America is running out of money and nobody cares

America is engulfed in an economic crisis. It’s something that many American politicians – Republican and Democrat – talk a lot about, but are reluctant to do anything about. As long as it doesn’t dissolve and it doesn’t take long.

That shadow is called the United States National Debt: defined by the U.S. Treasury Department as “the amount of money borrowed by the federal government to cover outstanding expenditures over time.” In short: guilt.

If you go to the Finance Ministry’s website, you will know how big the loan is. It stood at $34.5 trillion in mid-May. The pace of that credit growth is equally staggering. Every 100 days, about $1 trillion is added to the US national debt. A trillion is 1000 billion

Historically, the US national debt has reached enormous proportions during national emergencies such as World War II. US government debt has traditionally been used to finance such extraordinary activities, as well as more mundane government activities such as infrastructure development.

However, the United States is not currently at real war with an enemy that resembles Nazi Germany. Depending on the state of America’s highways, the federal government doesn’t spend much on infrastructure.

The reality is that the rapid growth of the US national debt is driven by two factors. First, it spends on core programs such as Social Security, Medicare, and income protection (eg, unemployment benefits).

In total, these programs account for 68 percent of the federal government’s spending in 2023. As boomers’ retirements accelerate, that number will rise.

A second factor is that US government tax revenue does not cover government spending. In other words: Americans — people and corporations — pay too little tax.

By 2023, the federal government will collect nearly $4.5 trillion in revenue, but spend $6.16 trillion. This trend has been going on for some time. Since 2000, successive presidents and Congresses have closed this revenue-spending gap by expanding the national debt.

The economic consequences of this trend are well known. First, economic growth is hampered by upward pressure on interest rates. As the bipartisan Committee for a Responsible Federal Budget states, “Each percentage point of debt to GDP increases interest rates by five basis points.” This means lower productivity and therefore lower economic growth.

Second, growing government debt and high interest rates on that debt divert more capital away from the private sector and into government bonds. The less productive public sector will therefore gradually play a larger role in the economy. This also translates into lower economic growth.

Another negative effect of expanding government debt is its impact on the confidence of individual and institutional investors in the creditworthiness of the US government. Few things could be more devastating to the U.S. economy than having this confidence dangerously eroded as domestic and foreign investors decide the U.S. government cannot meet its debt obligations. For decades it seemed impossible. But that’s not the case anymore. As capital markets begin to doubt the creditworthiness of the US government, the debt jar is filled with water until it bursts.

These issues are well understood by lawmakers on both sides of the American political divide. In October 2023, a bipartisan group of members of Congress proposed creating a bipartisan Federal Credit Commission to address the issue. But the project struggled to gain traction for months. Why?

One reason is that lawmakers from both parties have little motivation to tackle the problem. For example, it is hard to see how a significant reduction in the growth rate of the national debt (let alone an actual reduction in the size of the national debt!) could avoid major cuts to benefit programs. Trying to sell that to the millions of retired and soon-to-be-retired progressive and conservative Americans who receive a portion of their income from these programs is an electoral mission-impossible. We cannot win elections if we say we will deal with benefits. You can’t beat them by saying you’re going to raise taxes

Anyone who suggests austerity is inevitable will face an electoral backlash from this significant segment of the American electorate: young Americans who are more likely to vote. It is not without reason that both Joe Biden and Donald Trump have rejected major cuts in benefits spending.

From this perspective, the challenge of America’s national debt presents a political iron cage for both Democratic and Republican lawmakers. Although they talk about a bold approach to the problem, the political consequences of the actual approach are very unpleasant for both parties.

So America’s political class chooses to live in a state of financial unreality. Yes, it will save their political skin. But in the long run, deeper defaults in US government debt will further darken the US economy. There are no winners in that world.