A Tipping Point in the U.S. Deficit? How the U.S. Can Reverse Course

BIANNA GOLODRYGA: Now, three months into the war with Iran, the U.S. government’s borrowing costs are at their highest since 2007, with American taxpayers having to potentially fork out billions of dollars in interest. This as the national debt surpassed the size of the U.S. economy in late March. So, what does this spell for the country’s financial future? Maya MacGuineas is the president of the Nonprofit Committee for a Responsible Federal Budget, and she speaks to Walter Isaacson about what policymakers can do to reel in this crisis.

WALTER ISAACSON: Thank you Bianna. And Maya MacGuineas, welcome to the show.

MAYA MACGUINEAS: So nice to join you. Thank you.

ISAACSON: So we’ve just hit a milestone. Our debt is $39 trillion and the milestone is that’s as much as our entire GDP, our gross domestic product. How much of a milestone is that and what’s the significance?

MACGUINEAS: So we are hitting a lot of fiscal records when it comes to our debt and none of them are good. Debt as a share of the economy hitting a hundred percent of GDP is something that has rarely happened in this country only twice before, once briefly during COVID and right after World War II. It’s an inauspicious situation where we are now running a debt that is larger than the entire economy produces in a year. And the problem is we are supposed to — we are projected to race right past that and continue to borrow more with our debt as a share of GDP growing.

Now there’s nothing magical about a hundred percent. It’s not like that’s a tipping point. It is one of the many speed bumps or reminders that the fiscal policies of the country are really unsound and we need to make changes to get it back into a territory where there are fewer things to worry about. This is a big, big warning sign.

ISAACSON: Well, the markets seem rather sanguine. Why is that?

MACGUINEAS: Yes, they do. The problem is that markets and national debt actually are kind of on different timeframes. If you look at the national debt, where we’re headed, we see projections of it growing indefinitely. Markets are very short-term oriented. And some of the things that make the debt worse can actually feed markets because they like fiscal stimulus. They like big tax cuts, they like new spending programs because those juice the economy in the short run, they can help you this year, year and a half, but they make things worse in the long run. The more that you borrow, the more it actually slows down the economy. But the market is very short-term oriented focusing on those things and that’s why markets don’t tend to pre, to predict when there’ll be some kind of a fiscal emergency. What we do see though is ongoing nervousness in the bond markets and with interest rates as interest rates are gradually getting pushed upwards for a lot of reasons, certainly one of them is all of the excess of borrowing that we have in our economy right now that puts upward pressure on those interest rates. And we’re seeing that.

ISAACSON: Those interest rates going up. You talk about people having a short-term view, but it’s especially true for the loan bonds. In other words, 30-year Treasuries, is that a signal because of the deficit?

MACGUINEAS: So a lot is going on in our economy and our world right now, but absolutely. The deficit is one of the things that’s affecting the pushing up of the tenure and the 30-year that we’re seeing in the markets right now.

So one thing markets don’t like is uncertainty. And this is a world filled with uncertainty right now, clearly on the global stage in terms of geopolitical risks, what’s going on with oil. But also we are seeing people worrying about the debt in the U.S. and around the world because there are a number of things factoring into this. Our plans are to continue borrowing at least $2 trillion a year. A lot of policies are on the horizon that are likely to push that up even more. And populism, the fact that the political parties now kind of compete with each other to see who can give away more to win voters support rather than taking the longer view: we gotta do something to get the debt under control and we’re going to put in a plan. All of those are worrying markets where they see that it’s likely that we are going to have inflation over the longer run, higher interest rates, all of those things that slow economic growth. And you can see the fiscal underpinnings of the situation as contributing to that on a regular basis these days.

ISAACSON: Well you talk about the rise of populism, but I can remember when the populism meant being against runaway federal spending, being against having too much debt. When did that change?

MACGUINEAS: You know, it’s been a huge shift because for so long of, obviously there’ve been two parties, they disagree with each other, but routinely when the fiscal situation would get out of control — and this was at much lower levels than we have today — both parties would come together, acknowledge the problem and put in place reforms that would gradually bring those debt, those borrowing trajectories down. That’s something we don’t see anymore. And I think you know, the growth of partisanship and populism has led to a lot of big shifts in our country right now. But one of them is that almost every election feels like “existential threat.” Both parties are justifying almost anything because they feel like they need to win at all costs. And one of the shifts there has been, Okay, I am going to give big tax cuts and new spending programs.

It used to be that there was kind of the generalization that Democrats like spending and Republicans like tax cuts – both of those will make the fiscal situation worse if they aren’t paid for – but it’s shifted now where both Republicans and Democrats prefer tax cuts. They might look different, but they both like tax cuts and spending, new spending programs, and promises not to fix the very things we need to fix Social Security and Medicare. So you kind of have an unholy alliance between the parties of doing all the things that will make the fiscal situation worse all in defense of winning elections. But there are none of the adults in the room who come forward and say ‘okay, this milestone of debt as a hundred percent of GDP’ or the fact that social security is going to be insolvent in just six years mean that we need to make changes. You’re not hearing those voices, you’re not seeing that kind of leadership.

ISAACSON: Well, both parties seem to be on a race to cut taxes and do more spending. And you say the adults in the room aren’t there to say no. What, what can we do to stop this?

MACGUINEAS: So there’s — none of the solutions are things we’re not familiar with. They’re only things we’re unwilling to do. I would say the place we really need to start is by fixing Social Security. It will be insolvent in less than seven years. And when that happens, if we haven’t made changes, there will be across the board benefit cuts of 24% for every participant. That’s unconscionable. Nobody thinks that’s a good idea. We know the kinds of things we need to look at to fix Social Security. These are the things politicians won’t talk about. But we need to gradually raise the retirement age for younger people who are living longer. We need to talk about whether means testing in one form where we reduce the benefits from what they’re promised to be for people who don’t need them as much so that we can protect them for people who do. And there’s a cap on payroll taxes, we should talk about lifting that so that taxes go all the way up the income level and the program would be more funded. There’s different combinations of those things, but we need to be talking about them.

At the same time, we have to look at all the different places we can generate savings. I would say look at defense procurement. There’s a lot of savings to be had there. Look at our healthcare system, which is just filled with inefficiencies through the hospitals, the insurers, prescription drugs, all of those powerful industries are actually sort of fighting against some of the changes that we could implement, many of which are bipartisanly supported to help make savings in healthcare.

And then finally, you have to look at revenues. Anybody who talks about no new taxes isn’t looking at the numbers. We’re going to have to figure out a way to generate new revenues. One that can come from economic growth, but that won’t do it nearly at all on its own. We should look at, for instance, $25 trillion in lost revenue due to tax breaks over a decade. All those credits, deductions, exemptions, exclusions. I could go on. The list is very long in a $7 trillion a year budget where we could generate savings. It’s just that they’re not politically easy to talk about and we need to create an environment where our politicians are able to be more honest about the risks of these deficits and the realities of what it would take to fix them.

ISAACSON: Well, we’ve just hit this rather shocking milestone of having our total national debt equal our GDP for one year. And yet, and correct me if I’m wrong, it seems the deficit is gonna go up 16% this coming year. That’s what the Trump administration predicts. Is that right? And is that adding to this problem in a un — you know, in a surprising way?

MACGUINEAS: Yeah, so deficits are likely to continue to grow for a number of reasons. One, there’s new spending on invasion — the invasion of the, the geopolitical situation that we see around the world and the situation that the U.S. is in. That is going to cost a lot. Two, tariff revenue, which was bringing in important level of revenue has been declared unconstitutional by the Supreme Court. So we’ll be generating less in revenue than we’ve been hoping for. And three, now we’re likely to see a number of reconciliation bills coming out of Congress, which my deep concern is they will borrow more, not less. Reconciliation is a process that used to be used to reduce deficits. Boy should we go back to that. But the reconciliation bill that we just saw that moved tax cuts forward. Those in the past that have moved spending programs, they have not improved the fiscal situation. That would be a great thing that we could return to.

But the pressure is that we will generate more borrowing than already planned through additional spending that we’re seeing right now and the loss of the tariff revenue unless it’s replaced. So yes, these deficits are likely to be 2 trillion or more for all the coming years. It’s another reminder, just like debt at a hundred percent of GDP, that changes absolutely have to be made.

ISAACSON: Something you said just sort of struck me, which is that the tariff revenues going away, make this problem worse. Could this problem be actually solved by higher tariffs or does that have knock on effects that would be bad?

MACGUINEAS: It couldn’t. Tariffs would not generate nearly enough money to generate the savings that we need to bring the fiscal situation back under control. But it certainly would be an important step. Tariffs do have negative economic consequences, and that’s one of the things you always have to think about when you’re putting policies in place. Who do they affect? How do they affect the budget, and also how do they affect the economy? So tariffs would not be a lot of people’s first choice for revenue. But you could replace them with different kinds of consumption taxes, which actually could be good incentivizing savings and investment and other things.

So if you look at a fiscal target, a reasonable fiscal target would be to bring our deficit from 6% of GDP where it is now to about 3% of GDP in a decade. So cut it in half as a share of GDP over 10 years. That requires $10 trillion in savings. That is a lot of money. I don’t wanna diminish the importance of the, the, the level of changes we’d have to make to get there. And even that’s short of balancing the budget.

So if you look at a goal of saving $10 trillion, tariffs could generate trillions of dollars, but they couldn’t do it all on their own. We’re going to have to look at all parts of the federal budget.

ISAACSON: Well, you’ve just been saying we’re not very good at disciplining ourselves these days, either party. Is there some outside force that can discipline us such as really bad rising interest rates or inflation or the market?

MACGUINEAS: You know, it’s so sad that, that it probably will have to be something like that. One of our board members always said, We’re going to fix this problem. The question is whether it’ll come from leadership or crisis. It is becoming increasingly likely that there will be some kind of crisis, that this is forced upon us by bond markets getting skittish, by foreigners not wanting to lend to the U.S., by interest rates continuing to grow or another bout of high inflation. All of those things would be improved and avoided if we got our deficits and debt under control now.

There’s another outside force that I’m starting to see more signs of, which is younger people who are really concerned about their future. They have the pressure of what does AI mean for jobs, how is hiring out of college? But on top of this, we know that Social Security will be insolvent in six years. All of the plans are going to protect retirees. So younger people realize, Oh, I’m gonna have to fix that along with inheriting tens of trillions of national debt. And I think we’re going to see young people starting to say, All this borrowing so we can go on a spending spree as a country today, but push the bills onto younger people in the future, that’s not fair.

ISAACSON: Wait, wait, wait. Let me, let me push back on that.

MACGUINEAS: Please.

ISAACSON: Do you have any signs that younger people are saying that?

MACGUINEAS: I do. We’ve been, we’ve been hearing a lot recently of younger people starting to say that —well unfortunately you see it on social media, which is not my favorite place to hang out. But yes, there have been signs of that. There have been organizations that are starting to come up that are thinking about this. And in Congress a lot of the younger members talk more and more about some of these issues, that we need to think about the future at the long run. So I will say I don’t think 20-year-olds are going home and talking about the fiscal, the fiscal situation in the country is their number one issue. They’re worried about the high cost of student debt, the inability to borrow from get a mortgage. But what is linked is the fact that we’re more, we’re borrowing today is all pushing those costs to be higher. Part of this affordability challenge that we have is that the borrowing today is pushing up interest rates and prices, many of which are affecting younger people. So yeah, we have started to hear a lot more from people who are starting to worry about that on an intergenerational angle.

ISAACSON: What about the idea that artificial intelligence, AI, will increase productivity so much we can grow our way out of this?

MACGUINEAS: Yeah. So we’ve listened for years for all sorts of the sort of fiscal month myths or the free lunch promises. Don’t worry, you don’t need to do anything hard. This is all going to get fixed. And it used to be the untrue argument that tax cuts pay for themselves. No, they don’t. And then there were other theories out there, Don’t worry, we should just print money. Well, we saw what happens when you print too much money that leads to inflation. We’ve seen that here. We’ve seen that around the world. AI is going to do tremendous things and we have no ability to be able to predict exactly what it is. But there are no credible estimates out there that are calling for AI productivity levels that will be so high that it would fix this in including some of the additional costs that will go along with it, right? Because AI is going to increase productivity. We’ve already seen the effects in ways that it will be able to. But it will also cause either job dislocation or job transitions. It will cause larger amounts of disinformation, which is costly. Cyber protections will have to grow up. Energy costs which may well grow up and be inflationary. All of the other tangential things as we’re getting used to this new world we’re living in, are going to have at least transition, if not permanent costs that will take away from some of the gains. So we will see productivity growth, but we also will see new costs. We should not be banking on something that we don’t even understand to fix our way out of this.

We are an incredibly lucky com — country in that we are the reserve currency. People have always wanted to buy our debt. That gives us a huge privilege and it gives us the time to fix this on our own terms. But if we’re always clinging on to false promises and politicians in particular love that, Don’t worry, we don’t have to do anything hard, it will all get fixed, kind of viewpoint. We could end up in a world of pain because we didn’t take the reasonable measures now ahead of time to fix this.

ISAACSON: So we have 39 trillion in debt, a hundred percent of our GDP, we have to pay interest on that debt. And it, I think about 20% of the budget now is just going to interest payments. And that’s more than education, transportation, research and development combined. What does it say about our country when we spend more paying for past borrowing than we do for our services?

MACGUINEAS: Walter, I think this is honestly one of the most troubling signs that we’re seeing. That we are spending a trillion dollars on interest payments a year, some of which is leaving — a good deal of which — is leaving our economy and going abroad to foreigners who have lent to us. But interest payments are larger than national defense. There has been a study that showed no country ever remained a superpower when it was spending more on interest payments than national defense. It’s more than we spend at the federal level on all spending for children. Talk about focusing on consumption from the past instead of investment in the future. Really troubling. And on top of all of that, interest payments are the single fastest growing part of our federal budget.

And it’s the one thing we don’t control, right? So we can’t bring them down unless we bring the deficits down and that in turn brings those interest rates down. But this is something that is the result of people saying, Oh, deficits, don’t worry about them. Nothing will happen in the past. And now that’s sort of catching up with us in these interest payments that are squeezing out all the other important priorities of the budget.

And I would say at a time where it’s incredibly important to have a flexible budget, we know that risks around the world are growing. We know that that’s expensive. We know that AI, whether it’s the greatest thing that’s ever happened or a terrible dystopian thing, or most likely something in between, is going to have transition costs while we have to figure out how to adapt to it. That’s going to require partnering with the federal government to help. But we don’t have the fiscal flexibility right now in our budget because we’ve made so many promises and we owe so much in interest payment right now. So it’s going to have a profound effect as interest keeps us from having the budget that we need for the modern moment.

ISAACSON: Maya MacGuinas, thank you so much for joining us.

MACGUINEAS: Thank you.