The Problem With a $2 Trillion Deficit

from New York Times I'm Michael borro. this is the. [Music]. daily on Friday the US government. reported that over the past year the. federal deficit the gap between what the. US spent and what it earned doubled to. nearly $2. trillion that figure seems to validate. the worries of congressional Republicans. about government spending which have. been at the center of the messy fight.

over who should be house speaker but as. my colleague Jim tankersley explains the. Republicans plans won't come close to. solving the. problem it's Monday October. [Music]. 23rd so Jim $2. trillion we now know know is our deficit.

for just the last year and I'm not an. economist that seems like a huge number. and I'd like you to put that into. perspective it's a big deficit it's. twice the size of the deficit last year. so a big jump um it's only the third. time in American history when we've had. a $2 trillion deficit and the first two. were in the depths of the pandemic and. we're in a really different economic. place than we were those last $2. trillion deficits we're not just.

reopening from the pandemic we're back. and usually when an economy is growing. rapidly like our economy has been over. the last year deficits go down but this. one did not now Jim deficits are always. a tricky subject. Republicans talk about it now all the. time in fact they have put it at the. center of this chaotic speakership fight. that they're now. having yet you you have trained us.

through many long conversations to. understand that deficits aren't. necessarily that big of a deal so how. much should we really care about this2. trillion doll number I think we should. care a lot and people I know smart. people who I talk to for my stories who. have for a long time said don't worry. about deficits don't worry too much. about deficits are starting to worry. more and it's because of two big changes. in circumstances right we update our. views based on the information that.

changes around us the first big change. is that you don't normally run big. deficits when the economy is growing and. so that's an alarm Bell in itself um. historically when you get growth what. happens is that uh the government brings. in more taxes cuz people are earning. more money and spending more money and. the deficit usually goes down but not. here right but the second reason why a. lot of economists worry about the. deficit right now when maybe they. weren't even a few months ago is how. much it's costing the country all of a.

sudden to borrow all this money we need. to cover the deficit borrowing costs for. the federal government have shot up in. the last few months and if they stay. high that is going to become this sort. of feedback loop for deficits we pay a. lot more on interest and therefore the. we have to borrow more to pay the. interest and that could become a really. bad cycle for the government and the. economy you're describing a kind of. financial double whammy that sounds very. great.

I want to get to the root causes of. these two changed circumstances you're. describing the fact that our deficit. doubled despite a healthy economy and. the fact that our borrowing costs to. make up for that deficit have grown so. quickly so let's start with why our. deficit got so big in the past year the. biggest reason is the amount of tax. revenue that we brought in last year as. a country was just way down down by like. 9% why was that well we cut a bunch of.

taxes over the last couple of decades. that includes the Trump tax cuts which. passed in 2017 but we knew about those. Trump tax cuts we knew they were going. to hold down revenues and revenues still. came in lower than forecasters expected. and that was because of all sorts of. weird little reasons capital gains taxes. like what happens when you sell a stock. they went way down tariffs Revenue went. down we we just bought less stuff. imported from other countries uh there. were natural disasters all over the.

country that caused the IRS to change. some tax filing deadlines for like. people in California and so they didn't. have to pay certain taxes before the end. of the fiscal year all of that added up. to this huge drop in tax revenues so the. big thing that happened here is that we. took in a heck of a lot less tax money. than we did the year before but as we. all know deficits happen when our. spending outstrips our tax revenue so. I'm curious did we spend a lot more even. as this tax revenue fell by I think what.

you said 9% it's not a secret we're. spending a lot of money right now in. this country for example on the war in. Ukraine we're about to spend even more. money on the war in Israel is that a. factor in this deficit actually not a. very big one spending didn't actually go. up very much last year even with what we. spent in Ukraine I know Republicans like. to talk about this a lot but this type. of sort of emergency defense spending. Aid to foreign countries it's mostly. short-term and it's not very big in the.

context of the overall budget and. certainly not very big in the context of. our Long Haul budget problems so. spending didn't go up by nearly as much. as tax revenues fell the Big Driver here. is taxes it's that surprisingly big drop. in tax revenue okay clearly we have a. tax problem now Jim walk us through this. second big change you alluded to before. that compounds this problem the high.

cost of borrowing money to fill our. deficit Gap okay so when the government. takes in less money in tax revenue than. it needs to spend on Government Services. it has to borrow the money and there's a. way that it borrows the money it issues. bonds treasury bonds yep and when. interest rates are low in the economy. which they have been for a really long. time since the 2008 ccial crisis the.

cost of borrowing for the government is. not very much it's able to sort of to go. out get a bunch of money not have to. worry about paying a lot more back and. so the total interest costs that it's. paying as part of its budget are low but. now what's happened is the interest rate. of a 10-year treasury bond has been. hovering right around 5% MH which is. significantly higher than we've. experienced in recent years if it's it. stays at 5% for a long time that means.

significantly higher interest costs for. the government which means it's going to. need to borrow more money to pay those. costs so basically sounds like the. government is facing the same Financial. scenario that everybody else in America. is facing right now which is higher. interest rates on their loans to buy a. car to buy a house if you want to go buy. a house right now instead of paying 2%. 3% which you did a decade ago you're. paying five or even more percent and it. sucks. right it's really rough for the.

government's balance sheet that's a lot. to be paying in interest at a time when. you're going to have mounting interest. costs and mounting deficits anyway okay. so just walk us through what the world. looks like for a country with as much. deficit as we have and a. 5% interest rate cost of borrowing so. last year we're by the way interest. rates were not 5% for all of last year. they were lower for a while and then. they've jumped in recent months but but. last year year the federal government.

spent. $659 billion just to pay interest on the. national debt just for interest wow and. if rates stay at 5% that number is going. to go way up right and that's a. tremendous amount of money to have to. take out of the economy just to pay. interest I'm thinking of all the good. that money could do if we didn't have to. spend it on interest on debt perhaps it. could be used to build a bridge. infrastructure technology child care.

whatever something else that would. benefit a lot of people so yeah this is. one of the worries about higher interest. costs is that that interest cost starts. to what's called crowd out other. spending so maybe we can't build more. bridges because we have to pay this. interest or maybe we have to reduce. Medicaid benefits and health care to. people who really need it the big worry. is that if Congress doesn't want to get. into this. ongoing big spiral of bigger deficits.

and higher borrowing costs and more and. more of the federal budget going to pay. interest on the debt lawmakers are going. to have to make some pretty tough. choices about taxes and spending and I. don't know if you've been watching. Congress lately but they are not exactly. really good right now at making tough. choices or any choices or any choices. but let alone truly tough choices right. [Music].

we'll be right. back Jim we just agreed that it's a. tough time in Washington to confront the. financial challenges we're talking about. but I do want to pause to note that. Republicans in their own very.

complicated and to many people. dysfunctional way are talking a lot. about deficits spending and debt right. now so I want to talk through that and. make sense of how Republicans and in a. few moments Democrats are thinking about. the scale of the deficit in this moment. and these higher borrowing costs yeah. let's start with the Republicans. Republicans have been warning for more. than a decade that America deficits were. too high and that we needed to bring.

them down with the exception of when. Republicans were president and that is. an important thing to keep in mind here. they passed a large tax cut under. President Trump right and deficits went. up and they didn't complain in the way. they are complaining now with some. exceptions there are some Republican. fiscal Hawks who have complained. throughout in a bipartisan fashion but. those Republicans who do talk about. deficits and have sort of consistently. over the years what they're really.

talking about is reducing spending. levels and the size of government they. don't want to increase revenues they. want to reduce the amount that the. government is spending and what those. Republicans who are clamoring about. deficits are talking most about is a. very particular type of spending which. is non-defense discretionary spending. just Define that and includes a bunch of. things that are like fairly popular. national parks the department of educ. ation and you know other things keeping.

the business of the government running. day-to-day pretty small in the context. of a budget that also includes National. Security and large social programs like. Social Security and Medicare and so here. is the way that I think about it if the. deficit is sort of a leak in the whole. of our national budgetary boat um that. is growing over time you could think of. non-defense discretionary as the rain. falling on the deck and. not where the water's really coming into.

the boat there is water coming in it's. not the Big Driver you could cut it to. zero and still not solve the problem so. you could stop the rain the hole is. still going to be there and I think if. all you're focused on is these cuts that. they would like to see in discretionary. spending you're not anywhere close to. making a dent in the problem and the. best Sort of hope you would have as one. of The Advocates of that plan is that. you've taken a meaningful First Step but. it is not a solution and they are not. arguing over an act ual like way to.

change the course meaningfully of the. national debt that's really helpful. context so what about Democrats and. President Biden how do they talk about. these deficits and the borrowing costs. and the threat of the two of them. interacting in all the ways that. everyone now fears if I'm being honest I. don't feel like Democrats as a party. talk all that much about the deficit. yeah the Biden Administration has been. really tough to pin down on this the the. president and his advisers won't tell.

you exactly what they think the ideal. deficit number should be they just say. they want it to be fiscally sustainable. like they're not trying to balance the. budget over time none of their proposals. have done that but they do think that we. need more tax revenue over time to make. that sustainability happen so what. they've settled on is proposing deficit. reduction with things they think voters. will really like like what that's mostly. raising taxes on corporations and rich.

people in short Democrats mostly want to. reduce deficits by raising taxes at the. top and Republicans entirely want to. reduce the deficit by cutting spending. you've already said that the Republican. plan isn't really up to the scale of the. problem is the Democratic plan. potentially the tax plan up to the scale. of the problem very few budget experts. think that's possible entirely with tax. increases on the rich and Cly certainly. the amount of tax increases that the.

president has proposed now is probably. nowhere close to enough to actually. stabilize the debt and deficits in a. world where borrowing costs stay really. high got it so what the world really. needs is some sort of a goldilock. solution that takes the Democrats. instincts perhaps to raise taxes and. marries it to the Republican instincts. to cut spending and this is where we get. into the real hard choices problem the. sort of Think Tank industry around.

stabilizing the budget in Washington. basically agrees that you need a mix of. two things to stabilize deficits the. first is some tax increases which. Republicans refuse to do and the second. is a thing that President Biden has. unilaterally ruled out all Democrats. basically rule out and most Republicans. also rule out including former president. Trump which is reducing government. spending on social security and Medicare. H the big entitle programs right right.

and so that's what the fiscal Hawks say. hey we need to make some changes over. time we can raise some taxes we can. reduce some benefits and that's the. goldilock solution but in this case it's. like everybody hates Goldilocks and so. it's going to be a very difficult I mean. it's just a very difficult conversation. for Washington to even start having. about the actual drivers of debt when. seemingly tax increases are off the. table and so are you know the big. spending programs. are respons theed grow anding in the.

years to come when was the last time we. got even close to this goldilock style. solution yeah so the last time we had a. fiscal trajectory that got itself not. just to stabilized deficits but an. actual balanced budget was this magical. time you might remember Michael called. the 1990s oh yes I was running because I. thought we ought to change the direction. of the country I was worried about the. decline in middle class incomes the. growth of the.

underclass an exploding deficit a. declining level of investment Bill. Clinton was President and first he and. Democrats raised some taxes and then. when Republicans took over the House of. Representatives Clinton worked with them. and agreed on some spending cuts seems. to me that a lot of our problems are not. particularly partisan in nature Clinton. would make a point about this having. said that I'd like to now bring the. speaker on let him say a word or two and. then we'll get on with your questions Mr. Speaker. early on he even did a town hall with.

the Republican Speaker of the House new. Gingrich to just talk about how they. were going to bring down the deficit. together I believe in this process. working with the president with the. house and the Senate with the governors. I believe we can get to a balanced. budget in a positive way but it's got to. be done exactly like here today so I. hope with your permission the president. and I will now have a dialogue with you. and maybe the and then we got a bunch of. great economic growth and all of that. combined to actually balancing the. budget for several years at the end of.

the 90s right a truly balanced budget. same money coming in as went out yes for. the kids out there it once happened it. once happened um and I think really. crucially the sort of engine behind. Clinton's efforts to do that was an. actual economic theory that has now. become associated with the guy who was. his treasury secretary Robert reuin. Reuben AMX and the idea of romics was if.

you can reduce the deficit and maybe. even balance the budget then you can. actually Stoke more economic growth MH. and you do that because lower deficits. help to relieve pressure on interest. rates they can help interest rates fall. in the economy and the idea being lower. interest rates mean more people borrow. money to buy houses or cars or whatever. there's more economic activity you can. get a growth bang for deficit reduction. and that theory totally fell out of. favor among Democrats in particular in.

the last couple of decades why because. economic conditions changed interest. rates were low and there wasn't going to. be much of a bang for deficit reduction. in reducing rates that were basically. zero across the economy but now that. they're climbing again now that that. 10-year treasury is back around 5% you. start to hear some Whispers from some. people around Washington about could. Ruben obic make a comeback could. Democrats Republicans work together to.

reduce the deficit and by bringing down. the deficit sort of stoke more growth. and lower the cost of all that borrowing. and lower the cost of all that borrowing. exactly and so um not saying we're there. yet but there is speculation that we may. be nearing another one of these Ruben. night moments where a reduced deficit. could help grow the economy and create. sort of a virtuous cycle where more. growth helps bring down the deficit. further in the future future right and.

government money is freed up to do the. kinds of things we were talking about. before like maybe invest in child care. and if the government invests in child. care maybe a parent who puts their kid. in child care opens a business and that. business is a success and it generates. more tax revenue which we know from last. year we need That's The Virtuous cycle. you're talking about lots of good things. can happen that would be sort of the. platonic ideal of The Virtuous cycle. there or the Ruben ideal of The Virtuous. cycle there you might say but this is. the part where I guess we have to be. very honest that neither party even if.

they decided one day that Ruben omix was. the. solution seem all that inclined to. accept the version of economic events. that would be required to pull it off. right Democrats don't want spending cuts. Republicans don't want tax increases and. Congress is split in this moment yeah. it's basically impossible for me to. imagine President Biden standing up. giving us State of the Union speech and. saying we need trillions of dollars of. new tax taxes on rich people and. corporations in order to bring down the.

deficit we're not going to spend the. money anything else we're going to bring. down the deficit and Republicans. applauding him and sending him a bill to. do it I just don't think that that that. that's possible they have opposed tax. increases as a party for a very long. time and I don't think there's any. chance they would go for something like. that in the same way it's hard to. imagine Democrats in Congress who to be. very clear would like to raise taxes in. order to spend that money on more. programs like Child Care like it's hard. to imagine them agreeing to even deeper. Cuts in spending you know from.

Republicans particularly ones that touch. Charis programs like Social Security and. Medicare that's not where they are as a. party either and so you're at this. moment where really it is very difficult. to imagine either party adopting the. other part's view of what vehicle is the. right one to take to reducing the. deficit even if they could agree that. reducing the deficit might be a good. thing and so I think probably what. you're really looking at is more. economic disruption as possibly the only.

thing that could be a forcing agent by. which I mean if you think of 5% Bond. yeld is bad wait till it goes higher if. borrowing costs go from five to six to 7. to eight you might see people's. positions change a bit but I don't even. know then I really think that the fiscal. problem is so wrapped up in the great. political impass that we are in in this. country and the sort of inability of law. makers to find common ground that it.

seems very difficult to imagine anything. close to a resolution for this anytime. soon right what you're really getting at. is our political dysfunction begets our. fiscal dysfunction and then our. political dysfunction ensures that. there's no solution for our fiscal. dysfunction yeah I think that's exactly. [Music]. right and that is kind of the really. difficult thing about fiscal debates. particularly in Washington today say. there are not easy loow hanging fruits.

to pick that actually make a difference. in these deficit issues and the ideas. that smart people have on the table are. at best hail Mar's to actual. progress well Jim thank you very much we. appreciate it thank you. Michael we'll be right back. [Music].

here's what else you need to know today. with an Israeli ground Invasion imminent. Egypt opened its border to allow for. humanitarian Aid to enter Gaza for the. first time since the War Began but with. food and fuel cut off to the territory. Palestinian leaders called the initial. Convoy of 20 trucks entirely.

insufficient to meet the needs of the 2. million people inside of. Gaza the precise timing of an invasion. remains unclear but clashes between. Israel and its Arab neighbors Lebanon. and Syria intensified over the weekend. raising fears that the conflict could. quickly widen Beyond Gaza in an effort. to prevent that the US said it was. supplying Israel with new air defense. systems that would allow it to repel. missile attacks from its.

neighbors meanwhile president here's Jud. hey. Judas hello president President Biden. spoke with the two American hostages. released by Hamas on Friday a mother and. daughter from Illinois who were visiting. a kibuts when they were kidnapped I'm so. glad you're home I'm not home I'm glad. you're out thank you so very very much. hey Matt how are you God love you I just. want to say thank you for all your. services.

for and at least 10 Republicans have. announced they will run for speaker of. the house since Friday when the party. voted to reject its latest nominee. representative Jim Jordan of. Ohio as of today the house has operated. without a speaker for the past 19 days. bringing much of the chamber's work to a. halt. [Music].

today's episode was produced by Alex. Stern Eric krupky summer tamod Jessica. Chong and Sydney Harper it was edited by. Mark George and Lisa Chow contains. original music by Marian Lozano and. Alicia bitu and was engineered by Chris. Wood our theme music is by Jim brunberg. and Ben lansburg of. wonderling.

[Music]. that's it for the daily I'm Michael aaro. see you. [Music]. tomorrow.