The U.S. Is Not Prepared for the Next Economic Shock…

but we don’t seem to mind making it worse

This is an excerpt from a post by the Committee for a Responsible Federal Budget.

It’s a long post, but persevere.

Crafting the appropriate policy response for the next shock is challenging in the best of times and made especially difficult in the context of large structural deficits, high levels of debt, elevated interest rates, and ongoing inflationary pressure – all of which we have now.

In the past, the government’s responses to economic downturns have left us in a worse fiscal position. For instance, debt held by the public rose by roughly 20% of GDP during the COVID-19 pandemic and by roughly 35% over the course of the Great Recession.

While increased borrowing in response to an economic shock is often justified, it should be followed by an effort to reduce borrowing and debt levels after the shock has subsided. Unfortunately, policymakers have tended to do the opposite and have simply continued borrowing at elevated levels. As a result, our nation is in a worse fiscal position today than it has ever been going into any kind of economic downturn or emergency.

When the COVID-19 pandemic hit, debt was 79% of GDP and the deficit was 4.6% of GDP. Entering the Great Recession, debt totaled 35% of GDP and deficits 1.1%. Before the dot-com bubble burst, debt was a similar 34% of GDP and the country was running annual surpluses. In all three cases, interest consumed about one-tenth of all federal revenue.

Today, debt is roughly 100% of GDP, deficits are near 6% of GDP, and interest consumes almost one-fifth of federal revenue. Inflation also remains elevated above target at around 3%, and long-term Treasury yields remain high by recent standards – over 4% for ten-year notes and approaching 5% for the 30-year bond.

The U.S. has never entered an economic downturn or other emergency as indebted as it is today, with deficits as large as they are today, or with as little fiscal space as we have today.

Our dismal fiscal outlook, in combination with lingering inflationary pressures and ongoing Treasury market volatility, makes crafting any response to a potential future economic shock extremely difficult. Not only must such a response be robust enough to sufficiently address the shock, it must also be designed in such a way as to make clear the U.S. will not go ever deeper into debt as a consequence.

Policymakers should therefore include measures to improve the long-term fiscal outlook in any emergency response in order to make near-term borrowing easier and less costly, keep interest rates lower, and strengthen long-term economic growth.

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In an October 15, 2024, interview at the Economic Club of Chicago (with Bloomberg’s John Micklethwait), Trump defended his plans against projections of adding trillions to the debt, saying tariffs would revitalize manufacturing and bring in enough revenue to ease deficit concerns. He dismissed analyst estimates (e.g., $7.5 trillion added over 10 years) by arguing growth and trade policies would make deficits irrelevant or manageable.

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And then there were the promises of DOGE

In summary, while DOGE implemented significant disruptions—particularly to the federal workforce and certain discretionary programs—it failed to deliver meaningful net reductions in federal spending or deficits. Spending rose overall, and claimed savings were often overstated or offset by other costs. Nonpartisan and media analyses consistently describe it as having more symbolic/political impact than fiscal success.

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The Long-Term “Rising” Reality

Despite the recent monthly improvements, the CBO and other fiscal watchdogs warn that deficits are still projected to rise over the next decade.

• Annual Projections: The total deficit for 2026 is projected to hit $1.9 trillion.
• The 10-Year Outlook: By 2036, the annual deficit is expected to grow to $3.1 trillion.
• The Debt Spiral: For the first time, interest payments on the national debt are on track to exceed $1 trillion annually. ^{As the total debt grows, the cost of “carrying” that debt increases, which in turn feeds back into the deficit.}

Current Drivers of Growth

Social Security up 8%

Medicare up 9%

Net Interest up 8%

In short: while the government is bringing in more money right now (mostly via tariffs and income taxes), it isn’t enough to offset the structural growth in mandatory spending and interest costs.

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In addition, we still need to find a way to fulfill the promise of “protecting” Social Security and Medicare.

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President Trump recently announced a defense budget request of $1.5 trillion for FY2027 — a more than $600 billion increase over the prior year’s request — signaling the administration’s view that current funding levels are insufficient for military modernization and readiness. 

Iran

What’s Unfunded

The unbudgeted costs break down into munitions replacement (approximately $3.1 billion) and replacing combat losses and repairing damage (approximately $350 million) — neither of which was covered in existing appropriations. House Committee on Appropriations

The Emergency Funding Request

The Pentagon has reportedly put together a $50 billion supplemental budget request to replace Tomahawk and Patriot missiles, THAAD interceptors, and other damaged or depleted equipment from the first week of fighting. House Speaker Mike Johnson has told Politico he expects the Pentagon to formally request that emergency funding.