The Biden agenda would swell U.S. debt levels past ‘heavy borrowing’ and towards ‘basket case’ territory
If Joe Biden clinches most of his fiscal agenda, U.S. will reach the top ranks of the world’s most heavily indebted countries in a decade. Senators Joe Manchin (D-WVa) and and Kyrsten Sinema (R-AZ) may manage to lower the cost of the President’s $3.5 trillion package. Even so, the U.S. will most likely reach the levels well above where such heavy borrowers as France, Spain, and the the overall European Union are now, and hit around 85% of the burden hobbling Italy, one of the world’s most notorious basket cases. The Biden pledge that the “human infrastructure” measure will be fully paid for is a fantasy, according to Brian Riedl, a budget expert at the conservative Manhattan Institute. “I and most experts who crunch the numbers believe that even if it’s paid for ‘on paper,'” he says, “it will get there by using gimmicks and fiscal cliffs that will in the end require a big increase in deficits.”
Biden plans a whole raft of new spending above and beyond the $2 trillion stimulus passed in March, the $550 billion bipartisan infrastructure measure, and the $3.5 trillion reconciliation bill that’s so hotly debated in the Democratic ranks. Those include a huge expansion of Obamacare and college aid, and a big bump in discretionary spending. By Riedl’s estimate, the Biden measures are likely to add $9 trillion to our total debt by 2031, over and above what existing programs would have tacked on prior to his election. That amounts to 25% in extra borrowing. Even taking an optimistic view, interest on the federal debt will grow at double-digits over the next ten years to absorb the equivalent of two-third of all the revenue from payroll taxes.
Let’s look at the numbers. The stimulus and infrastructure bills add $2.55 trillion in spending that’s not offset by tax hikes. So the total, plus interest, goes straight into deficits. According to Riedl, a likely scenario for the reconciliation bill is $2.5 trillion in spending backed by $1 trillion in taxes. “It will be very difficult to find more than that $1 trillion in new revenue,” he says. “The Democrats will make the bill appear to pay for itself by sunsetting measures that will inevitably be extended. The shortfalls will eventually need to be borrowed.” That outcome would hike deficits by another $1.5 trillion. The human infrastructure measure is prepared for that outcome: It authorizes $1.7 trillion in new borrowing. (We’ll assume the actual number is $1.5 trillion.)
Biden also pledges to extend extra benefits included in the March stimulus bill, aid that if approved is also bound to become a permanent. Those include a renewal of the child tax credit set to expire in 2025, and a major expansion of Earned Income Tax Credit (EITC). Riedl puts the extra costs of those initiatives at $1 trillion. “Biden hasn’t even gotten to many of the promises he made as a candidate,” says Riedl. “But he’ll push for those as well.” His campaign vowed big expansions in the ACA, Social Security, Supplemental Security Income (SSI), and grants for college tuition. By Riedl’s estimate, those programs would swell borrowing by another $2 trillion.
The Biden offensive, then, calls for over $8 trillion in new spending that’s not paid for. Add interest, and you get to Riedl’s $9 trillion. At the close of fiscal 2019, the U.S. was carrying $16.7 trillion in “debt held by the public.” During the Trump Administration, the U.S. piled on $6.5 trillion more, mostly to counter the ravages of the pandemic, bringing the pre-Biden total to around $23 trillion. Because the U.S. was already running big structural deficits in the $1 trillion a year range before COVID struck, the Congressional Budget Office last year reckoned that in the absence of deficit spending that wasn’t already baked in, that total U.S. debt would reach $35 trillion by 2031.
Instead, Riedl now posits the Biden plans will boost that forecast to $44 trillion. If that happens, U.S. debt to GDP would jump to 131% from 78% at the end of 2019 and 100% at the close of 2020, a figure somewhat inflated since the pandemic hammered the economic output. The only major industrialized nations that today are carrying a heavier burden relative to national income are Japan (266%) and Italy (156%). The U.S. would be a lot more indebted than current levels in Spain (120%), France (116%), Argentina (102%), the U.K. (97%), Germany (70%) and China (67%).
Of course, a common rationale for why going big won’t damage our future is that the U.S. can borrow at extremely low interest rates. The problem is that the U.S. binged on short-term debt during the crisis to hold down our interest expense. As a result, both total amount of those close-in borrowings has gotten a lot bigger, and so has the proportion of Treasuries due in less-than-a-year to three years versus the share maturing in 10 to 30 years. In the next few years, tens of trillions in debt will be refinanced. It’s impossible to predict at what rates the U.S. will be paying on the newly-issued bonds. That uncertainty makes all the new spending a lot riskier.
Today, the CBO is projecting that by 2031, the U.S. will be lavishing 2.5% in net interest on our debt. If our borrowings indeed mushroom to $44 trillion, the total bill would come to $1.113 trillion. That’s almost three-and-a-half times the $331 bill projected for 2021. Our interest tab would grow by 12.8% a year, faster than Social Security, Medicare, Medicaid or any other expense. By 2031, interest would rise to the equivalent of 19% of all revenues, compared with 8.5% today.
It could get much worse if rates spike to anywhere near even the levels as recently as late 2018. Then, interest expense could swamp the federal budget. If Biden gets wish list, the U.S. will be borrowing over $20 trillion––$9 trillion added by the President––in the next ten years with little clarity on what all the debt will exact in interest. Homeowners who took out ARMs before the 2007 housing crisis found out the hard way what happens when artificially-low rates reset. An entire nation may suffer the same shock in the years ahead.
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