The Debt Pile.

Profligacy on steroids.

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Here’s what they didn’t talk about at The Republican National Convention. And here’s what they won’t talk about at The Democratic National Convention. As Mary puts it, “we’re all Argentines now.” — JE

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Something happened on June 27 that was promptly forgotten in the uproar about Joe Biden’s debate performance that night, and all the fast-moving election news since. But it merits attention, for the light it may shed on our country’s future as a world leader, no matter who ends up in the White House.

Just hours before the Biden-Trump debate, the head of the International Monetary Fund held a news conference in Washington to unveil the Fund’s new country report on the United States. We tend to think of the IMF as the overseer of debt pariahs, but in fact it also monitors the world’s wealthy nations, because the missteps of the rich can unintentionally hurt the others. 

The news conference went much as you’d expect, keeping in mind that the United States is the IMF’s biggest capital contributor and has by far the most votes. In any institution it’s going to be awkward when the staff has to criticize the chairman of the board. Managing director Kristalina Georgieva, a Bulgarian national, was at pains to let the good U.S. indicators offset the bad ones. Yes, U.S. poverty was up, but inflation was down. Yes, the U.S. banking system still had weak spots, but the market for Treasuries was getting stronger. Last year’s alarming flood of illegal immigrants had a silver lining; it expanded the U.S. labor supply.

But there was no ignoring the elephant in the room: Rampant U.S. government spending, financed by debt, was getting out of hand. The United States was deeply indebted even before the pandemic, and its response to the pandemic drove it much deeper. Now, four years later, the fiscal stimulus was over and the debt should be shrinking. But it was still growing.

“When there is a strong economy, it is time to arrest and reverse this trend,” Georgieva said, with a smile that seemed to say, “We all know perfectly well that’s not going to happen.”

How bad is this? 

First, some definitions: The federal debt is the accumulation over time of each year’s deficit spending. The United States has a budget deficit almost every year. It gets cash to cover the deficit by issuing Treasury securities. If you want to know how big the U.S. debt is, you look at the value of all the Treasuries outstanding. This summer the pile is worth $35.12 trillion, the most ever in dollars and the highest of any country in the world by amount. That’s causing consternation. But big numbers like $35.12 trillion aren’t meaningful out of context, so economists usually express both the deficit and the debt as percentages of GDP. That allows better comparisons across the years and between countries. 

Measured that way, the federal debt isn’t America’s biggest ever, but it’s close. The highest ever was in 2020, when the government rushed forward with massive, costly fiscal-stimulus programs, to tide the economy through unprecedented business shutdowns. Without those federal programs, U.S. unemployment threatened to hit 1930s levels. The U.S. debt-to-GDP ratio shot to 132 percent that year. Until then, the all-time high was in 1946, when the ratio was 118.9 percent. 

And World War II was over, the economy was booming, and the debt ratio started falling the very next year. It continued to fall until 1981, when it bottomed out at 31.8 percent. 

Measured that way, We the People are now carrying roughly four times the federal debt that we did when Ronald Reagan was inaugurated. 

What’s bothering the IMF now is that the pandemic has ended, and the fiscal stimulus is over, but the federal debt keeps growing. It waned at first, in 2021 and in 2022, but then it turned back up. It’s piling up faster because the federal government is spending more, especially on entitlements like Social Security and Medicare, and on the interest on the outstanding debt, thanks to higher interest rates. 

The IMF measures the U.S. debt at 123.2 percent of GDP this year, still less than the 2020 record, but not for long. It’s on track to be 134 percent of GDP in 2028 — a new record — and will hit 140 percent in 2032. That should be interesting. It’s just a couple of years before the Social Security program is due to exhaust its resources and give all retirees a 25 percent haircut. 

The new IMF report on the United States calls the trend “a growing risk to the U.S. and global economy,” and “a significant and persistent policy misalignment that needs to be urgently addressed.”

It’s strange to hearing the IMF scold the United States about economic mismanagement. When an IMF team talks to, say, Kenya, it’s dealing with a country that’s been shut out of the capital markets but urgently needs more money. It turns to the IMF as the world’s lender of last resort. The IMF arranges a bailout, with a program of fiscal reforms, designed to ensure the money will be paid back. Then the IMF can use it to rescue somebody else.

In Kenya’s case, the IMF rescue came in 2021, when Kenya’s debt-to-GDP ratio was 68 percent. As part of the fiscal reform, the government reduced fuel subsidies. Gasoline prices shot up. Then the government levied a new 3 percent tax on all workers and employers, and raised income taxes on high earners. Needing still more revenue this spring, lawmakers pushed through a 16 percent consumption tax on bread, plus an “eco” tax on commonplace things like disposable diapers and plastic that harm the environment. People took to the streets. The police cracked down. Dozens were killed. A chastened President William Ruto fired all but one member of his cabinet and said he would start listening to his people. 

Fiscal reforms soured this summer in Bangladesh, too. The country had just qualified for another $1.1 billion tranche of its $4.7 billion rescue loan in June when protests broke out over reinstatement of an old quota system for government jobs. In July things got worse when the government tried to make public university faculty contribute more to a national pension fund. The faculty walked out. The students joined them. Prime Minister Sheikh Hasina suggested the students were “razakars,” a rude word meaning “collaborators.” The armed wing of the ruling party — yes, it has an armed wing — began attacking the students with live ammunition. Police and paramilitary forces joined in. An estimated 266 people were killed, including 32 children. The protests continued and earlier this month the prime minister fled the country. 

For most Americans, violent civil unrest fueled by fiscal reforms is totally unthinkable. Even with a debt ratio of 123.2 percent — close to twice that of Kenya — the United States can still borrow money whenever it needs to. Even after a couple of downgrades, investors still call U.S. Treasuries “risk free.” Why worry about austerity? 

Georgieva is the first IMF chief whose country has been through an IMF rescue, and she seems determined to make Americans see that debt can have consequences. She sees the upcoming expiration of the 2017 tax cuts as “an opportunity to engage in a broader societal discussion about tax reform and the need for additional sources of revenue.” 

The new IMF report even makes it possible to see what it would be like if an IMF austerity plan were imposed on the United States. Not a very tough one. Just enough for the United States to reduce its debt to an acceptable level. It’s not enforceable, because the U.S. isn’t broke. But Georgieva said the IMF and the U.S. Treasury recently had “a very robust discussion” about it.  

Here’s how it would work: The IMF plan calls for the United States to reduce its budget deficit in each of the coming years. Every year, some of the outstanding Treasury debt will mature and be paid off. If the U.S. government can keep its budget deficit small enough, it won’t add enough new debt to the pile to replace the old debt that matures. Little by little, the debt pile will shrink. 

“We’re recommending a fairly long period of time,” to do this, Georgieva said. “We’re talking about this decade, not next year.”  

How much of a deficit reduction are we talking about?  

The U.S. deficit is currently running at about 3.8 percent of GDP. The IMF’s plan calls for the United States to cut spending and raise taxes enough to turn that 3.8 percent deficit into a 1 percent surplus every year. To make the numbers work, the U.S. has to find some combination of spending cuts and tax increases equal to 4.8 percent of GDP. (In dollars, that would be about $1.4 trillion this year.)

“Staff views this adjustment as feasible,” said the IMF report. 

And it really isn’t that onerous. If the United States can stick with the program, its debt would fall back to where it was before the pandemic, a mere 108.1 percent of GDP. No one’s ordering the United States to go back to the halcyon days of 2008, before the bank bailouts and everything else, when the federal debt was just 67.5 percent of GDP — close, coincidentally, to what Kenya defaulted on. But the IMF isn’t pushing that. It just notes that if that were the goal, it would take a much tougher austerity program. 

The IMF report has a helpful list of nips and tucks the United States could take to get those 4.8 little percentage points. Some examples: 

–Double the Tax on Gasoline and Diesel: These taxes have been stuck at 18.4 cents per gallon for gasoline, and 24.4 cents per gallon for diesel, since 1993. The resulting revenue has lost about half its purchasing power since then, so the IMF thinks the United States could double each tax. That would raise revenue by a princely 0.15 percent of GDP. 

–Raise the Corporate Tax Rate: The Tax Cuts and Jobs Act of 2017 cut the U.S. corporate tax rate to 21 percent from the previous 35 percent. The corporate rate won’t sunset in 2025. It’s going to stay at 21 percent. The IMF suggests raising it to 26 percent. That would yield revenue of around 0.3 percent of GDP per year. 

–Raise the Social Security cap on taxable income: Currently, the 6.2 percent Social Security payroll tax is withheld from each worker’s income up to $168,600. The IMF suggests taxing up to $250,000 instead. That would yield 0.4 percent of GDP per year. 

–Update Social Security’s inflation index: Social Security increases retirees’ benefits for inflation, but it uses an inflation measure from 1975. More realistic ones have been devised since then. One, Chained CPI, takes human behavior into account and calculates the inflation rate just a shade lower than the 1975 calculation. If Social Security switched rates, retirees would still get their annual increases, but they would be a little smaller. The IMF says this would save about 0.1 percent of GDP per year. 

–Phase in a Federal Consumption Tax: Many countries have both an income tax and a consumption tax, usually a Value Added Tax. The United States doesn’t, and the IMF suggests phasing one in. A broadly based 10 percent Value Added Tax would yield about 2 percent of GDP per year. 

–Drug Price Negotiations: Medicare currently negotiates the prices of a small number of prescription drugs. The IMF says that if the list were expanded, the Treasury could save about 0.1 percent of GDP per year. 

–End Four Tax Expenditures: Tax expenditures are subsidies in which the government doesn’t dish out money, but rather, declines to tax certain things. There’s a lot of money in certain tax expenditures. The IMF suggests scrapping these four: 

++The $250,000 capital-gains exclusion on the profit from selling your house ($500,000 for married couples); which is around a $42 billion annual subsidy.

++The deduction for mortgage interest on your house, in effect a $30 billion subsidy. 

++The deduction for state and local taxes paid. It was costing the U.S. Treasury $100 million a  year until it was capped at $10,000 in the 2017 tax package. The cap is set to expire next year, and Treasury’s annual losses would resume. The IMF says the cap should stay. 

++The subsidy for employer health plans. This is obscure, but it’s big. If you get health benefits at work, your employer most likely takes money from your pay, pre-tax, to cover the cost of your premiums. Pre-tax money buys more, so you get more health coverage at a lower cost. Congress’s Joint Committee on Taxation has estimated that this year, this practice is subsidizing workers’ healthcare to the tune of $200 billion. The IMF suggests ending it.

The IMF says that if all four of these tax expenditures were cut, the Treasury would gain 1.4 percent of GDP. 

Remember, the IMF plan calls for reforms that would capture 4.8 percent of GDP. What’s striking about these suggestions is how hard they would be to legislate, yet how little they would move the needle. Even if all of the IMF’s suggestions listed above were put in place, they’d only produce 4.5 of the 4.8 percent of GDP that the IMF wants us to find. 

Don’t worry. The IMF has a couple more ideas: 

–End the Tax Break for Masters of the Universe: Ooh, yes, let’s choose that one! Currently the “carried interest” provision lets private investment firms’ partners pay a 23.8 percent tax on their gains, rather than the 37 percent top marginal rate. The IMF doesn’t estimate how much this would yield, probably because the revenue would be volatile from year to year. 

–End the “Step Up Basis” for Capital Gains: Currently, the value of inherited assets is reset at the date of a benefactor’s death, so that the capital gains accrued during that person’s life are never taxed. The IMF suggests ending this practice but doesn’t estimate how much more revenue this would yield. But imagine the outcry from people who stand to inherit appreciated assets in the coming years.

What’s also striking about this list is how totally oblivious the presidential candidates are to the ideas, or apparently to the very notion of sustainability as Election Day approaches. It’s reminiscent of the last election in Argentina, where the incumbent gave away so many tax cuts that only one-fifth of the One Percent were left to pay any income tax at all. 

Kamala Harris likes to talk in generalities, about supporting women and small business, helping the working poor and middle-class families, promoting paid family leave and affordable child care. 

“Building up the middle class will be a defining goal of my presidency,” she said. “Because we here know when our middle class is strong, America is strong.” 

Well, so much for Harris tinkering with Social Security indexation or employer health benefits, or — God forbid! — establishing a Value Added Tax. (The proposed 16 percent bread tax that triggered riots in Kenya would have been a Value Added Tax.) 

Like President Biden, Harris has promised not to raise taxes on anyone earning less than $400,000 a year. The IMF report does say several times that this promise will have to be broken in a true fiscal reform — some of those people are going to have to pay more. 

Donald Trump isn’t any better. He says he’ll make the 2017 tax cuts permanent. (The IMF warns that would add about 1.7 percent of GDP to the federal deficit.) On a campaign trip to Nevada, a swing state where hotels, restaurants and casinos dominate the economy, he promised to liberate hospitality workers from having to pay taxes on tip income. 

In an interview with Bloomberg Businessweek, he spoke of lowering the corporate tax rate to 20 percent. But why stop there? He later said that as president he’d push for 15 percent. After that, he started calling for an end to the tax on Social Security benefits. The only people whose Social Security benefits are taxed are well-to-do retirees with other resources to draw on. The roughly 60 percent of older Americans who receive small Social Security benefits and haven’t saved much for retirement savings — the ones who really need every penny of their Social Security payments — are not taxed and would not benefit from Trump’s largesse. 

The Congressional Budget Office says that ending the taxation of Social Security benefits could cost $1.8 trillion over the next ten years. If this giveaway happens, somebody will have to pay for it. If you’re still working and paying taxes, that somebody is going to be you. 

“We’re all Keynesians now,” Richard Nixon said ruefully in 1971, as he gave Congress a budget plan with an $11.6 billion deficit. But we’ve gone way past that point. Take a look at us through the IMF’s eyes. We may all be Argentines now. 

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