3 Ways to Reduce the Debt, and 3 Reasons Why It Won’t Happen
By Kimberly Amadeo Updated October 31, 2017 – Source “the balance”
The U.S. debt is more than $20 trillion. It’s by far the largest in the world. It has increased by $1 trillion each year since 2007. The debt grew despite Congressional threats to not raise the debt ceiling. In 2011, the U.S. debt crisis almost forced America to default on its debt. In 2012, the fiscal cliff crisis almost stopped the government in its tracks. In 2013, the government shut down for 15 days.
Since these attempts didn’t work, what can and should be done?
Three Ways the U.S. Can Pay Off Its Debt
There are only three ways to decrease the debt. The first is to cut spending. Sequestration tried to force the government to cut discretionary spending by 10 percent. No one in Congress thought it was a good idea. Members adopted it to force themselves to come up with something better. The Simpson-Bowles report recommended many good ways to cut the debt, but Congress ignored it. Even with sequestration, the debt continued to grow. To truly cut the debt, Congress would have to cut spending so severely that it would slow economic growth. That’s because government spending is a component of gross domestic product
The second is to raise taxes. That could also slow growth. That’s especially true if the tax rate is more than 50 percent, according to the Laffer Curve. If Congress raises the tax rate beyond that level, then the additional revenue generated will be lower than before. That’s because that tax rate is enough to curb incentives to grow businesses and income.
The third is to drive economic growth at a faster rate than the debt. The means decreasing the debt-to-GDP ratio by increasing GDP. But Congress disagrees on how to grow the economy. Most Democrats say increased spending works the best.
Most Republicans say lower taxes will boost growth the most. Both tactics will definitely increase the debt, possibly more than GDP.
There is another solution. Congress should shift spending to areas that create the most jobs. Research shows that spending on bridges, roads and public buildings creates the most jobs per buck. The next best is education spending. Almost 25 percent of government spending goes to defense. Contrary to popular opinion, that’s not the economy-booster it was in World War II. One reason that it spends more on technology and equipment than in the 1940s. To reduce the debt, the government should shift spending from defense to public infrastructure and education. For more, see Four Best Real-World Ways to Create Jobs.
Will the United States Ever Get Out of Debt?
It’s unlikely America will ever pay off its debt. It doesn’t need to while creditors remain confident they will be repaid. Most creditors don’t worry until sovereign debt is more than 77 percent of GDP, according to the World Bank. The U.S. public debt-to-GDP ratio was only 75 percent, below at the tipping point, as of June 30, 2017. The public debt was $14.4 trillion and GDP was $19.246 trillion.
The U.S. debt also consists of debt the government owes to itself.
That’s mostly the Social Security Trust Fund. The government will need to pay this one day, as Baby Boomers retire. Creditors aren’t worried about this component of the debt yet.
What if the debt goes beyond the tipping point? Would the U.S. government reduce debt then? There are three reasons why that probably won’t happen.
First, the U.S. economy has historically outpaced the debt. For example, the U.S. debt at the end of World War II was $260 billion. That was 14 percent more than GDP. But the economy grew beyond that in just three years. By 1960, it was double. Congress knows that today’s debt will be dwarfed by tomorrow’s economic growth.
Second, Congress has a lot to lose by cutting spending. For example, if they cut Social Security or Medicare benefits, they will lose their next election.
Third, that can also happen if they raise taxes. A tax increase cost President George H.W. Bush his second term. Voters remembered he had said, “Read my lips. No new taxes.” He did raise taxes in 1990 to cut $500 billion from the deficit over the following five years. (Source: “George H.W. Bush Honored for Courage with 1990 Tax Hikes,” Reuters, May 5, 2014.)
That’s why you will notice most elected officials only want to raise taxes or cut spending on their opponents’ constituents.
The only way the United States will reduce its debt is if the American people are ready to tighten their belts and accept austerity measures. The most painless time to do so is when the economy is expanding. That’s when GDP growth rates are greater than 3 percent and unemployment is less than 5 percent. In fact, that’s the BEST time to cut the debt. It will prevent a boom and subsequent bust. Find out more about business cycle stages.
U.S. Debt Milestones
Here are some debt milestones since 1929. The U.S. debt will probably exceed $20 trillion in October 2017. That’s because Congress must raise the debt limit or the United States will default on its debt. Investors are not very concerned. This is normally a technicality that Congress does without any problem. But in 2011 and 2013 there was a short-lived debt crisis that Congress would not like to repeat.
|The Debt Exceeded||On This Date *|
|$5 trillion||February 23, 1996|
|$6 trillion||February 26, 2002|
|$7 trillion||January 15, 2004|
|$8 trillion||October 18, 2005|
|$9 trillion||September 5, 2007|
|$10 trillion||September 30, 2008|
|$11 trillion||March 16, 2009|
|$12 trillion||November 16, 2009|
|$13 trillion||June 1, 2010|
|$14 trillion||December 31, 2010|
|$15 trillion||November 15, 2011|
|$16 trillion||August 31, 2012|
|$17 trillion||October 17, 2013|
|$18 trillion||December 15, 2014|
|$19 trillion||January 29, 2016|
|$20 trillion||September 8, 2017|
*Note: Before 1996, debt levels are not available for each day. (Source: “U.S. Debt to the Penny,” United States Department of the Treasury.) For more, see U.S. Debt by President.