tax all the billionaires at 100 percent, that would not close the deficit this year. Perhaps we could ease up taxes everywhere. Today, we only subject income below $162,000 per year to payroll taxes for Social Security and Medicare. If we lifted that cap, we could gather another $0.10 trillion per year-just not enough to close the deficit.
Overall, taxes in the U.S. are low by international standards. We collect about 10 percent less of our GDP per year in taxes than does the average developed nation. There is significant room to raise taxes without substantially reducing economic growth, but that comparison isn’t terribly clear. The US spends less per person on benefits, and we only fund about 40 percent of our healthcare through the government. The remainder is paid by the private sector. So, we ought to collect fewer taxes.
Just to be clear, I’m not really advocating any of these proposals. I just think that the challenges of balancing the budget are far more complex than most folks imagine. There’s no silver bullet, no magical budget item to cut or magical tax to increase. There’s no class of welfare recipients we can send into the workforce or affluent people we can tax into national solvency.
Like other people, we Americans like low taxes and plentiful benefits. Until we understand that such a combination of desires holds some long-term risks, we’ll continue on our current path. Our current politics don’t reward honest efforts at fiscal solvency, and I see nothing in the present to change that. I think the best we can do is be honest with ourselves about the depth of the challenge.
Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University.
