There is a very important debate going on in the country right now as I have discussed in my last three posts:
- The Republican presidential candidates are proposing big tax cuts to stimulate the economy but at the cost of huge increases in annual deficits and the accumulated debt.
- The Democratic candidates want to raise taxes on the wealthy but even raising the top tax rate from 39.6% to 50% would have only a modest effect in lowering income inequality.
- The Tax Foundation has an excellent plan to lower tax rates for all in a revenue neutral manner by closing loopholes and limiting deductions. Their plan would give the economy a big boost and actually lower deficits by bringing in more tax revenue.
Now comes Paul Krugman in Friday’s New York Times, “Austerity’s Grim Legacy” saying that “Some of us tried in vain to point out that deficit fetishism was both wrong-headed and destructive, that there was no good evidence that government debt was a problem for major economies, … And we were vindicated by events. More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows.”
How can such an obviously intelligent and articulate economist miss what is so very, very clear to so many lesser mortals? Interest rates will not stay low forever! And when they do go up, interest payments on our rapidly expanding debt will skyrocket! The Congressional Budget Office estimates that the interest payment on our debt will increase from 1.7% of GDP today to 3.6% of GDP in 2025, or $827 billion in 2025 compared with $227 billion in 2015. Where will the money to pay this new $600 billion expense come from?
It is absolutely crazy not to take our enormous debt seriously. We simply must put this huge debt on a downward path as a percentage of GDP. It can be done but it will take a concerted effort by our national leaders to do it.