The $40 Trillion Question: Can America Turn Debt Into Renewal?

The recent news that total U.S. borrowing had broken the $40 trillion barrier has once again raised concerns about the country’s looming debt crisis.

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“There can be little question that [our] public finances are on an unsustainable path that will end in tears,” notes American Enterprise Institute Senior Fellow Desmond Lachman. The Washington Post agrees, calling the failure of politicians to control spending “one of the biggest threats to the country.” And the Wall Street Journal’s Chief Economics Commentator Greg Ip even questions whether investors will continue buying all the Treasury bonds needed to finance America’s borrowing without economically crippling interest rate increases.

What follows is not an attempt to diminish these concerns or to minimize the challenge of finally getting the federal government’s books in order. There is every reason to believe Social Security’s trustees when they that, if nothing is done, their main fund will be insolvent before the next president has completed a full term in 2032. And to believe Medicare’s own trustees, who have determined that their own hospital fund would be insolvent just a year later. The Bank of America’s chief investment strategist, Michael Hartnett, has calculated that total national debt could reach $50 trillion as early as 2029, after which just servicing it will cost at least $1.5 trillion annually.

But if any country has an economic system geared to making the most of challenging circumstances, it is the United States.

But it should also be remembered that a sovereign debt crisis is not a national death sentence. As Ray Dalio, founder of the hedge fund Bridgewater Associates, notes in his 2018 study of Principles for Navigating Big Debt Crises, there are many cases throughout history when the reforms needed to rescue a fiscally troubled country were not only enacted in time but actually produced significant economic and social improvements.

Fortunately for the U.S., some measures that could help trim federal spending have wide popular support. These include work requirements for Medicaid (estimated to save $32.6 billion per year), tighter screening of all entitlements for fraud ($233 to $521 billion per year), and a 10 percent across-the-board cut to all non-defense and non-entitlement discretionary spending ($73 billion per year).

Many left-wing groups are predictably fighting to preserve these expenditures, accusing reformers of everything from racism to greed. But as it becomes increasingly clear to voters that something must be sacrificed to keep the country solvent, they will clearly back the cuts most already accept.

Equally fortunate for the U.S. is that while its government added $29.8 trillion to the national debt after the financial crisis of 2007, the total value of all the country’s assets, public and private, simultaneously skyrocketed from $195 trillion to $513 trillion. In other words, America is currently worth nearly 13 times what it owes its lenders. Which means its credit is good enough that needed spending reductions can be stretched out to be less painful and even trimmed as an improving economy yields higher tax revenues.

But the country’s biggest advantage going into a financial crisis is that it is a remarkably diverse and technologically sophisticated society, which means that many spending cutbacks, while hard in the short run, will likely surface cheaper and even more beneficial alternatives. Something we read about all the time in business but is by no means unknown in the public sector.

Consider the average national per pupil cost of public education, which rose from $8,032 in 2000 to — far beyond the rate of inflation and without any significant improvement in student test scores. Were we still living in the 1830s, when limited transportation made it necessary to teach all of a town’s students in the same place, there would be no easy way to deal with such out-of-control spending.

But today’s automobile, the computer, and modern telecommunications have combined to make it possible for government to adopt to a far more economical approach to K-12 education, which has come to be known as “school choice.” By subsidizing families to place their children in an alternative venue — a private school, parochial academy, online venue, or homeschool — the 18 states which now do so have reduced the per pupil cost of participating students to while simultaneously boosting .

Once more, the benefits produced by school choice go well beyond education. Because giving one’s child a quality education no longer means buying or renting an expensive residence in one of the relatively few communities with good public schools, much of a family’s money that would have gone to a pricy mortgage or lease can now be spent on other things. Families are also free to live more conveniently to work, nearer a disabled relative who needs help, or in a neighborhood they find especially enjoyable.

As to what innovative policies will be adopted to compensate for coming entitlement, defense, and discretionary spending cuts, some hints are already visible. We know, for example, that researchers at Harvard, UC Berkeley, the Mayo Clinic, and elsewhere have made considerable progress on the use of artificial intelligence to both diagnose illnesses and direct patients to the cheapest high-value provider — an achievement estimated to reduce Medicare and Medicaid budgets by between 5.7 percent and 10.6 percent per year.

In the area of welfare, former Republican House speaker Paul Ryan is collaborating with other policy professionals to create a new version of President Clinton’s 1996 workfare reform, which in its time transitioned 2.3 million people from government dependency to regular employment. Their aim is to synthesize the dozens of currently disconnected federal welfare programs, collectively costing $1.6 trillion a year, to more effectively incentivize beneficiaries to get jobs.

To help wring waste and fraud out of public spending, the Mississippi Center for Public Policy has developed an online app called TaxToolMS.com, which allows every Mississippian to see what percent of his or her taxes goes to each level of government (local, state, and federal) and to the particular agencies and programs within those levels. As this calculator is adapted to work in other states, notes Center president Douglas Carswell, it will be possible to identify all hidden, inappropriate, needlessly duplicative, and suspiciously accelerating public expenditures.

Even U.S. monitoring of the Ukraine War has revealed ways to reduce the federal debt, especially when it comes to the design of expensive weapons systems. For example, the Ukrainians’ use of $500 explosive drones has proved just as effective against Russian armaments as U.S. made Hellfire and Javelin missiles, which cost $150,000 and $250,00 respectively. And the Ukraine’s Delta AI targeting system has in many cases outperformed America’s Advanced Battle Management System (ABMS), but at a fraction of the cost.

Again, none of this is to suggest that cutting back on America’s overspending will be easy or that any effort to do so should be delayed. As American Institute for Economic Research fellow Thomas Savidge has noted, every increase in the nation’s debt makes it that much harder for America to respond to a new military threat, a recession, or an unexpected emergency like Covid. And every dollar paid to cover the interest on the debt is money that could either reduce taxes or supplement a worthy social program.

But getting through the U.S. debt crisis will not mean returning to what was before. For just as the resolution of the debt incurred by the Medieval Crown of Aragon led to the growth of large cities in southern Spain … the reduction of England’s massive World War II borrowing (252 percent of GDP) produced an unprecedented period of social mobility, and the Greek avoidance of bankruptcy during the global financial crisis created both a stronger economy and bigger social safety net, there is every reason to believe that the U.S. too will emerge an even more vital and prosperous country.

Exactly what it will look like cannot be predicted, for even the glimmers just identified will likely expand and multiply in unexpected ways. But if any country has an economic system geared to making the most of challenging circumstances, it is the United States.

READ MORE from Lewis M. Andrews:

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Dr. Andrews is former executive director of the Yankee Institute for Public Policy. His latest book is Living Spiritually in the Material World (Post Hill Press).