An Urban's Rural View

The national debt is one of those subjects Wall Street Journal reporters in my day called DBIs -- dull but important. We did headstands trying to make these dense, abstract topics readable. One Journal piece began: "This is the story of the western world's 27th largest steel producer. Oh, read it anyway."

I've never shied away from DBIs. I once penned a long WSJ story about total factor productivity, a fairly arcane economic topic. In my early years at DTN I wrote a five-part series on the World Trade Organization. Talk about an eye-glazing subject.

Now the national debt has become so important that commentators have little choice but to risk glazed-over eyes and address it.

Maybe the debt seems dull because we've been lulled into thinking the pain lies in the future, when the debt forces the government to impose enormous tax increases or print money and touch off runaway inflation, or both. Actually, it's inflicting pain now, and paying it down, or slowing its growth, will cause pain of a different sort.

Indeed, the more the debt continues to grow -- as it will under Trump, and would have under Harris -- the greater the pain.

Grow it certainly has. Since 2015, the federal debt held by the public has soared 123% to $28.9 trillion. (https://fiscaldata.treasury.gov/…) It has increased under every presidential administration this century.

At $36.2 trillion, the total federal debt, which includes government debt held by other government agencies, is equal to 123% of gross domestic product. To put that in perspective, at the end of World War II the ratio was only 106% -- and, unlike then -- we haven't been in a major war for the last five years.

To understand why the debt will continue to grow and the pain it will cause, consider four possible approaches the government could take to the debt problem.

1) Let it grow. This is the most likely approach and the least painful -- in the short term. The tax cuts planned by the Trump administration and the Republican House of Representatives total $4.5 trillion over 10 years. No one thinks the government will cut spending anywhere near that much. Estimates of the addition to the debt by 2035 range from $4 trillion to $10 trillion.

Pain? The debt is already putting upward pressure on interest rates. Long-term bond investors see increasing risk, including being repaid in devalued dollars. Their fears push rates higher.

Long-term bond rates, in turn, affect everyday interest rates. While the Fed has cut its benchmark rate a full percentage point since last September, the yield on the 10-year Treasury note is considerably higher. As a result, so is the interest rate on the average 30-year mortgage. Farm interest rates have barely budged in many places and remain high.

2) Cut spending. The government is doing some of that, but not enough to come close to a balanced budget. Elon Musk is attacking nondefense discretionary spending, which is only 16% of the budget.

Payments to individuals, starting with Medicare, Medicaid and Social Security but including food stamps and farm programs are what make the government a big spender.

The House is looking at Medicaid and food stamp cuts. If they're actually made, they'll cause many Americans sharp pain.

Farmers and ranchers aren't exempt. Food aid to the tune of $4 billion a year was among the foreign-aid programs the administration has targeted.

Some farmers who contracted with the government to upgrade their practices could end up not being compensated for money they've spent. And food-stamp cuts in the budget will complicate the prospects for a new farm bill.

3) Raise taxes. This won't happen; the GOP has no appetite for actual tax increases. As mentioned, $4.5 trillion in tax cuts are on the table. Advocates say tax cuts promote economic growth, but none so far have promoted enough growth to "pay for themselves." Were tax increases to happen, however, American taxpayers' pain would be immediate.

4) Hope for a surge in the economy's productivity. This would produce stronger economic growth and more tax revenue. It's not an irrational hope; as more organizations adopt AI, productivity could indeed surge, as it did in the late 1990s during the internet boom.

But, like previous surges, the productivity benefits from the internet boom soon faded. If the coming AI boom is stronger and longer lasting, it could indeed boost tax revenue for a while. But enough to start cutting the federal debt? That's putting a lot of weight on a hope -- and hope is not a strategy.

Today's debt-inflicted pain is spread widely; there's no powerful interest group lobbying for changes, and certainly no one's pushing for the really painful changes that would most matter, in programs like Social Security and Medicare. Washington will let the debt grow. Upward pressure on long-term interest rates will continue.

Urban Lehner can be reached at urbanize@gmail.com

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