The left predictably erupted after Kyrsten Sinema joined her Senate colleague Joe Manchin and declared her opposition to their party’s reconciliation bill that would cost $3.5 trillion over the decade. With the votes of all 50 Senate Democrats needed to enact such legislation, either of them or any other Democrat has veto power over the whole package.
A progressive organization has announced a series of Arizona television ads telling Sinema, “You’ve become the problem.” These two senators are subjected to a daily dose of progressive vitriol that often exceeds even that directed at Mitch McConnell. They are seen as traitors, working with Republicans to sabotage the full Democratic control of Congress and the White House that took a decade to build and requires a blitzkrieg of legislative activity before the next election in 15 months.
Except that Sinema and Manchin are absolutely correct. We cannot afford a massive $3.5 trillion expansion of government.
Before the pandemic, the national debt stood at $17 trillion. The pandemic added roughly $5 trillion in (mostly necessary) new legislative costs.
Democrats have already enacted on top of that a $1.9 trillion “stimulus” bill filled with unnecessary items like bailouts for states with large budget surpluses. The bipartisan infrastructure deal that advanced in the Senate on Wednesday evening would add $600 billion over the decade in new spending, and the president’s proposed 8.4 percent hike in discretionary spending would cost $1 trillion over the decade. Adding $3.5 trillion over the decade for this reconciliation bill—plus another $1 trillion to renew policies with fake expiration dates, such as the child credit expansion—would bring the total ten-year price tag to $8 trillion.
It is fashionable to dismiss cost and deficit concerns during this period of low interest rates. Besides, critics assert, Japan has shown that surging debt levels do not matter. Such assertions are remarkably short-sighted.
First, Washington would need to finance not only today’s $8 trillion spending spree, but also the underlying $105 trillion in baseline deficits projected by the Congressional Budget Office over the next three decades. These deficit estimates—which are driven almost exclusively by the Social Security and Medicare systems’ projected cost of $100 trillion more than they will collect in payroll taxes and premiums—already assume peace, prosperity, and low interest rates.
However, anyone with student loans understands that, when debt grows too large, even low interest rates won’t make the monthly payments easy. Similarly, CBO estimates that even with low interest rates, interest will become the largest item in the federal budget, and consume half of all tax revenues within three decades. And if interest rates do rise, the government’s reliance on short-term debt means all this debt would roll over into the higher rates. Each percentage point that interest rates exceed the CBO baseline would add $30 trillion in interest costs over three decades. In terms of long-term costs, that is like adding an extra Defense Department every time interest rates rise by one percentage point.
This 1 percent increase in interest rates above the baseline would push the debt level in 30 years to 264 percent of the economy. At that point, interest payments alone would cost two-thirds of all tax revenues, and annual deficits would exceed 12 percent of the economy. This is not some far-fetched scenario. It is merely the CBO baseline with interest rates gradually rising to 5 percent over a few decades.
What do these shortfalls mean for families? Even under the low interest rate scenario, merely stabilizing the national debt at the current 100 percent share of the economy would require gradually doubling payroll taxes to 30 percent, or imposing a European-style value-added tax (essentially a national sales tax) that gradually rises past 30 percent over three decades. And even then, modest budget deficits would continue.
In that context, borrowing $8 trillion more this decade—$60,000 for every household— would be pouring gasoline on a fire. Even assuming that interest rates never again exceed 3 percent, this year’s spending spree alone would add $240 billion in interest costs to the federal budget every year, forever. That is $240 billion each year that could otherwise provide free public college, finance major climate initiatives, or significantly expand health care coverage. Instead, it will be spent on interest for bondholders.
Some Democrats suggest that the Federal Reserve can finance all this new spending with the printing press. While the economic effects of the Fed financing $3 trillion in recent government borrowing are undetermined, it is absurd to assume it would—or should—finance this $8 trillion spending spree or a large portion of the $100 trillion baseline debt this way. The numbers are just too large.
Other Democrats assert that we can just tax the rich. Yet even combining virtually every progressive tax increase—including a 70 percent income tax bracket, higher capital gains taxes, Social Security taxes on all wages, an 8 percent wealth tax, a 77 percent estate tax, a carbon tax, and steep new taxes on Wall Street and corporations—would not even balance the baseline budget over the next decade, much less this new spending spree. And even that assumes that combined marginal tax rates of nearly 100 percent do not harm the economy.
We can pin our long-term economic solvency to the hopes that interest rates never exceed 2 percent again, but that would be extraordinarily reckless. As for Japan’s aforementioned debt: It has benefitted from higher domestic savings to finance its debt, yet the nation has nonetheless suffered under slow economic growth rates for three decades.
That leaves the option of burying our heads in the sand and hoping for some undefined miracle. The danger of soaring debt is that—much like global warming—by the time you can directly feel its effects, it is too late to address them without significant pain. Nations that find themselves with unsustainable debt face three painful choices: historic tax increases, drastic spending cuts, or running the printing press. Much better to make responsible decisions today to avoid these awful options.
This does not mean the progressive wish list is dead. Instead, it means that anything worth doing is worth paying for. Republicans absolutely should have paid for their $1.5 trillion tax cut. And responsible Democrats should scale back—and pay for—their top priorities from the remaining $6 trillion of this year’s $8 trillion wish list (or cap their new borrowing at $1.5 trillion to match the GOP tax cuts).
Progressives could afford many of their goals if they were willing to address the $100 trillion Social Security and Medicare shortfalls projected over the next few decades. Even trimming benefits for wealthy seniors could save trillions of dollars over the long term. Modest proposals like family leave, child tax credits, and clean energy investments can be funded by trimming existing programs, or with smaller tax increases. But if progressive instead want to spend like Europeans, they should be willing to tax like Europeans. That means preparing the middle class for substantially higher income and payroll taxes and creating exorbitant new value-added taxes.
Spending trillions of dollars on popular benefits is easy, especially when you can dump the painful costs on future taxpayers. Sinema and Manchin deserve credit for demanding that new benefits be provided in a manner that is economically and fiscally sustainable. Today’s television ads may be nasty, but tomorrow’s taxpayers will thank them.