Somewhat ironically, the editors of the Washington Post declaim that President Biden and Congress should worry about the burgeoning federal deficit and debt:
In 2023 — with the economy humming along — the federal deficit is spiking to $2 trillion, according to calculations from the Committee for a Responsible Federal Budget, a watchdog group. That’s double last year’s deficit. The deficit has been this high and surged this fast only during global crises such as World War II or the covid-19 pandemic. This isn’t supposed to happen in a good economic year, in which tax revenue rises and fewer people need government aid.
and
Federal debt is on track to hit a record level by 2029, meaning it will be higher as a percentage of the U.S. economy than even World War II’s peaks. And it will only get uglier from there if politicians continue to ignore it.
concluding:
Getting the United States on a better fiscal track requires significant, broad-based change that includes tax increases, spending moderation and modest reforms to Medicare and Social Security. We know it’s hard. We spent months coming up with our own debt plan this year, and we received many angry letters. But delaying action means the problem gets worse and the solutions become more painful.
Don’t blame me. I opposed both President Bush’s and President Trump’s tax cuts and have argued for Medicare and Social Security reform for decades.
The significance of historic deficits and debt is that increasing spending now would place fiscal policy and monetary policy at cross-purposes.
What needs to happen is that the United States needs to produce more of what its people consume not less. Keynesian strategies for economic growth only work when aggregate product exceeds aggregate demand. That hasn’t been the case for some time. Furthermore, the Republicans’ preferred economic strategy, reducing taxes, was effective in Reagan’s time but it’s a lot less effective now. Now tax cuts just increase the deficit.
“the Republicans’ preferred economic strategy, reducing taxes, was effective in Reagan’s time”
I am not sure to what you are referring here. We had a very large increase in debt during Reagan’s time.
A side observation. In first year engineering, they teach “sensitivity” analysis; how to calculate changes in one input changes a dependent output in a system.
It would be illuminating to do such a study on two effects in the Federal budget; (1) a sustained 1%, 2% increase in the interest rate of Federal debt for 1 year on total expenses of the federal government (2) the increase or decrease on total revenues resulting from each 1% increase or decrease in the S&P 500
The reason why is on the expense side, something like $300 billion of the $1 trillion increase in the deficit this year is due to the increase in interest rates. The other is federal revenues are down 10% yoy driven by a decline in income and capital gains tax of 38% despite wage withholding increasing by 5% — my gut explanation is it is related to capital gains (S&P was down 20% in 2022).
The analysis also points that there is an easily achievable solution to the budget deficit / debt.
Lower interest rates back to 0% (or at least well below inflation).
Save the cost of interest on the debt, boost capital gains on the revenue side. It would also increase inflation, which would erode the burden of the debt — an increase in inflation would boost revenues further as capital gains is not indexed to inflation.
I’ll leave it to the reader to decide whether the cure is worse then the disease. I didn’t say the solution is without tradeoffs, just that it is within the capabilities of the Federal Government.