Category Archives: high debt

Fiscal Irresponsibility: Our Country’s Most Fundamental Problem

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As a fiscal conservative, I am worried about our nation’s future. The public debt (on which we pay interest) is now 75% of GDP, the highest level since right after WWII, and growing steadily.  Furthermore, our economy has just barely recovered from the Great Recession and is expanding too slowly to revive widespread prosperity.  Neither of the two main presidential candidates, Hillary Clinton nor Donald Trump, is talking seriously about our huge debt and neither has a credible plan to boost economic growth.

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The above chart from the Heritage Foundation is a vivid way of illustrating this problem:

  • Already entitlement spending (Social Security, Medicare and Medicaid), and interest payments on our debt, use up 2/3 of all federal tax revenue. And spending on each of these entitlement programs is growing faster than the economy as a whole. Interest rates will eventually rise from their current rock bottom level. When this happens, interest payments on our growing debt will increase rapidly.
  • In 2032, just 16 years from now, spending on entitlements and interest payments is projected to consume all federal tax revenues, assuming a steady 18% of GDP level for tax revenue.

There are three possible ways to offset this bleak picture:

  • Speed up economic growth. This should, of course, be possible but it will take a major shift in thinking to accomplish.
  • Increase federal tax revenue. Suppose that federal tax revenues were raised by 1% of GDP, or $180 billion per year. This would at least temporarily put our debt on a downward path (as a percentage of GDP). But it would be very hard to accomplish politically. Mrs. Clinton, for example, has proposed raising taxes by $100 billion per year which she wants to spend entirely on new programs rather than reducing our annual deficits.
  • Reform entitlement programs. This is by far the best way to address our debt problem, and the only effective way in the long run.  But, again, it will be very hard to accomplish politically.

Conclusion. If the U.S. cannot get its debt and slow growth problems under control, it risks losing its status as the world’s major superpower. This would be a calamity for both our own national security and the peace and stability of the entire world.

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The Slow Growth Economy We’re Stuck In

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We have very high debt and Paul Krugman says in “Debt Is Good” that we need more! The Congressional Budget Office’s latest report this week, “An Update to the Budget and Economic Outlook: 2015 – 2025” predicts slow economic growth for the next ten years, averaging 2.1% per year (see chart below).
CaptureUnfortunately, high debt and slow growth are a deadly, self-reinforcing, combination. Today’s Wall Street Journal has a chart (pictured below) showing clearly how budget deficits are likely to increase over the next ten years. The public debt (on which we pay interest) is predicted to grow from 74% of GDP today to 77% of GDP in 2025, increasing by a total of $7 trillion over this time period.
Capture1Here is another connection between slow growth and high debt:

  • Slow Growth means higher than necessary unemployment and under-employment as well as minimal raises for employed workers. The resulting economic slack leads to
  • Low Inflation. But low inflation means that the Federal Reserve can maintain
  • Low Interest Rates to try to encourage more borrowing to stimulate the economy. This means, in turn, that Congress can run up huge deficits without having to pay much interest on this almost “free” money. This eventually leads to:
  • Massive Debt. But what happens when inflation does take off, which has happened before and is likely to happen again? Then the Federal Reserve is forced to raise interest rates quickly and we are stuck with huge interest payments on our accumulated debt. And meanwhile entitlement spending on Social Security, Medicare and Medicaid is also growing rapidly. At this point debt increases very rapidly which leads to a severe
  • Fiscal Crisis.

Of course things don’t have to happen like this. Congress might become more responsible and either cut spending and/or raise taxes and start shrinking our huge deficits. Or perhaps slow growth really is the new normal and interest rates will remain low indefinitely. But slow growth is not pain free; there are many millions of unemployed and under-employed Americans who want to work and whose lives are stunted otherwise.
Slow growth is a very destructive path to be following. We badly need to adopt policies to speed it up!