(02 February 2021) Based on the original paper by Dr. David L. Blond, Principle Researcher and President, QuERI-International. The views expressed are those of the author(s) and do not necessarily represent the views of Knoema Holdings and its Executive Board.

In November 2020, US voters went to the ballot box and sent a Democrat back into the White House to stare down a federal deficit that grew under President Trump from $19 trillion in January 2016 to more than $27 trillion the day that Joe Biden was inaugurated. As you can imagine, the deficit hawks are out in force once again. The usual argument against more deficit spending, even in the midst of a disaster like the COVID-19 shutdown and prevailing economic conditions, is that the US can’t afford to spend that kind of money.  

For true deficit hawks it’s this idea of repaying the debt, of the burden on future generations, that leads to the ideal of fiscal conservatism. So, let’s pull that thread, as they say: If the United States were to adopt that logic and start down this repayment path, given the way the US allocates discretionary and non-discretionary expenditures, what options are available today?

  • The US Department of Defense is the largest single discretionary expenditure in the Federal budget, a $750 billion budget item and growing. If you were to cut that in half and use the savings to pay down debt, in addition to trimming around the edges of discretionary social programs to the tune of another $25 billion, you could maybe net $325 billion to pay down the debt (after accounting for social assistance for jobs lost to cuts in the defense sector.) But this is not enough to slow the increase in the size of the debt outstanding because we still have to pay interest.  
  • If we turn to non-discretionary spending, we find that most of the money for Medicare and Medicaid goes to the oldest and frailest and the most costly to keep alive. So, what, we'd phase out government payments for people over 85? Gradually raise the retirement age and collect social security payroll taxes on all income earned without a cap, not cutting taxes?

It is interesting how when you start to study the debt question and pull in the details over the past 40 years of debt, GDP, and interest rates, and match it against who was the US President at the time, everything becomes much clearer. So, too, does an essential point about the debt overhang and what it does or does not mean for an economy like the United States. Rather than focus on debt, we should also consider the relative usefulness of deficit spending, e.g the relative value of each dollar of debt to the change in GDP. Failure to spend is very likely more dangerous than spending too much. 

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