The Real Economic Catastrophe Will Be Caused by the U.S. Debt

The U.S. is headed for "the most predictable economic crisis in history," as Bill Clinton's former White House chief of staff once put it. Why? Because of the mountain of federal debt that we keep making bigger and bigger.

For the first time since the wartime economy of the late 1940s, U.S. debt is roughly equal to the value of all the goods and services our economy produces in a year. When World War II ended, all that spending on tanks and aircraft came to a quick end. But the major drivers of today's debt crisis are Medicare and Social Security, and their price tags are set to keep rising. So what does President Joe Biden promise to do about this looming crisis? Absolutely nothing. And Republican lawmakers have cheered him on.

"Tonight, let's all agree," Biden said in his 2023 State of the Union address, "we will not touch social security. We will not cut Medicare. Those benefits belong to the American people…I'm not gonna allow them to be taken away—not today, not tomorrow, not ever. But apparently it's not going to be a problem."

Doing nothing might not be a political problem today, but it will become one as the debt wreaks havoc on the U.S. economy.

We already spend more on paying interest on the federal debt than we do on Medicaid and defense. Even if rates remain at 4 percent for the next few decades, annual interest payments are projected to surpass what we spend on Medicare and Social Security.

It's like having a ballooning credit card bill that gradually swallows up your entire salary.

Interest rates are like a time bomb. If they rise to 5, 6, or 7 percent, the cost of borrowing will increase so much that federal debt would be on track to surpass 300 percent of gross domestic product—or three times higher than World War II levels. Eventually, interest costs would consume nearly all of annual U.S. tax revenues.

The cause is no mystery. The combination of rising health care costs and 74 million retiring baby boomers is causing annual Social Security and Medicare costs to explode.

Social Security and Medicare have special revenue sources, but if nothing changes by 2034, these two programs will be collecting $2.6 trillion annually in payroll taxes and related revenues while spending $4.8 trillion in benefits and associated interest costs.

Republicans blame all the spending on Democrats. But former President George W. Bush signed legislation that collectively added $6.9 trillion in debt. And former President Donald Trump approved $7.8 trillion in new legislation in just one term. For both presidents, this includes both huge new spending bills and trillion-dollar tax cuts.

Republicans like to talk about slashing social spending, but to balance the budget we'd need to completely eliminate all funding for veterans' benefits, child credit payments, the earned income tax credit, school lunches, disability benefits, K-12 schooling, health research, unemployment benefits, food stamps, homeland security, infrastructure, embassy security, federal prisons, border security, and much more.

There's not much appetite for that.

The most basic progressive narrative is that deficits don't matter and that taxing the rich can eliminate the deficit. But approximately 70 percent of the 2001 and 2017 tax cut costs and subsequent extensions went to the middle and lower classes. If you size up their fiscal impact, only a tiny sliver can be attributed to "tax cuts for the rich."

Seizing every home, yacht, business, and investment from America's 800 billionaires would fund the federal government for just nine months. And then the money would be gone. So would your 401(k), given that most of this wealth would be seized from the stock market, causing the S&P 500 to crater.

There simply aren't enough millionaires, billionaires, and undertaxed corporations to close Social Security and Medicare's projected $124 trillion cash shortfall over three decades or—as some Democrats propose—to finance a generous social democracy for 330 million Americans.

There's no way to protect current retirees from the impact. And there is no way to tweak our way out of it. Social Security's eligibility age will need to rise and its payout to above-average earners must be curtailed. Medicare will have to become cheaper, and wealthier people are going to have to pay more for it.

"Those benefits belong to the American people," Biden said in his 2023 State of the Union address. "They earned it. And if anyone tries to cut Social Security, which apparently no one's going to do. And if anyone tries to stop Medicare, I'll stop them. I'll veto it."

Should we blame Biden and the politicians applauding him for their unwillingness to risk addressing our looming fiscal insolvency?

Actually, voters are mostly to blame.

We simultaneously call for a balanced budget, higher spending, and no more taxes. We vote for Santa Claus candidates from both parties. We're the ones who selected those craven politicians. And eventually, we'll pay the price.

This video essay is adapted from "The Debt Lies We Tell Ourselves," which was the cover story of Reason's August/September 2024 issue.)

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Music Credits: Artful Thief by Kadir Demir, Brightest by Ardie Son, Prism by Ardie Son, Footprints by Ardie Son.

• Video Editor: Adani Samat
• Audio Production: Ian Keyser
• Assistant Editor: Cody Huff