The Debt Crisis Is Coming—Here’s What Could Happen
The exploding national debt
By Phil Gramm
This article appears in the Summer 2024 issue of the Coolidge Review. Request a free copy of the print issue.
Countries don’t go broke by borrowing too much money. People don’t go broke by the amount of debt they’ve got outstanding. They go broke when they can’t service the debt.
After the subprime mortgage crisis reached a critical point in 2008, you had an explosion in government spending that went on for four years, long after the recession ended. Then, in 2017, Donald Trump came into office with no commitment to fiscal responsibility. After that, the pandemic struck, and Joe Biden became president. From 2019 to 2020, total federal outlays rose by more than $2.1 trillion, according to official White House budget figures. That represents a single-year increase of 47 percent. And spending rose again the next year.
The Biden administration seemed willing to spend any amount of money that Congress would approve. The Federal Reserve expanded the money supply at the fastest rate since World War II. The inflation rate soared to 9 percent. Foreigners started dumping Treasury notes. Had the Fed not intervened, in my opinion, we might have had a come-to-Jesus moment then on debt—a time when we could not service our debt. Or at least, we could have seen some hint of what such a moment would look like.
Even in the Reagan years, Washington lost its appetite for controlling spending.
THE LIFE AND DEATH OF GRAMM-RUDMAN
My experience with fiscal restraint goes back to the Reagan era. It all started when I met David Stockman, soon after I entered Congress in 1979. Stockman and I both served on the House Energy and Commerce Committee, which took up a bill dealing with pipeline safety. I decided to offer a substitute for the pending bill. I’d been in Congress for two days, but the substitute bill passed—with David Stockman’s help. We got every Republican vote and significant number of the conservative Democrats on the committee. I was so impressed by what Stockman said that the first thing I wanted to do when the debate ended was run over and introduce myself.
We met, we shook hands, and started a partnership that you might say changed America.
We prepared a budget in 1980 that became the Reagan budget when the president named Stockman the director of the Office of Management and Budget. That budget plan was adopted because America had experienced nine years of 9.2 percent inflation, the Soviets were on the move all over the world, and interest rates had reached 21.5 percent. America in 1980 had voted for a change and they got it. We cut spending and eliminated three Social Security benefits in one day. But we didn’t achieve everything we wanted to achieve.
If you look at the whole eight years of the Reagan presidency, we reduced nondefense spending as a percentage of gross domestic product (GDP) by half a percentage point. Now, when you’re talking about a percentage of GDP, you’re talking about serious money. Meanwhile, we increased defense spending by half a percentage point of GDP.
These changes, together with the tax cut, stimulated economic growth. The tax cut quickly paid for itself. Very few taxpayers had paid any taxes at the previous top rate of 70 percent, but that high tax rate had affected their economic decisions and depressed growth.
With these moves, we broke the back of inflation and unleashed a twenty-five-year period of prosperity.
Even in the Reagan years, however, Washington lost its appetite for controlling spending. In Congress I watched all these amendments add money to appropriation bills. A lot of people looking over the congressman’s left shoulder told constituents back home that the representative cared about the poor, the sick, the tired, the bicycle rider—whomever. But nobody was looking over the congressman’s right shoulder to see whether he cared about the taxpayer.
To deal with this problem, I wrote Gramm-Rudman-Hollings. This legislation was signed into law in 1985 (and amended in 1987). The idea of Gramm-Rudman was to set a cap on the deficit and force government programs to compete against one another.
Unfortunately, the Supreme Court struck down the triggering mechanism for automatic spending cuts if Congress missed the deficit targets. To get the triggering mechanism back in the bill, I had to agree to let the winner of the 1992 presidential election decide whether Gramm-Rudman would continue.
Bill Clinton won that election, and Gramm-Rudman died.
The debt crisis will come to a head when the government can’t or won’t service the debt.
THE CRITICAL MOMENT
What will bring our current debt crisis to a head? The critical moment will come when the government can’t or won’t service the debt. When investors realize that the government can’t or won’t pay, you will see markets move.
The financial media write as if the Fed sets interest rates, but the market sets interest rates. And when doubts arise about the ability or willingness of the government to pay the interest due on the debt market, interest rates will skyrocket, and a crisis will occur.
So what is going to happen? Things that can’t go on forever don’t go on forever. At some point, there’s going to be a come-to-Jesus moment.
I wish I could be young and be there when it happens, but I had my opportunity of being young and being there when it really mattered. Had the government adopted the original budget Stockman and I proposed, the country would look very different.
But old men always say that if people had listened to them, things would have been better. We gave America a good twenty-five years. Now we’re waiting for the next crisis to call forth new leadership to do it again.
Phil Gramm represented Texas in the U.S. Congress for more than two decades, including eighteen years in the Senate. Before entering politics, Gramm taught economics at Texas A&M University.