Debt 2023: $33T

Alan Rappeport at NYT:

America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month amid another fight over federal spending.

The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. It came as Congress appeared to be faltering in its efforts to fund the government ahead of a Sept. 30 deadline. Unless Congress can pass a dozen appropriations bills or agree to a short-term extension of federal funding at existing levels, the United States will face its first government shutdown since 2019.

Over the weekend, House Republicans considered a short-term proposal that would slash spending for most federal agencies and resurrect tough Trump-era border initiatives to extend funding through the end of October. But the plan had little hope of breaking the impasse on Capitol Hill, with Republicans still divided on their demands and Democrats unlikely to support whatever compromise they reach among themselves.

The debate over the debt has grown louder this year, punctuated by an extended standoff over raising the nation’s borrowing cap.

That fight ended with a bipartisan agreement to suspend the debt limit for two years and cut federal spending by $1.5 trillion over a decade by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025. But the debt is on track to top $50 trillion by the end of the decade, even after newly passed spending cuts are taken into account, as interest on the debt mounts and the cost of the nation’s social safety net programs keeps growing.

College, Debt, and Wealth

Paul Tough at NYT:

In the fall of 2009, 70 percent of that year’s crop of high school graduates did in fact go straight to college. That was the highest percentage ever, and the collegegoing rate stayed near that elevated level for the next few years. The motivation of these students was largely financial. The 2008 recession devastated many of the industries that for decades provided good jobs for less-educated workers, and a college degree had become a particularly valuable commodity in the American labor market. The typical American with a bachelor’s degree (and no further credential) was earning about two-thirds more than the typical high school grad, a financial advantage about twice as large as the one a college degree produced a generation earlier. College seemed like a reliable runway to a life of comfort and affluence.

A decade later, Americans’ feelings about higher education have turned sharply negative. The percentage of young adults who said that a college degree is very important fell to 41 percent from 74 percent. Only about a third of Americans now say they have a lot of confidence in higher education. Among young Americans in Generation Z, 45 percent say that a high school diploma is all you need today to “ensure financial security.” And in contrast to the college-focused parents of a decade ago, now almost half of American parents say they’d prefer that their children not enroll in a four-year college.

He writes that the opinion has some basis in fact.  Younger college graduates do not have much of a wealth advantage over young non-college adults.

 Millennials with college degrees are earning a good bit more than those without, but they aren’t accumulating any more wealth. How can that be?

Lowell Ricketts told me he had a pretty good idea of the cause, even though the group’s data couldn’t be conclusive on this point. The likely culprit, he said, was cost: the rising expense of college and the student debt that often goes along with it. Carrying debt obviously diminishes your net worth through simple subtraction, but it can also prevent you from taking important wealth-generating steps as a young adult, like buying a house or starting a small business. And even if you (or your parents) were able to pay your tuition without loans, the savings you used are gone when you graduate, and thus are no longer available to serve as a down payment on a starter home or the beginning of a nest egg for retirement.

A few decades ago, tuition costs were manageable for many Americans. But since 1992, the sticker price has almost doubled for four-year private colleges and more than doubled for four-year public colleges, even after adjusting for inflation. Today the average total cost of attending a private college, including living expenses, is about $58,000 a year. After financial aid, the average net price for private-college students is about $33,000 a year; at public institutions, it is about $19,000. Those averages conceal a great deal of variation, however; at the University of Michigan (a public university), tuition, fees and expenses for out-of-state juniors and seniors total more than $80,000 a year.

Deficit and Debt 2023

Many posts have discussed federal deficits and the federal debt.

 From CBO:

Each year, the Congressional Budget Office publishes a report presenting its projections of what the federal budget and the economy would look like over the next 30 years if current laws generally remained unchanged. The long-term budget projections typically follow CBO’s 10-year baseline budget projections and then extend most of the concepts underlying them for an additional 20 years. This year, the long-term projections are based on CBO’s May 2023 baseline projections but also reflect the estimated budgetary effects of the Fiscal Responsibility Act of 2023 (Public Law 118-5), which was enacted on June 3, 2023.


In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053. Over the past century, that level has been exceeded only during World War II and the coronavirus pandemic. The increase in the total deficit results from faster growth in spending than in revenues. The primary deficit, which excludes interest costs, equals 3.3 percent of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs.


By the end of 2023, federal debt held by the public equals 98 percent of GDP. Debt then rises in relation to GDP: It surpasses its historical high in 2029, when it reaches 107 percent of GDP, and climbs to 181 percent of GDP by 2053. Such high and rising debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices. 

Federal debt as percentage of GDP 

Leaving California

 Benjamin Oreskes at LAT:

The findings of a new poll from a consortium of local nonprofits aiming to take stock of the state’s mood point to a contradiction playing out across the Golden State: People are pleased by the bounty the country’s largest state had to offer and mostly favor its liberal attitudes on social issues, but are also far more concerned about their livelihoods than last year.

Nearly half of those surveyed (46%) said they struggle to save money or pay for unexpected expenses even as they scrape by — a jump of 6 percentage points since April 2022 when residents were asked the same question. About 35% said they live comfortably and 18% said they find it difficult to make ends meet every month.

More than 40% of residents say they’re contemplating moving out of California, with nearly half of them saying they’re considering that “very seriously.” About 61% pointed to the high cost of living here as the reason they’d go. People of color are far more likely to say that the expense of living in California is the reason they might leave. About 71% of residents who are either Black or Asian/Pacific Islander and considering relocating cited the cost of living.

New York and California are Losing Affluent Taxpayers

 Justin Fox at Bloomberg:

New York has been losing people to other states for a while. But something new happened during the pandemioc: The people who left had higher incomes than those who stayed behind — much higher.

The 2020-21 numbers here were released in late April by the Internal Revenue Service. They sort taxpayers by whether and where they moved between filing their taxes in 2020 and filing them in 2021; the adjusted gross incomes are for the 2020 tax year. It has been two years since May 17, 2021 — that year’s belated income tax filing deadline — and a lot has changed. But New York has continued to lose population, and if the trend depicted above were to continue, even in less extreme form, it would be disastrous for the finances of a state that relies on income taxes paid by those making $200,000 or more a year for almost half its revenue. (That is, before the pandemic in 2019, personal income taxes accounted for 65% of state revenue, and those making $200,000 or more paid 71% of the income taxes.)

...

The role of taxes in driving interstate migration is often exaggerated, but it’s not nothing. In a couple of recent papers, Joshua Rauh of the Stanford Graduate School of Business has shown that the percentage of very-high-income taxpayers leaving California jumped in the wake of one, a 2013 increase in the state’s top income tax rate, two, the 2017 Tax Cuts and Job Act’s curtailing of state and local tax deductions and three, the pandemic. Still, that’s not many people and for years those leaving California and New York have been mainly lower— and middle-income residents for whom expensive housing and other cost-of-living issues probably played a bigger role than tax rates per se.

In New York, the initial pandemic exodus was led by those who could afford to leave quickly and could work remotely. The composition seems to have shifted since then, with affluent Manhattan gaining population from mid-2021 to mid-2022, according to Census Bureau estimates, and the state’s poorest county, the Bronx, losing the biggest percentage of population. (The recent New York Times analysis showing an accelerating exodus of college graduates from the New York City metro area relies on different Census numbers that aren’t available yet for 2022.) New York has been finding all sorts of different ways to drive away all sorts of different people — and it looks as if that’s about to start seriously hampering the state’s ability to pay its bills.

Debt Limit Warning

 From CBO:

The debt limit—commonly called the debt ceiling—is the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies. The amount is set by law and has been increased or suspended over the years to allow for the additional borrowing needed to finance the government’s operations. On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion.1 On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” and began using well-established “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The Congressional Budget Office projects that if the debt limit remains unchanged, there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations. The extent to which the Treasury will be able to fund the government’s ongoing operations will remain uncertain throughout May, even if the Treasury ultimately runs out of funds in early June. That uncertainty exists because the timing and amount of revenue collections and outlays over the intervening weeks could differ from CBO’s projections.

If the debt limit is not raised or suspended before the Treasury’s cash and extraordinary measures are exhausted, the government will have to delay making payments for some activities, default on its debt obligations, or both.2 If the Treasury’s cash and extraordinary measures are sufficient to finance the government until June 15, expected quarterly tax receipts and additional extraordinary measures will probably allow the government to continue financing operations through at least the end of July.

Polarization: Econonomic Growth v. Environment

 Jeffrey M. Jones at Gallup:

Though Democrats and Republicans have long come down on different sides when considering the tradeoffs between economic growth and environmental protection, the gap between the parties has never been larger. Seventy-eight percent of Democrats, compared with 20% of Republicans, now believe environmental protection should be given the higher priority.

From 1984 to 1991, the parties expressed similar views on this matter, but by 1995 a divide became evident, which has since gradually expanded. At least half of Democrats have favored the environment over economic growth in all years of Gallup’s trend except during the economically challenged years of 2010 and 2011. Meanwhile, majorities of Republicans typically prioritized the environment from 1984 through 2000, but Republicans have not returned to that level since falling to 47% in 2001.

 

Social Security Trust Funds: The Lights are Blinking Red

From the Social Security Administration: 

The Social Security Board of Trustees today released its annual report on the financial status of the Social Security Trust Funds. The combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds are projected to become depleted in 2034, one year earlier than projected last year, with 80 percent of benefits payable at that time.

The OASI Trust Fund is projected to become depleted in 2033, one year sooner than last year’s estimate, with 77 percent of benefits payable at that time. The DI Trust Fund asset reserves are not projected to become depleted during the 75-year projection period.

In the 2023 Annual Report to Congress, the Trustees announced:

• The asset reserves of the combined OASI and DI Trust Funds declined by $22 billion in 2022 to a total of $2.830 trillion.
• The total annual cost of the program is projected to exceed total annual income in 2023 and remain higher throughout the 75-year projection period. Total cost began to be higher than total income in 2021. Social Security’s cost has exceeded its non-interest income since 2010.
• The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2034. At that time, there would be sufficient income coming in to pay 80 percent of scheduled benefits.

...

View the 2023 Trustees Report at www.socialsecurity.gov/OACT/TR/2023/.

California Is Losing Affluent Residents

Many posts have discussed California's many problems.

Hans Johnson and Eric McGhee at PPIC:

During the height of the pandemic, the flows out of the state became so large that almost every demographic and socioeconomic group has experienced net losses. For example, California used to gain college graduates even as it lost less educated adults. But in the last couple of years, the state has started losing college graduates as well, quite markedly—albeit still not to the same extent as less educated adults. Even among young college graduates in their 20s, a group that California has disproportionately attracted in the past, the flows out of the state have been about the same as the flows into the state.

Perhaps most striking, California is now losing higher-income households as well as middle- and lower-income households. During the pandemic, the number of higher-income households moving to California declined a bit, but the number leaving the state increased dramatically (from less than 150,000 in 2019 to almost 220,000 by 2021).

The losses of college graduates and higher-income households are likely related to the ability of many highly educated and highly paid workers to work from home. The Census Bureau’s Household Pulse surveys show that about two-thirds of the almost three million Californians who telework full-time (five or more days per week) have at least a bachelor’s degree. Among recent higher-income Californians leaving the state, over half (53%) report working from home.

Consquences of Default

Written Testimony of Mark Zandi Chief Economist of Moody’s Analytics, U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy ““The Federal Debt Limit and its Economic and Financial Consequences” March 7, 2023

If lawmakers are unable to resolve the debt limit in time and the Treasury begins paying its bills late and defaults, financial markets would be roiled. A TARP moment seems likely, hearkening back to that dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered. A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.

It is unimaginable that lawmakers would allow things to get to this point, but as the TARP experience highlights, they have done the unimaginable before. Yet, if that experience is a guide, lawmakers would reverse course within a few days and resolve the debt limit impasse to allow the Treasury to resume issuing debt again and pay its bills. Much damage will have already been done, and although markets would right themselves, it would be too late for the already fragile economy, and a recession would ensue.

However, if lawmakers do not reverse course quickly and the impasse drags on for even a few weeks the hit to the economy would be cataclysmic. Most immediately, the federal government would have to slash its spending. Say if the debt limit was breached on October 1 and dragged on all month, the Treasury would have no choice but to cut government spending by an estimated $125 billion. And if there is no agreement in November, another close to $200 billion in spending would need to be cut. The hit to the economy as these government spending cuts cascade through the economy would be overwhelming.

Adding to the economic turmoil would be the loss of consumer, business, and investor confidence. Political brinkmanship over the operations of the federal government has been frightening for Americans to watch. In both the 2011 and 2013 debt limit episodes, households were closely attuned to the political hardball being played in Washington and consumer sentiment slumped. The brinkmanship is also unnerving for businesses, who will pullback on investment and hiring, and financial institutions, who will quickly turn more circumspect about extending credit to households and businesses.

The timing couldn’t be worse for the economy as even before the specter of a debt limit breach many CEOs and economists believe a recession is likely this year. With the Federal Reserve ramping up interest rates in an effort to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong. Most leading indicators of recession, including the prescient policy yield curve – the difference between 10-year Treasury yields and the federal fund rate – point to recession beginning later this year at about the time lawmakers will be doing battle over the limit.

Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline beginning late this year and through much of 2024, falling over 4% peak to trough, costing the economy more than 7 million jobs, and pushing the unemployment rate to over 8%. Stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion 4 in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates would not fall back to where they were previously. And the economy’s long-term growth prospects will be materially diminished. A decade from now, real GDP is almost one percentage point lower than if there had been a clean debt limit increase, there are 900,000 fewer jobs, and the full-employment unemployment rate is 0.1% percentage points higher.

"Buy American" -- A Bad Idea

 George F. Will at WP:

“Buy American,” like protectionism generally, can protect some blue-collar jobs — but at a steep price: A Peterson Institute for International Economics study concludes that it costs taxpayers $250,000 annually for each job saved in a protected industry. And lots of white-collar jobs are created for lawyers seeking waivers from the rules. And for accountants tabulating U.S. content in this and that, when, say, an auto component might cross international borders (U.S., Canadian, Mexican) five times before it is ready for installation in a vehicle.

In the usual braying-and-pouting choreography of the State of the Union evening, members of the president’s party leap ecstatically when he praises himself, and members of the other party respond sullenly, by not responding. This year, however, something unusual happened when President Biden vowed to “require all construction materials used in federal infrastructure projects to be made in America.” A bipartisan ovation greeted his promise to reduce the purchasing power of tax dollars spent on infrastructure projects by raising the cost of materials.

The Budget Process

In the forward to a committee report on the congressional budget process, Senator Bernie Sanders offers some observations:

This volume explains, in excruciating detail, how the congressional budget process works. That process gives new meaning to the word Byzantine.

Let’s be clear: no one would intentionally design something like this. This process is needlessly complicated. Americans deserve a simpler, more transparent budget process.

This process is bound by precedent, but many of these precedents are known to only a few. Secret law is not fair law. This volume makes public precedents that Democrats have collected. We welcome others to join us and make other precedents public.

This process vests a great deal of power in the hands of the SenateParliamentarian, who does not answer to voters, to often make arbitrary decisions to block changes in law that would substantially improve the lives of working families supported by the overwhelming majority of the American people without a supermajority of 60 votes. As this volume makes clear, in the budget process, those decisions have empowered a minority of Senators to block a raise in the minimum wage, sensible immigration reform, a cap on the price of insulin, and many other common-sense initiatives.

A fair system would respond to the demands of the American people. The congressional budget process fails that test.

I hope that by laying out this story, this volume will highlight the weaknesses in the current system and spur reform. We need a more democratic system that allows the will of the American people to prevail.

From the report:

The Congressional Budget Act layered new institutions—Budget Committees and the Congressional Budget Office—on top of the existing structures. And the Budget Act layered new procedures on top of existing procedures. In Riddick‘s Senate Procedure, the premier authority on Senate procedure, the Senate Parliamentarian noted: “The provisions of the Congressional Budget Act of 1974 supplement rather than supplant Senate procedure, and therefore they are not the exclusive means to achieve the purposes for which they were enacted.”13 This volume details those Budget Act procedures.

 

Income Taxes Are Progressive

As many posts have pointed out, the federal tax system is more progressive than many people believe:

 

Explore the latest federal income tax data: https://t.co/jJhzcDRWei @ericadyork

— Tax Foundation (@TaxFoundation) February 15, 2023

CBO data:

Average Federal Tax Rates, by Income Group, 1979 to 2019

Public Opinion on Debt and Default

Many posts have discussed federal deficits and the federal debt.

Anthony Salvato and colleagues at CBS:

Views on raising the debt ceiling start off negative in principle, but if people are faced with the prospect of a U.S. default, a big majority would end up saying, "raise it."

Here's how that unfolds:

We first asked if the U.S. borrowing limit should be raised to pay current debts, and most say no, with Republicans and conservatives especially opposed. That suggests in part that the general idea of added borrowing is not popular.

But then we asked those opposed to raising the debt ceiling: what if that means the U.S. defaults?

In that case, the majority view on the debt ceiling moves in favor of raising it.

Republicans, Democrats and independents all shift substantially toward raising it when presented with the prospect of default. And shifts are most pronounced among those more worried about an economic downturn if the limit isn't raised.

So, it turns out defaulting is even more unpopular than borrowing.

And it's an important lesson both for politics — as we watch political leaders talk about the matter in the coming weeks — and for how we gauge public opinion on a complicated issue and its potential implications.

 

Inequality and the Path to a PhD

Andrew Van Dam at WP:

In 1970, just 1 in 5 U.S.-born PhD graduates in economics had a parent with a graduate degree. Now? Two-thirds of them do, according to a new analysis from the Peterson Institute for International Economics. The trends are similar for other fields (and for foreign-born students), but economics is off the charts.

This partly reflects population trends: Over that same period, the share of parents with graduate degrees and college-age children rose 10 percentage points, to 14 percent, our analysis of Census Bureau data shows. But compared with the typical American, a typical new economist is about five times more likely to have a parent with a graduate degree.

The new analysis comes from Anna Stansbury of the Massachusetts Institute of Technology and University of Michigan graduate student Robert Schultz, who got their hands on detailed data on U.S. PhD recipients going back more than 50 years. The data includes extensive information about almost half a million recipients in the 2010-to-2018 period alone.

It shows that the elite dominate even more among the top schools that produce about half of all future economics professors. Among the top 15 programs, 78 percent of new PhDs since 2010 had a parent with a graduate degree while just 6 percent are first-generation college students.

To an outsider, the long path to a professorship can seem frustratingly opaque, particularly in economics. PhD programs tend to require a hidden curriculum of classes in subjects such as mathematics that are not technically required for economics majors. If you discover economics late in your college career and don’t have expert guidance, it might already be too late to get on the PhD track. Similar hidden hurdles lurk in the job market and academic publishing.

University of Southern California economist Robert Metcalfe said the hidden curriculum is just the beginning. Elite social networks determine which economists get accepted at top schools and published in top journals, and it can be difficult for first-generation students such as himself to break in.

“I’m always on catch-up. That’s because I come from a background that didn’t know anything about academia,” said Metcalfe, who grew up in southern Wales in the United Kingdom, where his dad worked as a warehouse man at a brewery while his mom stayed home to raise four kids. “I got tenured before the age of 40, but I just feel like I’m always one step behind in the academy.” 

Debt: Pay Now or Pay More Later

CBO analyzes the effects of waiting to stabilize the federal debt.

• Regardless of when the process was begun, stabilizing federal debt as a percentage of GDP would require that income tax receipts or benefit payments change substantially from their currently projected path.
• The longer policymakers waited to implement a policy change, the more debt would grow in relation to GDP, and the greater the policy changes needed to stabilize it would be.
• If the option of increasing income tax rates was chosen, the effects of delaying implementation would be greater than they would be under the option of cutting benefits: Increases in interest costs would be larger, GDP and household consumption would be lower, and debt as a percentage of GDP would be higher in the long run.
• Under either option, the negative effects of delaying the implementation of policy changes on people’s consumption and labor supply would be disproportionately borne by younger people and lower-income people.

 

Why Debt Matters

 Desmond Lachman at Inside Sources:

The major problem with a high public debt level is that it saddles the government with large future interest payment obligations. That leaves little room for other public expenditures and makes it difficult for the government to bring the budget deficit under control. Failing to rein in the deficit, in turn, risks keeping the public debt on an ever-increasing path. In that context, it has to be of deep concern that the non-partisan Congressional Budget Office is forecasting that on present trends the country’s public debt to GDP ratio will approximately double from around 100 percent at present to 200 percent by 2050.

A high public debt level highly compromises the Federal Reserve’s ability to keep inflation under control. In particular, it makes it difficult for the Fed to raise interest rates for fear of adding to the government’s interest payment burden. Such a consideration would seem to have particular pertinence today with inflation running at its fastest pace in the past forty years and with the Fed needing to raise interest rates substantially from its present zero bound if it hopes to get the inflation genie back into the bottle.

Especially at a time of high inflation, a high public debt level makes the country economically vulnerable. That is because we have become the world’s largest debtor nation. For many years now, we have relied on the kindness of strangers in general and on the Chinese and Japanese in particular to finance our budget excesses.

If foreigners begin to perceive that we are in the process of inflating away our debt, they will be reluctant to hold that debt and will demand higher interest rates in order to compensate them for inflation risk. That in turn could cause the dollar to swoon, which would only add to inflationary pressures and fuel further concerns about our wanting to inflate away our debt.

$30 Trillion Debt

Alan Rappeport at NYT:

America’s gross national debt topped $30 trillion for the first time on Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with soaring prices and the prospect of higher interest rates.

The breach of that threshold, which was revealed in new Treasury Department figures, arrived years earlier than previously projected as a result of trillions in federal spending that the United States has deployed to combat the pandemic. That $5 trillion, which funded expanded jobless benefits, financial support for small businesses and stimulus payments, was financed with borrowed money.

Trust and Inequality

Many posts have discussed economic inequality.

 

Inflation Redux

 Rachel Siegel at WP:

Prices rose at the fastest pace in 40 years in December, increasing 7 percent over the same period a year ago, and cementing 2021 as a year marked by soaring inflation wrought by the ongoing coronavirus pandemic.

Prices were also up 0.5 percent in December compared to the month before.

Indeed, 2021 went down as the worst year for inflation since 1981, as broken supply chains collided with high consumer demand for used cars and construction materials alike. Higher prices seeped into just about everything households and businesses buy, raising alarms for policymakers at the Federal Reserve and White House that inflation has spread throughout the economy.