About the author: Sheila Bair is former chair of the Federal Deposit Insurance Corp. and founding chair of the CFA Institute Systemic Risk Council.
I have seen more than my fair share of financial crises during my time in the U.S. government. I was the assistant secretary of the U.S. Treasury for financial institutions during the 9/11 terrorist attacks and chair of the Federal Deposit Insurance Corp. during the 2007-2008 financial crisis. The U.S. government resorted to deficit-financed spending and tax relief to these crises, and to the pandemic. Those decisions were right.
Unfortunately, once the crises passed, we just kept spending as if nothing had changed. Now, the resulting overhang of federal debt could itself be the cause of a future crisis.
Our gross national debt exceeds $35 trillion. This puts the federal debt held by the public at a staggering 99% of U.S. gross domestic product, nearly as high as its peak at the end of World War II. After the war, our “greatest generation” of political leadership steadily restored our nation’s finances, bringing the debt down to about 31% of GDP by 1981.
Unfortunately, more recent political leadership has concluded that deficits do not matter. Both Republicans and Democrats have settled on deficits as the easiest way to pay for politically popular initiatives, be they lower taxes (Republicans) or higher spending (Democrats). Elected officials are wary of braving the political pain of deficit reduction, knowing their successors could easily squander those hard-fought battles with more deficit-financed spending and tax cuts.
Case in point is the current election. Both presidential candidates are proposing tax and spending giveaways to curry favor with voters. The nonpartisan Committee for a Responsible Federal Budget projects that Vice President Kamala Harris’ proposals will increase the debt by $3.95 trillion over the next 10 years, which pales in comparison to Donald Trump’s plans, which will increase it by $7.75 trillion. Neither candidate is talking seriously about our unsustainable fiscal position, much less the related issue of projected funding shortfalls in two of our most important safety net programs, Social Security and Medicare. Based on current projections, the Social Security trust fund will run out by 2035, while Medicare’s Hospital Insurance fund will be depleted by 2036. Absent reforms to shore up these programs—and avoid automatic cuts—funding gaps will have to be filled with hundreds of billions in new deficit financing each year.