The U.S. must address deficit spending and the national debt in a rational manner in the near term or face a reckoning in highly unpopular but unavoidable and debilitating reduced benefits, increased taxes, or a combination of the two. A looming rise in interest rates to historically normal levels will exacerbate the situation. A divided nation must debate fundamental philosophical positions about the size and role of government and find an acceptable path forward before circumstance forces bad choices.
The national debt is made up of two components 1) debt held by the public (foreign an d domestic) in the form of Treasury securities and 2) IOUs held by the federal government that are owed to other federal government accounts such as Social Security. The principal on debt held by the public is about $13 trillion and the annual interest payment is $218 billion. The principle on IOUs held by the federal government is about $5 trillion and the annual interest payment is $146 billion.
This debt grows each year through the accumulation of budget deficits. According to the non-partisan Congressional Budget Office (CBO) the federal budget deficit has decreased from $1.4 trillion in 2009 to $514 billion in fiscal year 2014. It is projected to decrease for the next few years followed by an upswing that will continue indefinitely. The cause is demographic. The baby boom generation is retiring. Their Social Security, and particularly their health care, are going to begin a strong and steady growth in expenses that will increase deficits and the national debt.
The Gross Domestic Product (GDP) of the U.S. representing the total of goods and services produced by the economy is $17 trillion. Therefore the total national debt of nearly $18 trillion dollars is more than the total annual output of the economy.
Federal debt as a percentage of GDP has reached 103% and is on an upward trajectory that is unsustainable. Debt obligations have not been as high since World War II. Debt averaged about 40% through the 1960-1980 period. It rose in the late 1980s to about 65% on average where it remained until 2008. Experts recommend a debt level of 50% as manageable level that provides room to deal with unanticipated crisis.
The average interest rate on national debt is 2.4%. This is about half of the average historical interest rate in the 5-6% range. Interest rates have been held down artificially by the Federal Reserve for purposes of supporting a lagging economy, but coincidentally made national debt interest payments low. Interest rates will inevitably rise to their historical levels and raise the percentage of the annual federal budget allocated to interest payments.
Increasing amounts of federal borrowing ultimately results in less money available for private capital investment because it forces interest rates to rise. Less capital decreases economic growth and a vicious cycle begins. Add to the situation a decline in the dollar as the world’s reserve currency such as China and Russia are currently orchestrating or an unforeseen crisis such as was experienced in the Great Recession of 2008 and the result is unimaginably calamitous.
The services, programs and benefits the federal government provides cannot be sustained. The U.S. has to make decisions now about the type of government it wants, but its citizens cannot on the one hand say they want lower taxes and on the other say “don’t cut my benefits or deductions.”
There are ways to change the future through a combination of aggressive economic growth, tax reform, benefit reform, and improved government effectiveness and simplification that can mitigate the severe negative consequences of inaction. We can leave our children a manageable debt if we have the will.
FOR THOSE WHO ARE INTERESTED IN MORE INFORMATION ABOUT THIS TOPIC THE INFORMATION BELOW IS PROVIDEDReplyDelete
What is driving the national debt in the long term? In a word – demographics. The population is aging. Fewer people are contributing to Social Security than are receiving benefits and an aging population increases health care costs.
The federal budget is driven by non-discretionary spending or entitlements – Social Security, Medicare, Medicaid, Food Stamps (SNAP) - which make up about 60% of the federal budget. Another 6% goes to paying interest on the debt, which will sharply rise in coming years. The remaining 35% is discretionary funding for national defense, education, research, transportation, agriculture, etc.
Cutting the $100 million payment to cotton farmers in Brazil (yes it’s true) might make us feel better, but it does little to solving the problem. The annual debate about the budget is about the 35% only. The entitlements must be tackled to make a difference.
Without radically changing the nature of our relationship with government to become a European style socialist society receiving cradle to grave benefits or drastically reducing the role of the federal government and eliminating many very popular programs through inadequate taxation we are going to have to find a position that reflects traditional and historical levels of federal involvement.
In recent history the size of the federal government has averaged in the 18% of GDP range, but in recent years revenues have been as low as 15% and spending almost 25% of GDP. The gap between the two is the deficit.
We have to decide how much federal government we want as a percent of our GDP and fund it into balance. Is it 18, 19, 20%? It makes a difference which and we have to decide. See the Congressional Budget Office Table below for a graphic representation of the present trajectory.
“White House Burning, The Founding Fathers, Our National Debt, and Why it Matters to You,” Simon Johnson and James Kwak, Pantheon Books, New York 2012 is recommended for an easy read in understanding the issues related to the debt. The two make recommendations to correct the problem. They are too reliant on taxes, but they are a start. There are a number of other recommendations made by others that in combination could result in a compromise solution to the debt problem. No one will be fully happy and never are, but we must stop insisting that there be a vanquished and victor in our politics.
Other recommended reading include:
“The 2014 Long-Term Budget Outlook,” Congressional Budget Office, July 2014 http://tinyurl.com/n5b8tak
This post was published as a MyView editorial in the Cape Cod Times on August 22, 2014 and is available at the following link: http://www.capecodonline.com/apps/pbcs.dll/article?AID=/20140822/OPINION/140829849ReplyDelete