8 Steps to Solving the National Debt Crisis
Part 2 of 2 on the National Debt: Keeping the US economy going in it’s current direction will be unsustainable for nearly all Americans
Fixing the national debt problem can be done in one of two fundamental ways: 1) increase revenues or 2) decrease spending. And this is where conservatives and liberals tend to disagree the most.
The biggest long-term growth areas on the spending side are the growing number of retirees who are receiving Social Security and Medicare benefits along with the cost of servicing the national debt. I’m excluding national defense in this discussion because it is subject to dynamics that are more external than internal. It is likely that we cannot significantly influence the spending on national defense, so it is essentially a “given”.
The most significant issues on the revenue side are primarily related to demographics and the problem with our tax code. The labor participation rate has been very low in recent years. And this problem is complicated by the fact that Americans of child-bearing age are having fewer children. This means that fewer Americans will be responsible for generating and/or increasing our GDP while increasing the tax revenues that are required to pay for everything. The current tax code results in an effective tax rate that is essentially flat for lower income and middle-class Americans, yet largely regressive for higher income Americans and corporations.
Moreover, payroll tax revenues (the second largest component on the revenue side) are capped and most of the income of high-income earners is not subject to payroll withholding. For 2022, ordinary income above $147,000 was not subject to FICA withholding and, in 2023, the FICA cap limit rose to $160,200. For a more detailed deep-dive on this point, check out my previous post here on Substack:
We are approaching a critical juncture with our national debt. The figure above shows the national debt, expressed as a percentage of our GDP. In simple terms, this ratio tells analysts how much money the country earns every year and how that compares to the amount the country owes. A high ratio—at 100% or over—means that a country isn't producing enough to pay off its debt. The Balance [2] recently provided an excellent analogy:
“If a country were a household, GDP is like its income. Banks will give you a bigger loan if you make more money. In the same way, investors will be happy to take on a country's debt if it has a relatively high level of economic output. However, once investors begin to worry about repayment, they perceive a higher risk of default, which means they will demand a higher interest rate for their investment. That increases the country's cost of debt. When the cost of debt rises too high, an economy faces a financial crisis.”
So there are a lot of “balls in play” related to our burgeoning debt. What is clear, from the data, is that we are headed for a precipice. While there are some things that can be done to fix all of this, they all (or most of them) will face great obstacles in Congress. But that list of necessary fundamental changes is fairly short:
1) Increase legal immigration to back fill lower birth rates in order to make sure that we have enough Americans to support our GDP and tax revenue needs
2) Close the loopholes in the tax code to ensure that all ordinary income is taxed and that those in the top 10% of earners and corporations are generating enough tax revenues to support the nation's needs (in other words, make the tax code more progressive in the high-income brackets and slightly more regressive on the low-income and middle-class side).
3) Remove the cap on FICA withholding, applying a payroll tax levy to all ordinary income to make sure that Medicare and Social Security remain solvent. This would greatly benefit two key areas on the revenue side.
4) Creating new legislation that increases the amount of value-added work that is done inside the US and reducing major purchases that are made off-shore.
5) Create new legislation that reduces or eliminates foreign nationals from buying US industries, commercial property and farm land in the US.
Unfortunately, each of these steps are mired in partisan bickering and are unlikely to make their way through Congress and into viable legislation that addresses these problems.
So, there are a few other things that we, the people, can do to fix that part of the issue:
6) Introduce term limits in Congress to make sure that Congress remains accountable to the people whom they represent and not to the political parties. Increasingly, Congress is marching to the beat of political party rhetoric, rather than representing the will of the people. As long as divisiveness and bill-blocking have a greater priority than working on a bipartisan basis to get the people's work done, we cannot come out of this vortex.
7) To the greatest extent possible, Americans need to do their best to "buy American" - even when that means "more expensive".
8) Require a balanced federal budget every single year.
What does NOT work is:
1) A true “flat” tax that would shift the burden to lower income classes (total taxes vs their actual disposable income)
2) Increasing payroll tax deductions across the board for all working Americans to pay for the large number of retirees
3) Allowing foreign nationals to purchase commercial property, US companies, and farm land in the US.
4) Cutting retirement benefits to those who have contributed to these programs for their entire lives and, largely without the wherewithal to subsidize such a loss in income.
5) To let things go on as they currently are.
The reasons for these "what does NOT work" items should be obvious to all of us, of course.
If we could bipartisanly achieve all of these things, the GDP would continue to grow, there would be sufficient numbers of Americans to fill jobs and create new American businesses, the tax base and the payroll tax revenues would increase to sustainable levels, and Congress would become more accountable and in-tune with the wants and needs of average Americans.
It sounds simple at the macro level, but there are myriad hurdles at the micro level.
For example, give-away social programs that create large expenditures are usually insufficient to really provide tangible help the intended recipients and they greatly contribute to inflation. Without appropriate means testing to make sure that only the people who really need such a social program receive money, these programs can turn into massive spending bills that do more harm than good. Infrastructure programs, on the other hand, tend to have a direct payback that will churn both economic growth and jobs while providing a public service. Bottom line: It's easy to say "reduce spending" but there are correct and incorrect ways to do that.
A similar example on the revenue side would be bringing manufacturing jobs back on-shore and restricting foreign entities from purchasing corporations, commercial properties and land. Such an action, while beneficial to our economy, would likely trigger an immense foreign relations problem that would have significant (and global) social, economic, and balance of power implications. So, the micro-details are the challenge. But solving the issues at the micro level truly requires special expertise and knowledge.
What is abundantly clear, though, is that allowing the US economy to continue in it’s current trajectory without correction will be unsustainable for nearly all Americans. And we need to start now, not later when the problem is so acute that it cannot be reasonably addressed.
I'm interested in what you think about this 8-step plan. Please respond in your comments, but let's try to keep the discussion at the macro level details and not digress into the micro issues that most of us are not highly-qualified to delve into and/or will create even more partisan bickering.
I would hope that, as Americans, we can find enough common-ground to make some or all of these things happen. There's enough "meat" here for both conservatives and moderates/liberals. But, as in any negotiation, you have to be willing to give something up in order to get something you want. Is America up to the task?
Sources:
[1] https://usafacts.org/state-of-the-union/budget/?utm_source=Facebook&utm_medium=Paid&utm_campaign=SOTU&utm_content=SOTUbudget_Sankey_Econ_Conversions&fbclid=IwAR0zXcovv8rWvYea8GBFj6LZ566k8eeEiSWU4A6-Dj15Dm3eQPMpyws82us#the-federal-government-collected-50-trillion-in-revenue-in-fiscal-year-2022-fy-2022-or-15098-per-person
[2] https://www.thebalancemoney.com/debt-to-gdp-ratio-how-to-calculate-and-use-it-3305832