The US Debt Circus

Political theater is in full swing in our nation’s capital as Republicans and Democrats have at each other
over the debt ceiling. In the spirit of community service, the Digital Patriot is happy to suss out this mess
for you in the following Q&A format, featuring us asking the questions, and us imagining the response of
some unnamed Assistant Deputy Undersecretary of Unaccountability in the Treasury Department.
Enjoy!

Q: What exactly is a debt ceiling?

A: It’s a colloquial term for the limit on the amount of debt that the US Treasury can borrow to pay bills
that have come due. This is getting a lot of attention, because as it stands now, the national debt is
$31.4 trillion, and the limit on said debt is $31.4 trillion.

Q: Hahahaha – it sounded like you said “trillion.” Wow – THAT would be insane!

A: (embarrassed silence)

Q: No, seriously -- $31.4 TRILLION?!?

A: Yes. That’s nearly $95,000 for each and every one of us 332 million Americans.

Q: Holy (deleted). How did that happen?

A: Well, almost every year, our government spends more money than it takes in. That’s called a
“deficit.” The national debt is the accumulation of past deficits. In 2022, we added to that with a wee bit
of a deficit.

Q: And when you say “a wee bit,” you mean…

A: About $1.4 trillion.

Q: That’s incredible. What’s the math behind that?

A: The government collected $4.9 trillion in revenue and spent $6.3 trillion on things like entitlements,
defense, health care, Tunisia’s tourism industry, and –

Q: Whoa, whoa, whoa – Tunisia’s tourism industry?

A: Well, just $50 million.

Q: Unbelievable. When was the last time we did NOT spend more than we took in?

A: 2001 was the year of the last budget surplus. It’s akin to 21 consecutive years of a person using a
credit card and not paying off the full balance each month.

Q: That seems breathtakingly irresponsible and reckless.

A: Friendly reminder – this is a Q&A, and technically, that’s not a question.

Q: Fine. Why do our elected leaders have all the fiscal sense of a bowl of fruit?

A: You’ve just offended an entire sub-population of San Francisco that identifies as ripe bananas. Shame
on you.

Q: Fine, let’s look at this in a different way. All of that debt requires payment. What’s happening with
our debt service, especially in light of the Federal Reservie hiking interest rates 4.25 percentage points
between March and December of 2022?

A: It’s not pretty. In the fourth quarter, interest payments on the national debt totaled $213 billion, up
$63 billion or 42% from a year earlier. For all of 2022, interest payments totaled $710 billion, up 23%
from $579 billion in 2021.

Q: Yeeesh. We talked about our debt to revenue earlier. Economists like to look at debt as a
percentage of a country’s gross domestic product, or GP, which is the total annual amount of goods and
services produced by a country. What’s that percentage look like?

A: Well, there’s good news and bad news.

Q: Hit me with the good news.

A: That percentage has been coming down!

Q: And the bad news?

A: It’s still ungodly high. Our GDP in 2022 totaled $25.5 trillion. The national debt was equivalent to
123% of the GDP in the fourth quarter of 2022. That’s down from the all-time high of 135% in the
second quarter of 2020, when revenues tanked because of the pandemic shutdown.

Q: That’s awful. Are we going to become the 2009 version of Greece, when fear of default on Greek
debt triggered the collapse of its bond market?

A: It is true that a country with a high debt-to-GDP ratio may struggle to pay its debts. The problem is
compounded by investors seeking higher interest rates from the issuing country to compensate for that
greater risk of default. For example, Greece’s 10-year bond at one point had a 35% interest rate. But no,
we’re not at risk of becoming Greece.

Q: Phew! That’s a relief!

A: At least not immediately.

Q: Excuse me!?!?

A: The issue with Greece was that its 2009 budget deficit exceeded 15% of its GDP. That sent bond
investors scurrying for cover. Our budget deficit as a percentage of our GDP is not quite 4%, though it’s
on the rise, as the Congressional Budget Office estimates the percentage will top 6% in 2033. So while
we do have a ways to go, the trend is not good, and the mess we are in comes with hidden costs. A
study by the World Bank, for example, found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth. The study estimates that every percentage point of debt above 77% costs countries 0.017 percentage points in economic growth. For the US, that’s nearly 0.8% in economic growth.

Q: That’s terrible. Let’s get back to the debt ceiling. How’s this going to play out?

A: The usual drama will unfold but ultimately the debt ceiling will be raised. Because if it is not, a US
default on its obligations would, in the words of our own Treasury Department, “likely have catastrophic
repercussions in the United States and in markets across the globe.”

Q: Okay, so this long-term trend of us spending more than we take in is a big, big problem. But we’re
not Greece, at least not yet, so we have time to act to right the ship. Surely are elected officials are
working on this, so the situation won’t get worse, right?

A: (silence)

Q: Right?!?

A: Well, no. Fresh projections from the Congressional Budget Office have deficits totaling more than $20
trillion across the next decade (2024 through 2033), topped out by a budget deficit of nearly $2.9 trillion
in 2033 alone. This assumes an annual growth rate in revenue of 4.4% versus 4.7% for expenditures.

Q: Why won’t our government address this?

A: Our debt has grown persistently due to spending growth in entitlement programs – Social Security,
Medicare and Medicaid. While those programs keep millions out of poverty, they do so in their current
structure via an unsustainable mismatch between what people pay in to those programs in taxes and
what they receive, on average, in lifetime benefits. According to the Urban Institute’s Social Security &
Medicare Lifetime Benefits and Taxes: 2001 report, a male turning 65 in 2025 with average earnings
(defined as $59,000 in 2021 dollars) will receive, on average, $615,000 in Social Security and Medicare
benefits. He will have paid in $434,000.

Q: So how will this play out?

A: We have two options. Get our house in order via some necessary if unpalatable medicine, e.g.,
extending the Social Security payroll tax past its current ceiling, implementing means testing, and so on.
Or we can wait for those who buy our debt to inflict their own brand of discipline on us in the former of
ever increasing interest rates, to satisfy their return demands for the risk they take on in investing in a
country with a steadily deteriorating balance sheet. And that will be painful. Just ask Greece.