It’s time to step out of the partisan rubric and attempt to find middle ground solutions to address the problems of federal spending, deficits, and the ever-increasing national debt.  We’ll do so by attempting to apply the insights we gained from the extensive research and analysis presented in prior posts. The aim is not so much to reach agreement on specific solutions; rather, I’m hoping we can gain a greater understanding of the options and the solutions that can effectively and durably solve the problems.  Also, many of the solutions I offer are for purposes of discussion, leaving them open for modification or rejection.  I also note in advance that many of these options and solutions involve a heavy lift and are not politically feasible under current conditions.  Thus, in my final post of this series, I’ll attempt to provide a feasible path forward.

Annual Spending by the Federal Government

Our analysis has shown that the level of spending by the federal government varies significantly depending on whether or not the country is experiencing extraordinary conditions (war, recession, pandemic, etc.).  If there are extraordinary conditions, spending jumps depending on nature and extent of the condition or conditions.  For instance, in connection with the great recession of 2008-09, spending jumped to 24.3% of GDP in 2009, 22.97% of GDP in 2010, and 23.1% of GDP in 2011. In connection with the Covid-19 pandemic and recession of 2020, spending spiked to 31.37% of GDP in 2020, 30.5% of GDP in 2021, and 24.1% of GDP in 2022. Extraordinary conditions thus present a very difficult budget challenge because we can’t predict when they’ll occur, how long they’ll last, and how much spending will be necessary to address them.    

On the other hand, when the country isn’t experiencing extraordinary conditions, federal spending has typically been in the range of 20-22% of GDP.  I would submit that this level of spending has been tolerated and/or accepted by both Democrats and Republicans.  For at least 35 of these 43 years, Republicans had real power to control the spending that has occurred.  Republicans held the Presidency and both houses of Congress for 8 years; they held the Presidency and one house for another 8 years; they held both houses, but not the presidency for 8 years; and they held the presidency, but neither house for 8 years.  In only 8 years did the Democrats hold the Presidency and both houses of Congress.  

My thought, for purposes of discussion, is that the upper range of 22% of GDP for federal government spending does not appear to be excessive.  I base this conclusion on the 43-year history, the effects of population growth and inflation during that time, and spending for state and local government increasing at a higher rate than federal spending.  Further, if we consider projections by the Congressional Budget Office (CBO,10-year Budget Projections, May 2022 version) it forecasts spending at or above the 22% of GDP level for the next decade (averaging 22.5% during the period of 2023-2027, and 23.2% during the period of 2023-2032).  

However, if Republicans believe the upper range of 22% of GDP is excessive, they should provide their arguments and metrics for this conclusion, and it should be debated. 

If Republicans and Democrats decide to move in this direction, the exact percentage of GDP and the rules can be negotiated and agreed upon.  Also, the parties would need to negotiate and agree upon how to handle spending during times of extraordinary conditions. I would offer, for purposes of discussion, that a regular spending limit of 22% or 23% of GDP should be adopted as something less than an absolute or hard limit.  In essence, the parties would agree that if spending is kept under the agreed-upon percentage, it will not be deemed excessive.  The exact level of spending, which could be less or more, would be resolved annually through the Budget process.  Thus, as long as Republicans control at least one house of Congress or the presidency, they will retain leverage to exact spending cuts at a different level than the established limit.  

As to extraordinary conditions, my thought for purposes of discussion is that each set of conditions should be evaluated and decided upon individually.  Thus, the additional and exceptional level of spending would have to be approved by both houses of Congress and signed by the President. This additional level of spending would be outside of the regular spending limit.

Deficits

Now that we have considered spending limits, we need to address deficit spending, which we know occurs at significant levels almost every year. Eliminating annual deficits in their entirety would be incredibly expensive, inconsistent with practices in rest of the world, and probably unnecessary.  In terms of costs, for instance, eliminating the deficit in 2023 would have cost $1,154 billion; the cost in 2024 would be $1,200 billion; and the cost in 2025 would be $1,329 billion.  

A less expensive and more feasible solution might be to permit an annual deficit of less than an agreed-upon percentage of GDP, such as something in the range of 2 to 4%. Thus, for instance, if we adopted a practice that permitted deficits at 3% of GDP, we could spend at 22% of GDP while taking in revenues at 19% of GDP.  This approach could be effective because during normal times, deficits are typically in the range of 2-4% of GDP.  Interest costs for this level of deficit have been manageable, based on prior history.  

However, this solution is problematic because we know that deficit spending jumps with extraordinary conditions; and it’s impossible to know when these conditions will occur and how much spending will be necessary to address them.  With the recessions and aftermath years of the early to mid-1980’s, deficits jumped to 5-6% of GDP; during the recession of 2008 and 2009 and the aftermath years, deficits soared to 8-10% of GDP in 2009, 2010, and 2011.  And, with the recession and pandemic of 2020 and 2021, deficits soared to 12-15% of GDP in 2020 and 2021.  

What will we do in the instance that spending needs overwhelm available revenue and we need to incur deficit spending considerably above the agreed-upon limit?  We won’t have a revenue source to reduce these deficits.  Thus, the only practical option will be to accept them.  However, if these very high deficits are tolerated, they will definitely drive up total national debt and impose high interest costs.  We’ll be back to square one.  

My view, for purposes of discussion, is that the gap between what we spend and what we take in is too large and unacceptable.  We persistently spend at the level of 20-22% of GDP, yet we only have revenues of 16-18% of GDP.  This gap, typically around 3% of GDP, currently translates into deficits in the range of $1,000 billion and above.  And, as we know, things get worse when we experience extraordinary conditions.  I would suggest, for purposes of discussion, that the gap should be narrowed to around 1% of GDP.

To narrow the gap between what we spend and what we take in, we can increase revenues, make cuts, or do a combination of the two.  My thought, for purposes of discussion, is that most of the gap should be closed by means of revenue enhancements.  I say this based on the prior discussion that a spending level of 22% of GDP is justified by prior history and other metrics.  More important, if revenues are consistently generated at or around the level of 22% of GDP, this will provide us an opportunity to balance annual budgets and possibly pay down some of the national debt.  On the other hand, cuts should definitely be considered and should be part of narrowing the gap.  Again, the exact mix should be negotiated and agreed upon by Republicans and Democrats.

Budget Reserve

Establishing a “Budget Reserve” is a solution embraced by many state and local governments.  Typically, this involves an annual mandatory set-aside of funds that are deposited into a reserve that can only be used under certain conditions (e.g., to bring deficits into permissible range, or to deal with extraordinary conditions).  Thus, for instance, an amount equivalent to 2% of projected revenues for a year would be set aside and deposited into the Budget Reserve before all other spending is decided.  

Ostensibly, the solution of a Budget Reserve at the federal level seems like a no-brainer. There are two problems, however.  First, building up a Budget Reserve requires either additional revenues, spending cuts and reallocation of revenue to the Reserve, or some combination.  And second, building up a sizeable enough reserve may not be feasible.  Let’s consider each of these problems. 

If we were to consider establishing a Budget Reserve beginning in 2024, we have to recognize going in that we already face a $1,024 billion deficit.  CBO projections are that we will face deficits of 4-6% of GDP for the next several years.  Were we to set aside 2% of projected revenues for 2024 (about $100 billion) and create a reserve, this would further increase the deficit unless we made $100 billion in cuts to 2024 spending.  In order to build up the Budget Reserve to say, $600 billion, we’d need to make similar deposits for the next 4-5 years, incurring some combination of larger deficits or additional cuts.  Making additional cuts will become increasingly difficult because of their cumulative effect.  So, by 2029, we might have $600 billion in reserve.  However, we’ll still be facing deficits of well over $1,000 billion that are very likely to be well over 4% of GDP.  And we’ll still be facing an even greater national debt.  

What does $600 billion buy us?  It might be of some help in bringing deficits to an acceptable range (e.g., 3% of GDP).  But it wouldn’t be even remotely enough for just one year of deficits with conditions like the recession of 2009 (when deficits ranged from $1.4 trillion in 2009 to $1.1 trillion a year in 2010 and 2011); or the pandemic/recession of 2020 (which resulted in a $3.2 trillion deficit in 2020, and a $2.8 trillion deficit in 2021).  

Finally, if we fund the Budget Reserve with spending cuts, this will drive spending well below the 22% of GDP limit that was previously discussed.  If we funded the Budget Reserve from additional funds, this would require tax increases on top of tax increases that we will need to adopt to narrow the gap between spending and revenues.  

The solution of a Budget Reserve does not appear to be viable or effective at the federal government level.  When exceptional conditions occur, the federal government needs to respond, often with exceptional levels of spending. Unlike state and local governments, the federal government doesn’t have an external entity to help stabilize its finances during such times.  No one bails out the federal government.  Further, because we can’t know when exceptional conditions will occur, or how severe they will be, it’s difficult to know how much we need to set aside to address these conditions.  Finally, establishing a Budget Reserve is not feasible in an environment where the federal government is already persistently spending far more than it takes in.

Total National Debt

There is probably consensus among us that our national debt is too high because of the interest costs it imposes.  The CBO projects that interest expense for this debt will climb from $525 billion in 2024 to $1,194 billion in 2032.  Our capacity to spend on important priorities will increasingly be constrained because of interest obligations.  

We can also probably agree that totally eliminating the national debt is neither feasible nor necessary.  It’s mind-boggling to contemplate eliminating a national debt that has grown exponentially because we constantly spend far more than we take in. On top of that, we’ve ballooned the national debt in order to address extraordinary conditions over the years.  

We’ve seen that virtually all countries of the world carry large national debt (as a percentage of GDP).  Thus, a rational middle ground might be to establish a goal for reducing national debt as a percentage of GDP over an agreed period of time.  Thus, for instance, we might establish a goal to reduce the national debt from 125% of GDP to 75% of GDP over a period such as 10, 15, or 20 years.  The percentage of reduction and the period of time would be negotiated and agreed upon between Republicans and Democrats.   

As a caveat, it’s clear that even this middle ground approach will be incredibly expensive.  Currently, and for the next several years, national debt is projected to hover at 125% of GDP.  Thus, a goal to reduce national debt to, say, 75% of GDP would involve a reduction of 50 percentage points.  In 2023, the cost to reduce national debt as a percentage of GDP by just 1% would be $256 billion.  To achieve a 50-percentage point reduction in 10, 15, or 20 years will involve an annual expense of at least 3 to 5 times this amount.  And remember, this solution will involve trying to buy down the national debt at the same time that we’re trying to reduce annual budget deficits and get our revenues more in line with what we’ve been spending.  In short, it’s impossible to see a way forward based on cuts alone.  If we’re going to buy down the national debt, we’re going to have to generate more revenue and dedicate it to that purpose.

There are No Easy Answers and the Path Forward Isn’t Clear

If you’re feeling a bit discouraged by the lack of feasible options, it’s because you understand the situation correctly.  There are no easy answers or a clear way forward—unless it is to continue to do what we’ve been doing. The simple truth is that we have not seriously confronted the large gap between what we spend and what we take in. Republicans see the problem as excessive spending; and the solutions are spending cuts, tax cuts, and resisting all tax increases.  On the other side, Democrats see the problem as addressing unmet needs; and the solutions are spending increases and tax increases as necessary.  Neither side has been willing to relent, and the inevitable result is that both parties have come to grudgingly tolerate the “lesser evil” of ongoing deficits and an ever-increasing national debt. There is lots of sound and fury, and there is much finger-pointing; but in the end, both sides are complicit in creating the predicament we find ourselves in. 

Next in the Series

---