3 unconventional ways Trump can tackle the national debt

The federal government’s nearly $20 trillion debt may be unimaginable, but is it manageable?

For nearly a decade, abnormally low interest rates have allowed the U.S. Treasury to carry the burgeoning federal debt with ease and at relatively little cost to taxpayers. Net interest costs totaled “only” $241 billion last year, the same as 20 years ago, when the debt was just one-fourth as large.

This era of bargain-basement debt will eventually end. To prepare for that day, the Trump administration should rethink how the federal government manages its debt.

Consider the following three proposals.

1. To lock in today’s low interest rates, issue 50- and 100-year Treasury bonds.

Scores of corporations (e.g., Coca-Cola, Disney, Federal Express, Ford and IBM) and countries (e.g., Belgium, Ireland and Mexico) have issued 100-year bonds. And while it doesn’t take a rocket scientist to understand the benefit of ultra-long bonds, several institutions of higher education — including the University of Pennsylvania, Ohio State University, the University of Southern California and Yale University — have floated their own 100-year bonds.

{mosads}The Obama administration claimed it took advantage of low yields, but that was an empty boast. The average duration of the federal debt stood at 5.7 years in December 2016. That’s up from an average of four years in October 2008, but short of the record of 5.9 years in May 2001 — and not even close to what is appropriate given current circumstances.

Indeed, the Treasury’s approach to debt management in recent years is reminiscent of comedian Steven Wright’s quip: “I intend to live forever. So far, so good.” But interest rates will not remain near historic lows forever.

The threat is real. According to the Congressional Budget Office (CBO), a measly 1 percentage point increase in interest rates above current projections would swell the budget deficit an additional $1.6 trillion over 10 years.

Treasury Secretary Steven Mnuchin understands the potential benefits of issuing longer-term debt. He commented on CBNC last month:

“I think it’s something we should seriously look at. I’ve already begun to talk to the staff about looking at that. We’ll reach out to the market, investors, different people, but I think it’s something that is a very serious issue of whether we should explore whether we can raise 50- or 100-year money at a very slight premium.”

To the extent the yield curve is upward sloping, issuing longer-term debt will slightly increase interest costs in the short-run. Then again, that’s a small price to pay for not having to worry about refinancing quite so much of our short-term debt in a few years when interest rates are no longer at rock bottom.

2. Reform the federal debt limit.

The gross federal debt has more than tripled in dollar terms and Congress has raised or suspended the debt limit 15 times since 2001. If the debt limit was intended to limit debt, it’s not working.

Economists generally agree we should abolish the debt limit. Once government spending and tax decisions are made, the only question remaining is whether to honor our obligations. As Mnuchin said just last Friday, “We’ve spent the money. So the concept of the debt limit … is somewhat of a ridiculous concept.”

Congress won’t abolish the debt limit because it’s a handy, must-pass piece of legislation on which all manner of amendments can ride into law. Additionally, a vote against the debt limit can give spendthrift members of Congress the appearance of fiscal responsibility.

So the debt limit remains.

Meanwhile, yet another debt limit crisis is brewing. Some on Capitol Hill argue they ought to “get something” in return for voting to increase the debt limit.

But isn’t it enough to prevent the Treasury from defaulting on the federal debt and potentially sending the U.S. economy into a tailspin?

As with so many of his predecessors, Mnuchin recently announced a series of so-called “extraordinary measures” to keep from breaching the debt limit before Congress acts. Given the regularity with which the Treasury resorts to these measures, it would be more accurate to call them “ordinary extraordinary measures.”

The renewed threat of debt limit brinkmanship led then-Treasury Secretary Jack Lew to publish a nearly 6,000-word essay earlier this year highlighting the problem and urging reform. He concluded:

“The debt limit can no longer be a topic for negotiation, and Congress should take action to eliminate this risk of periodic crisis. No longer a tool for simplifying the borrowing process, the debt limit has morphed into a weapon that irresponsible actors in Congress can wield against our economic well-being. However Congress chooses to exercise its Constitutional role with regard to our nation’s debts, whether to abandon the debt limit entirely or to adopt a new course that addresses the current risks, one thing is clear: the current debt limit regime has outlived its usefulness.”

In other words, it’s time to take off the fiscal suicide vest.

If the debt limit is to remain in some form, one practical solution would be to change the law to allow the president to increase the limit as needed unless Congress passes subsequent legislation specifically blocking the increase.

3. Better manage the federal debt by issuing less of it.

As the old saying goes, “When you’re in a hole, stop digging!”

Under current law, the CBO estimates the federal government will accumulate budget deficits totaling $9.4 trillion over the coming decade. Consequently, the publicly held federal debt is expected to increase from 77.5 percent of gross domestic product (GDP) this year to 88.9 percent by fiscal year 2027. At that level, the debt-to-GDP ratio would, in the words of the CBO, “be the greatest since 1947 and more than double the 50-year average of 40 percent.”

Then things get ugly. By 2046, the debt-to-GDP ratio is expected to balloon to 141 percent of GDP as federal healthcare programs and a vicious debt spiral drive annual federal outlays to 27 percent of GDP, up from less than 21 percent today.

President Trump’s first budget should seek to stabilize, and then reduce, the federal debt-to-GDP ratio. It won’t be easy. Merely stabilizing the debt-to-GDP ratio at today’s level thru 2027 would, absent faster economic growth, require deficit reduction totaling $3.2 trillion (including interest savings) over the next 10 years.

The math is unforgiving. Further squeezing discretionary federal spending will do little to solve our long-term budget problems.

Healthcare reform, despite last week’s temporary setback, remains absolutely essential to putting the federal budget on a sound footing. Similarly, pro-growth tax reform along the lines proposed by the president and congressional Republicans is crucial as it would simultaneously grow the economy and the tax base.

Managing the federal government’s massive debt will require shedding timeworn conventions and adopting new ways of thinking. It is no small task.

But then, as President Trump is fond of saying, “Remember, there’s no such thing as an unrealistic goal — just unrealistic time frames.”

James Carter served as the head of tax policy implementation for President Trump’s transition team. Previously, he was a deputy assistant secretary of the Treasury under President George W. Bush and served on the staff of the U.S. Senate Budget Committee.

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