Elon Musk and President Trump’s Challenge – National Debt and Spending

In the most recent elections, the country overwhelmingly elected a Republican president, Senate, and House of Representatives. There were several reasons for the landslide victory, including out-of-control spending in Washington and the massive federal debt. Over the years, and especially during the pandemic, the federal government has accumulated an enormous debt that will put enormous pressure on subsequent generations. The new Doge Commission under the Trump administration means fiscal sanity will be restored in Washington. But even if Washington begins to act with fiscal prudence, the huge debt will take years to pay down and could harm the U.S. economy in the interim. In other words, things could get worse before they get better.

The negative effects of excessive government debt on the economy and society

Rising government debt presents headwinds towards economic growth. This was proven in a survey from the International Village Bank in September 2011. BIS is owned by 63 central banks around the world, including our own Federal Reserve System. A BIS paper titled “The Real Impact of Debt” states: “At moderate levels, debt improves welfare and fosters growth. But high levels can be damaging.” The study concluded that economic activity becomes more subdued when government debt exceeds 85% of GDP. The higher this ratio, the greater the impact. The paper goes on to state that “…too much debt undermines the government’s ability to provide critical services to its citizens.” It is widely accepted that debt is one of the key building blocks of a prosperous economy. Without debt, the country’s economy would suffer greatly. Again, some debt is beneficial, but too much is harmful.

US government debt

The national debt is currently $35.4 trillion. GDP is just under $29.3 trillion. A country’s debt is often measured as the debt-to-GDP ratio. This is calculated by dividing the amount of debt into the country’s GDP. If debt is greater than GDP, the ratio will exceed 100%. According to usdebtclock.org, America’s debt-to-GDP ratio is 122.87%. By comparison, it was 53.33% in 1960, 34.50% in 1980, and 59.46% in 2000. In recent decades, national debt has increased faster than economic growth (GDP).

During the 2008 financial crisis, America’s debt rose, spending increased, economic activity slowed, and revenues fell. But nothing compares to the recent increase from the pandemic. To explain, let’s refer to the following chart. From 1974 to 1984, debt more than tripled. From 1984 to 1994, it almost tripled again. Over the next decade, debt rose 1.5 times. From 2004 to 2014, it more than doubled. Finally, from 2014 to 2024, it doubled again. To even the most casual observer, this debt explosion is unsustainable.

What is driving the national debt?

When governments spend more than they collect, debt rises. If you look at federal spending (see chart below), you’ll see that it tends to increase during times of war and crisis. For example, during World War II, spending rose to support the war effort. After the war ended, spending returned to pre-war levels. After rising, spending fell again after the 2008 financial crisis. Spending during and after the pandemic tells a very different story. In the first year of the pandemic (2020), it increased by 50% from the previous year. It rose another 4.1% in the second year of the pandemic and fell by 8.0% and 2.2% in the next two fiscal years. Please enroll in 2024. Although the pandemic is officially over, federal spending has increased by 10.1% in 2024. According to Debtclock.org, federal spending now exceeds $7 trillion and revenue is just under $5 trillion. Therefore, the current budget shortfall is a record $2 trillion, which is added to the national debt.

address the national debt

How to get out of such a large debt? First, you need to align your expenses with your income. This means you need a balanced budget. Expenses need to be cut. Second, we need to grow our economy. Strong economic growth means more people are participating in the workforce, which translates into higher tax revenues. Politicians don’t seem to want to cut spending as members of Congress seek office. This is a strong argument for term limits.

Doge is focused on reducing waste and fraud, but there are concerns. If President Trump wants money to advance his agenda, whether it’s for deportations or AI initiatives, will Musk and Doge push back? Does this create a disparity between the two? Even if Doge manages to reduce spending, there will be a period of adjustment where things get worse before they get better.

In the long run, dealing with the federal budget and debt will prove beneficial. However, there may be difficult times as the nation adapts to a more lean and efficient government. A short-term disaster? probably. Long term benefit? absolutely.