National Debt: Will It Destroy America’s Economy?

America’s national debt is now a major problem. On that, nearly everyone, regardless of party or political beliefs, agrees.




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The national debt has exploded in the last decade to $21 trillion from about half that. What we owe is now larger than the U.S. economy, a level that many, if not most, economists believe poses a danger to America’s standard of living and its financial standing in the world. And the debt is growing faster than our economy.

The only question is, will the U.S. wait for a crisis to deal with the problem? Or will it deal with it now, while the economy remains strong? While logic would seem to suggest taking care of it now, politics will likely interfere, as in the past.

Democrats favor tax hikes to raise federal revenues. Republicans philosophically lean more toward entitlement reforms to curb future spending and continued tax cuts to make the economy grow. But neither seems to have the political capital to make sweeping changes in a gridlocked Congress.

So the problem, unfortunately, remains. So does our national debt.

How Big Is $21 Trillion?

Today, our national debt is almost inconceivably large. It’s equivalent to every person in the country owing $64,000. And it’s growing fast. Last year, we added another $789 billion to the total. Over the next 10 years, projections say, we could add another $10 trillion.

Let’s visualize this debt for a moment. If it was in individual dollars, a $21 trillion stack of bills would reach from earth to the moon a bit more than five times. Put another way, it would circle the Earth’s equator 48.4 times. The point is, speaking of abstract numbers like “trillions” doesn’t give you a sense of magnitude. It’s an immense amount of money.

Where will we get the money to pay for it all? The answer is, we won’t. We’ll either cut our surging federal spending and begin paying down the debt, or join the fiscally foolish company of Italy, Greece, Ireland, Spain and the other nations that refused to follow financial common sense. That is, we’ll have a financial breakdown with rising unemployment, soaring interest rates, declining standards of living, and fewer overall choices.

National Debt Spiraling Up

The problem is, even with the debt at a lofty $21 trillion, we could still pull back from the brink by cutting long-term spending. But soon, we won’t have that luxury. The Congressional Budget Office’s most-likely scenario estimates that the debt will grow from $21 trillion today to $98 trillion by 2048. No, that’s not a misprint.

“The numbers are really terrifying,” said Brian M. Riedl, a senior fellow at the Manhattan Institute, speaking at a Heritage Foundation debt forum last year. By the way, Riedl reminds us that the $98 trillion number is “the rosy scenario. That assumes no wars, no terrorist attacks, no recessions, and that interest rates stay low.”

And what are the chances of that?

One is left wondering: How did things get so bad?

Soaring Entitlements

The answer is, runaway entitlement spending. We’ve put Social Security and Medicare on automatic pilot. They go up every year, with a cost of living increase already baked into the budget cake. Today, the population over age 65 is about 16% of the total. But by 2048, it will be 22%.  So entitlements will relentlessly drive U.S. federal spending up sharply, if Congress does nothing.

Economists agree: We don’t have the luxury to wait.

While we only “owe” $21 trillion, our promises to future retirees total more than $60 trillion, without the current means to pay them.

Not only will the debt grow bigger, but the interest on the debt will grow, too, faster even than the debt itself. The Federal Reserve kept interest rates at close to zero for nearly a decade, but now is raising them back to “neutral” — which means higher interest rates.

Soaring Debt Payments Starting … Now

In the short term, rising interest on the national debt will choke off other spending. Indeed, it’s already happening. Last fiscal year, which ended Sept. 30, net interest payment on the national debt jumped 20% to $371 billion.

The Congressional Budget Office, employing conservative estimates, says that amount will double in just five years to $702 billion.

As the Street.com recently noted, “At that point, the interest payments would eclipse not just the $493 billion of mandatory outlays for Medicaid … but the $679 billion spent on defense — the U.S. government’s largest category of nondiscretionary expenditures.”

Just to keep our total debt level where it is currently as a share of GDP would require the government “to enact deficit reduction equal to 1.9 percentage points of GDP, or $400 billion, in 2019, and then keep that deficit reduction going for a full three decades,” wrote American Enterprise Institute Fellow James C. Capretta on RealClearPolicy.

In short, the U.S. government will be like an out-of-control household running up their credit cards without the means to pay for it. It’s a recipe for bankruptcy.

Stagnation, Here We Come

It’s also a recipe for economic stagnation. As the CBO noted in its 2018 long-term outlook, the growing federal deficits and debt would have a number of highly negative impacts on future growth. They would:

    • Reduce national saving and income in the long term;
    • Increase the government’s interest costs, putting more pressure on the rest of the budget;
    • Limit lawmakers’ ability to respond to unforeseen events; and
    • Increase the likelihood of a fiscal crisis, a situation in which the interest rate on federal debt rises abruptly, dramatically increasing the cost of government borrowing.

None of these things is good. And it’s safe to say that the CBO’s list represents a kind of consensus among economists that the debt, at current levels, is unsustainable. If we can’t really afford $21 trillion today, how will we afford $98 trillion in a mere 30 years?

Preventing Worst-Case Scenarios

To ensure we don’t go down the same road as Italy, Greece, Argentina, Ireland and others, we have stark choices to make. With spending expected to rise from the current 20% or so of GDP to 29% of GDP by 2048, that would require raising taxes — now at about 18% of GDP — by roughly half. Or to cut spending by roughly a third. Or some mix of the two.

Such ideas haven’t appealed to average Americans in the past. Or, more important, to Congress.

“For a generation, the looming entitlement crisis for retiring baby boomers was a constant concern of the political class,” wrote IBD’s Jed Graham. “Presidents Clinton and George W. Bush both put fixing Social Security at the top of their agendas, to no avail. President Obama enacted Medicare cost cuts, though he used the savings to help pay for ObamaCare. An Obama deficit commission proposed a grand compromise on taxes and spending in 2010.

“Now that the feared U.S. national debt spiral is getting started,” Graham wrote, “most of the talk about fiscal red ink comes from people urging still-bigger deficits.”

What About Privatization?

Other proposals, which have worked elsewhere, include making part of Social Security and Medicare private — creating personal accounts backed by workers’ own savings, replacing the tax money that now goes into the Social Security and Medicare “trust funds” — but then gets spent by Congress.

Some 31 countries, ranging from Australia and Chile to Singapore and Sweden, have private accounts as part of their social security systems. They work well, boosting private savings and retirement income, while limiting taxes and helping individuals build wealth that can be passed on to their kids and grandkids.

There are answers to this problem. It’s not intractable. The sooner we act, however, the better. Putting off dealing with the problem, as Washington has done now for nearly four decades, isn’t an answer.

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