MacGuineas: Federal debt is 'chipping away at our economic health'

Committee for a Responsible Federal Budget President Maya MacGuineas breaks down President's Biden's budget plan.

Video Transcript

ADAM SHAPIRO: President Biden's administration has proposed a new budget that could add anywhere between $5 to $6 trillion over 10 years in new government spending. And the Committee for a Responsible Federal Budget took a look at all of this. And they said, quote, "The budget adds too much to the debt over the next 10 years and does too little to address high and rising debt over the long term."

Let's bring in the president of the Committee for a Responsible Federal Budget, Maya MacGuineas, to talk about this. And I want to kick off with you, Maya, because you and I have discussed this several times in the past. I'm of the generation that's always been afraid of federal government debt and the burden it puts on future generations. And yet, four decades in, the shoe has not dropped. So are people like me who are afraid of this debt missing something?

MAYA MACGUINEAS: No, what in fact-- in some ways we're missing is that the effects of the national debt already do affect us, but in more invisible ways that we actually don't see. But because we've been running large deficits and debt for so long and we've been spending that money more on consumption than investments, the result is today, our standard of living is lower than it otherwise would have been.

And probably more concerning, we are incredibly vulnerable to a number of the threats and economic risks that exist right now. We are not in good fighting shape for whatever might come along. So we're not the kind of country that's going to have a huge crisis, like you see around the world, because we borrow in our own currencies we're not going to default.

But it's chipping away at our economic health, which both means we're poor today than we have to be. And for the long term, it bodes very poorly for our economic strength and, frankly, our geopolitical strength. So I think there's plenty of reason for us all to keep worrying. And unfortunately, there is nothing that would alleviate those concerns because the debt trajectory is just getting worse and worse.

SEANA SMITH: So Maya, it sounds like you think that we're in trouble already. It's not something that so much in the future. It's something that we could start to experience or maybe already are starting experiencing some of the negative effects from.

MAYA MACGUINEAS: Yeah, I do think that we are in a position where we have global competition around the world. We have cyber threats-- all sorts of new threats which actually cost a great deal of money for us to be building defenses against. And we have massive public investments, which we are going to have to find a way to pay for, which makes them harder because we've already borrowed so much in the past decades for consumption.

And let me just sort of-- but when you think about our budget, we spend $6 per senior on every one we invest in the younger generation. One thing to say about the president's new budget is it does shift massively towards investment. And I think that makes a lot of sense. We've been underinvesting for a very long time. So fiscal responsibility is actually important for the same reasons that investing is. It's building the long-term health of your country.

However, you can't really borrow so much money for these investments when you've already borrowed trillions for consumption. And the new budget that we're looking at would actually build in another 14 and 1/2 trillion in borrowing over the next decade. There's just no way we can stay on that course without those kind of underlying economic effects starting to come up more to the surface and cause us again. That's both economically, but also in terms of our global security.

ADAM SHAPIRO: And yet, OMB-- and this was in your committee's paper-- points out that at the end of this year, debt will be 110% of GDP at the end of this year. At the end of 2031 under the proposed budget, it'd be 117%. I go back to with that. The shoe has yet to drop. I mean, isn't Japan over 200%? And the standard of living in Japan doesn't seem to be suffering.

MAYA MACGUINEAS: Well, in Japan, their debt is 240% of GDP. That's true. And what they have that's different than the US is massive domestic savings. So they continue to borrow. Almost all of their money comes from domestic savers.

We, on the other hand, borrow so much from abroad. And that means that those interest payments leave our economy. That's one of the ways that our standard of living fails to grow as much as it otherwise would. Also, that said, I don't actually think Japanese growth is something that we aspire to. And we already have a number of big threats/headwinds against us when it comes to economic growth primarily driven by the aging of our population, which is going to make growth much more difficult to achieve.

But that debt overhang that we have also is going to make it more difficult. And we are, in fact, on the verge of setting the record in this country where our debt to GDP will be the highest it's ever been. The last time that it was this high was right after World War II when we'd fought a world war.

This time, it's the result of things like the past three years before COVID, because I should be very clear that during COVID, we should have been borrowing. It was a good thing that we did borrow. But the three years, for instance, running up to that, we borrowed $4, almost $5 trillion when the economy was strong.

There was no economic justification for that borrowing. That was a purely political preference where we now have a situation where our politicians are so polarized. And nobody wants to do anything hard. And that means no one wants to pay for things. So there are lots of excuses of don't worry. But this is leaving us dangerously vulnerable.

If interest rates, for instance, go up one percentage point, that's going to add $300 billion per year to our interest payments. So while things look pretty, good on the surface right now, it's really the fact that it's such thin ice. And it could crack at any time. And given that we have the luxury of being the reserve currency, it's very risky for us to not be more prepared for all the risks that are certainly sitting there on the horizon.

SEANA SMITH: So Maya, let's talk about some of the spending that's on the table right now. President Biden, obviously infrastructure is very important to him. Something that he is pushing. That sounds like maybe, we could get some sort of bipartisan deal on this. And, of course, the argument for this is something that if we spend on infrastructure, it will help our US economy-- will help the recovery here down the road. Is something like that worth spending on right now with rates so low?

MAYA MACGUINEAS: I think it's definitely worth spending on and investing, because, again, I think the past decades have been the decades of the lost public investment era, both in infrastructure. And I would say human capital probably even more importantly. And the Biden budget does look at both of those.

However, if those are things that you would think about investing, borrowing for those investments if you weren't already borrowing so much for all of our consumptions. So right now, we have a budget that structurally is going about trillions of dollars to pay for a whole long list of consumption items.

Dollars are fungible. That means we're taking the money we could have borrowed from investments otherwise. But what we've seen and looking at the likely payoff from investments is that if you debt financed them, the returns from those investments will be lower, possibly even negative. So interest rates are low. That's helping us with our existing date debt.

Thank goodness they're low, because we'd be in a lot of trouble if interest rates were to go up. But unfortunately, we've already used all that space. So we need to find a way to pay for these things. And the good news is the Biden administration has said they do want to pay for all this. They're not making kind of a magical theory case that you can just borrow all you want. Don't worry about it.

They're saying we need to find ways to pay for it. That's what the big fight will be about, because, frankly, everybody agrees we need spending on infrastructure. And politicians definitely like that. But it will be difficult to figure out how to pay for it. But I would say it's great news at the start of the discussion has been putting on the marker that, yes, this is indeed something we do need to pay for. It's worth doing, and it's worth paying for.

ADAM SHAPIRO: What do you say to the politicians who point out that those ratios and those percentages we were talking about, that sounds so frightening-- debt of 117% to GDP that as GDP grows, however, that alone will shrink that percentage. What do you say to those people?

MAYA MACGUINEAS: Well, it's not in the projections that it will. It would have. Interest rates are so low. Growth will be higher than that. If we hadn't already had borrowing on the books, we could have been in better shape. But we've built in all this borrowing to finance our aging of our population and our growing health care costs and the fact that we continue to create initiatives that aren't fully paid for.

And so the problem is that if you look at any projection, our debt is projected to grow faster than our economy every year forever. And that's basically the definition of unsustainable right there. If it were flipped-- and as somebody who really worries about this issue, I don't think we need to balance the budget. But I think we probably could not balance the budget even if we tried to. We're so deep in a fiscal hole.

But if we were to switch that to get that to the point where our economy were growing faster than our debt, we'd have a little bit more breathing room. And we wouldn't have to focus on what should be a priority right now, which is getting some fiscal consolidation on the books as the economy starts to recover shifting there so that, again, you meet that benchmark that you put out. Your debt should not be growing faster than the economy. And for us, it is going to be.

ADAM SHAPIRO: Maya MacGuineas is president of the Committee for a Responsible Federal Budget. Good to see you. Thank you for being here with that insight--