Originally written on 7/12/2024

Recently, the Congressional Budget Office released  An Update to the Budget and Economic Outlook: 2024 to 2034, forecasting that the 2024 budget deficit will be $1.9 trillion and grow to $2.8 trillion by 2034. Over the last 50 years, the Federal deficit has averaged 3.7% of GDP. The 2034 estimated deficit is 6.9% of GDP. The report also forecasts that the Federal Government debt will rise from 99% of GDP in 2024 to 122% by 2034. Federal expenditures will increase from 23.9% of GDP in 2024 to nearly a quarter of the U.S. GDP by 2034. The increase in spending comes from additional expenditures on scheduled benefits for senior citizens and higher net interest costs.  

Last year, the Penn Wharton Budget Model estimated that the United States cannot sustain a U.S. public debt of more than 200% of GDP. They estimate that the U.S. has about 20 years to reduce the deficit, after which no amount of higher taxes or lower spending would avoid government default either through not paying the debt or through inflation. Financial markets seem to expect that future fiscal policy will reduce the deficit, but if financial markets stop believing in the federal government’s ability to reduce future deficits, U.S. government finances will be unsustainable much sooner.  

Brad DeLong, an economist at U.C. Berkley and previously an economist for the Clinton administration, noted that the United States could solve its government debt problem if it could get the deficit to 3% of GDP or less. At that level, economic growth is typically more than the real interest rate the government pays on debt. Growth in tax revenue keeps debt from spiraling out of control. The problem is that the current $1.9 trillion deficit is twice as large at 6% of GDP.  

So why does our government borrow so much? Frankly, because it can. The late Belgian economist Robert Triffin noted years ago that as long as the U.S. dollar is a reserve currency, the United States will supply an ever-increasing amount of U.S. dollars to the world market. We exchange dollars, and the rest of the world supplies us with goods. Therefore, there is a large and persistent U.S. trade deficit. A dollar-hungry world means the U.S. government can borrow those dollars back at bargain-basement interest rates. Issuing new debts is much easier for Washington, D.C., than raising taxes or cutting spending. So, it continues, at least for now.