After decades of near-uninterrupted budget deficits and unprecedented spending during the COVID pandemic, the U.S. national debt is $31.5 trillion and growing.
Congress is currently embroiled in a fight over raising the debt ceiling — increasing the amount that the federal government is allowed to borrow. Republicans insist that the federal government must cut its spending in order for them to agree to raise the debt ceiling, but so far they have not specified which spending measures should be cut.
Without a deal, the government could run out of money by as early as this summer, according to both Treasury Secretary Janet Yellen and an analysis from the Bipartisan Policy Center. Many have reported that the failure to raise the debt ceiling would mean a default on the nation’s debt, which even the most optimistic forecasts warn would cause extensive damage to the nation’s economy.
The regularity and indecisiveness of these debt battles highlight the fact that politicians from both major parties have chronically avoided concrete solutions to spending and the debt. The Tea Party made concerns about the national debt — which stood at a retrospectively quaint $13 trillion in 2010 — one of the pillars of their movement. Other than these periodic debt ceiling battles, however, the Republican Party has offered very few solid policy proposals for tackling the problem aside from vague calls to “cut spending” not unlike the GOP’s current demand in the debt ceiling fight.
While most elected officials are pretty short on answers in regard to the issue, solutions are indeed out there.
The two most notable plans to tackle the debt are the Simpson-Bowles Plan and the plan developed by the Domenici-Rivlin Task Force.
The Simpson-Bowles Plan was formulated by former Republican Wyoming Sen. Alan Simpson and former Bill Clinton Chief of Staff Erskine Bowles while the two sat on the National Commission on Fiscal Responsibility and Reform.
The plan called for raising federal revenue to 21% of GDP, which was only 14.6% of GDP in 2010, while simultaneously reducing spending to 21% of GDP, which was 23.4% that year. In 2019, before the fiscal chaos of the coronavirus pandemic, federal expenditure was 21% of GDP, but federal revenue was only 16.3%, according to the Congressional Budget Office. To get the 2019 revenue up to 21% of GDP, it would have required an increase of over $1 trillion.
Additionally, the plan called for reducing the overall tax rate for Americans but eliminating almost all deductions and tax credits. The plan also recommended strict caps on future spending and a reform of Social Security.
The Domenici-Rivlin Task Force was created by the Bipartisan Policy Center in 2010 and also included a former Republican senator and former Clinton administration official — Pete Domenici of New Mexico and Alice Rivlin, respectively. Its plan shared several measures with Simpson-Bowles, but it recommended a reduction in spending to 23% of GDP instead of 21%, a full freeze on all spending after that reduction, and a thorough reform of entitlements.
In 2019, the Peter G. Peterson Foundation hosted the Fiscal Summit, which brought together prestigious think tanks like the American Enterprise Institute, the Manhattan Institute, and the Center for American Progress to present potential solutions to the national debt. The overall impact that each plan would have on the national debt varied widely, but all seven proposals followed the same basic structure of the two plans from 2010: reduce spending, increase revenue, reform the tax code, and make adjustments to entitlements.
Almost every realistic plan to appreciably reduce or eliminate the national debt will include some combination of those measures. However, there are some actions that could help put a dent.
A drastic increase in legal immigration could help increase federal revenue. In theory, the more people there are in the country, the higher the demand for goods and services, thereby growing the economy and the tax revenue gleaned from it, and these new taxpayers would help bolster entitlement programs like Social Security. Immigrants also start businesses at twice the rate of natural-born American citizens, and accepting highly skilled immigrants who would most likely pay higher taxes could be an effective method of increasing revenue.
The labor force participation rate is still low after the shock of the pandemic, and there is an acute shortage in highly skilled job applicants, so filling those positions with immigrants who would then pay taxes could be an effective strategy.
The U.S. government could also sell federal land to quickly raise revenue. The Bureau of Economic Analysis estimated in 2015 that all federally owned land in the contiguous United States was worth around $1.8 trillion. Barring the sale of federal land used for military installations and national parks, the remaining value of federal land would most likely stand at less than $1 trillion, but that would be $1 trillion the federal government would not have to acquire through cutting important social programs or raising taxes.
The starkest solution would be to simply default on the debt, wherein the federal government would declare that it is unable to repay its obligations to its debtors.
The economic consequences of a full-fledged default would be severe. The country’s credit rating would almost certainly be downgraded. The stock market would most likely take a severe hit, the U.S. dollar would weaken, interest rates would rise, and most Americans’ retirement savings would be impacted.
“Nobody knows for sure what will happen, because it’s never happened before,” Eric Swanson, an economics professor at UC Irvine, told TIME back in January.
Some commentators have argued that the short-term consequences of a default might be agonizing, but in the long run, it may not be as catastrophic as many warn.
In 2011, as a consequence of another debt ceiling standoff between House Republicans and then-President Barack Obama, the United States’ credit rating was downgraded from AAA to AA+. That caused some turbulence in the market at the time, but it has not significantly impacted the nation’s ability to borrow, and the stock market recovered fairly quickly.
Even if we default and short-term economic disruptions ensue, the United States is so prosperous and such an integral part of the world economy that both foreign and domestic investors will still be enticed to purchase any future debt in the form of bonds. Additionally, if the nation enacts strict fiscal measures in some variation of the Simpson-Bowles Plan along with a default, it could prove that it is dedicated to a more responsible path and quickly regain the confidence of investors.
The U.S. could also selectively default. It could choose to just default on the portion of the debt owned by foreign entities, roughly 33% of the public debt; the portion owned by government agencies, around $7 trillion; or that which is owned by individuals in the top 1% of income or wealth. That could eliminate large portions of the debt while possibly avoiding the worst outcomes of a full-on default.
However, a recent opinion piece published in The Wall Street Journal argued that a default is unconstitutional. According to the piece, Section 4 of the 14th Amendment stipulates, “The validity of the public debt of the United States, authorized by law … shall not be questioned.” It’s unclear if that includes the debt held by intra-governmental agencies, which is roughly 20% of the total.
So, barring a Supreme Court case re-interpreting that section of the amendment or a new constitutional amendment to change that section, the nation is stuck with the vast majority of its debt.
Besides the nuclear option of default, most comprehensive plans to fix the national debt rely on simple premises. Get spending under control, increase federal revenues, reform the tax code, etc. Politicians, especially those in the GOP, have been advocating for similar measures for decades, but whenever they are in power, the opportunity to take action seems to pass them by. They are well aware that spending cuts and tax increases are deeply unpopular with the constituents of both parties, and election season is always just around the corner.
The biggest obstacle to fixing the debt doesn’t seem to be the lack of a plan, but the lack of will to enact it.