Before we were told not to worry about inflation, we were told not to worry about federal debt and deficits. (In many cases, the same people did the telling.) But debt and deficits, like inflation, don’t care what we were told and continue to be told. Their impact isn’t subject to the intellectual whims of the day, even if those whims are expressed by EconTwitter. It’s hardly unreasonable to raise an eyebrow, maybe both eyebrows, at this:

The U.S. could become unable to pay all of its bills on time sometime between July and September, the nonpartisan Congressional Budget Office estimated, giving lawmakers several months to reach an agreement on lifting the debt limit and avoiding a default. The CBO also forecast on Wednesday that the U.S. deficit would hold largely steady this fiscal year at roughly $1.4 trillion before expanding over the next decade as higher costs for Social Security, Medicare and interest on the debt increase spending. New federal spending from legislation, such as an expansion of veterans benefits, as well as higher interest costs from high inflation, led CBO to project an additional $3 trillion in debt over the next decade compared with its forecast last May. The CBO’s estimates assume that lawmakers make no changes to current policies over the next decade. “The fiscal trajectory is unsustainable,” said CBO Director Phillip Swagel. “The challenge is…there’s no one point at which, you know, we have a Wile E. Coyote moment, and it’s unsustainable.”

I mean, we could wait to do anything until financial markets forcefully tell us to stop waiting, requiring drastic and draconian action. Or we could pretend markets will be eternally uninterested in the subject. Those are options, for sure.

Interregnum: I’ve been repeatedly told not to worry about deficits and debt because of low interest costs. But, as noted in an excellent Peterson Foundation analysis, the recent step-up in interest rates means interest costs will increase to $1.4 trillion in 2033 from $475 billion today. What’s more, “relative to the size of the economy, net interest would grow from 2.4 percent this year to 3.6 percent in 2033. In 2030, the ratio of interest to GDP would total 3.3 percent, the highest recorded since 1940 (the first year for which such data are reported),” according to Peterson.

Another option: Start the ball rolling now. Get a handle ASAP on the main debt drivers: the major health care programs and Social Security. Thank goodness these are well studied issues, and there are smart ideas for reform—many of which come from my AEI colleague. Andrew Biggs has proposed a plan that would cap the maximum benefit for Social Security recipients, but boost benefits for low earners and provide every worker access to a retirement plan. Joe Antos and James Capretta recommend converting Medicare to a premium support plan, providing a subsidy to beneficiaries who would choose from among competing health plans. Those selecting more expensive plans (including traditional Medicare) would be responsible for any premium amount above the subsidy. 

And don’t forget the other side of the equation: raising revenue. This from Alex Brill and Alan Viard: 

All individual income tax rates would be lowered by approximately 5 percent across the board from their TCJA values. The corporate income tax rate would be kept at 21 percent. The individual and corporate income tax bases would be broadened by reforming or eliminating ill-designed tax preferences, with transition relief for taxpayers who have relied on current tax laws. The municipal bond interest exclusion, the mortgage deduction, the remaining state and local tax deduction, the medical expense deduction, the pass-through business income deduction, and a variety of business tax preferences would be repealed. The estate and gift tax would be repealed, but unrealized capital gains (above a threshold amount) would be taxed at death. The 3.8 percent net investment income tax would be repealed. A carbon tax would be adopted to replace the Clean Power Plan and other climate-related regulations. The gasoline tax would be increased.

All these ideas and more, including plenty of detail, come from a 2019 report, so an updated version would be a bit different given Biden policies. But the direction and broad strokes would be the same. And avoiding a financial shock isn’t the only goal here. As Biggs recently observed: “Government has important jobs other than taking money from young people and giving it to old people. . . . But the federal government’s ability to take on these tasks will be severely limited if we don’t think hard about how to slow the growth of entitlement benefits for seniors, in particular well-off seniors.”

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