The Big Ugly Debt Gray Rhino

Everyone is talking about it... but what can (or will) Washington do?

Image via Microsoft Designer

There has been an awful lot of talk about the US federal debt lately, for good reason. At the end of 2024, it stood at $37 trillion, or 123 percent of GDP.

As I prepare to hit the “publish” button, the US National Debt Clock stands at a little over $37 trillion (T for TWELVE zeros).

The federal debt gray rhino is big, daunting, and highly obvious.

So why is it growing faster and faster? That’s a good question. Policy choices and economic trends are the easy part of the answer. The tougher part to answer is why the White House has been pushing policies that appear to be diametrically opposed to the solution.

Government spending grew dramatically during the Covid-19 pandemic and has not yet fallen to sustainable levels. Tax revenue ($4.92 trillion in 2024) has not kept up with spending ($6.75 trillion in 2024), resulting in a budget deficit of $1.83 trillion in 2024.

But the current administration has been cutting revenue, while increasing spending on defense and cutting spending in areas that support future growth. The Congressional Budget Office estimates that the budget bill passed in July will add $3 trillion to the deficit over the next decade.

That’s a bigger and bigger problem for lots of reasons beyond simply the fact that taxpayers are on the hook for it.

• As government debt rises -particularly in relationship to the economy-- borrowers demand higher and higher interest rates for lending to the U.S. Treasury. That makes the debt rise even faster.

• Because other interest rates are tied to US Treasury rates, it will cost more for businesses to borrow to invest in order to grow, and for consumers to borrow to buy houses, cars, and other purchases.

• The higher the debt goes, the faster the marginal utility or productivity of debt falls: That is, each dollar of debt produces less and less by way of additional growth.

Responses

What can Washington do in face of the federal debt gray rhino?

There are three workable options. A fourth option, which in a normal world should be off the table, would be a disaster yet unfortunately is no longer unimaginable.

The workable options:

1) Increase revenue through higher economic growth.

2) Increase revenue through tax policy, such as higher tax rates on higher incomes; higher capital gains tax rates; closing loopholes and exemptions.

3) Cut spending. The easiest is discretionary spending; that is, funds that the government is not legally required to spend. Roughly half of this is the defense budget. The other half includes transportation, education, income security, health, justice, international affairs, the environment, community development, and science/space/technology. But tweaks are possible to mandatory spending —mainly health and Social Security programs— as well.

The fourth, nuclear option:

4) “Make a deal” –ie, default on the debt the federal government owes. (This could include de facto default through inflation, which reduces the size of the debt in real —that is, inflation-adjusted— terms.)

Many observers remain in denial. But the federal debt gray rhino is getting harder and harder to ignore. Bond markets certainly are paying attention. And as the next federal budget shutdown deadline –September 30^th—approaches, the budget, deficits, and debt will all be front and center.

The sheer size and complexity of the federal debt problem can make many people throw up their hands in capitulation to an inevitable crisis. Anyone looking for a single “silver bullet” solution is going to be sorely disappointed.

But there are options for solving it. This is important because research shows that when people believe that a problem is solvable, we are more likely to take action.

Over the coming week, I’ll be going into more detail here on what Congress can do to reduce budget deficits and grow the economy, both of which need to happen to reduce the federal debt and burden on taxpayers.

In the meantime, I’m sharing some tools to help you think about the challenge.

How would YOU wrangle the national debt gray rhino?

The tools below, shared in no particular order after the Congressional Budget Office numbers upon which the other tools rely. Some are lists or bundles of options. Others are gamified to calculate the impact of the changes you choose.

Congressional Budget Office Options for Reducing the Deficit: 2025 to 2034
This analysis, requested by the House and Senate Committees on the Budget, provides summary tables of various options for reducing mandatory spending, discretionary spending, and revenue increases, with a search engine and data to back up estimates. The tools below rely partly or entirely on CBO calculations.

Brookings Institution 15 Ways to Rethink the Federal Budget
If the list of options in the CBO report is overwhelming, this set of proposals may be easier to digest. Brookings bundles sets of related deficit reduction and revenue increase ideas together.

Peterson Foundation 76 Options for Reducing the Deficit (based on CBO Numbers)
This includes 32 revenue raising options, 17 discretionary spending alternatives, and 27 mandatory spending tweaks.

Committee for a Responsible Budget Debt Fixer
This tool includes options that might increase or decrease spending under a challenge to cut $7.75 trillion from the federal budget to stabilize the debt at 100 percent of GDP by 2035. The downside is that many of the proposed options are all-or-nothing, so you won’t be able to be as precise as you might like. The upside is that it’s simple –and there’s a handy tell-your-representative-what-you-think email tool at the end.

Concord Coalition Federal Budget Challenge
This tool provides a disclaimer that its options are neither comprehensive nor recommendations.

Penn Wharton Budget Model
Three different policy bundles with projections of possible outcomes –and data downloads if you want to do your own math. This was compiled in Spring 2024 –but the basic logic of possible choices and trade-offs still applies. What I like about this one is that it considers secondary effects -like which reduces deficits the most through spending cuts and which reduces deficit-to-GDP by increasing growth.

Have fun –and see you soon.

Next up: A deep dive into “increasing revenue through economic growth”