There is no shortage of both real and imagined crises vying for the headlines these days. Left relatively unchallenged, largely ignored, or often denied by Washington and the media, however, is one of the gravest internal, self-made threats to our economy: the crisis of government debt. Most economists agree that the United States federal debt poses a real and serious problem for our future, but for the debt deniers, such warnings fall on deaf ears.
As the latest Congressional Budget Office (CBO) report notes, even with the recent—and temporary—decline in budget deficits, government debt continues surging to historic levels. In 2007, for example, debt owed to outside investors (called “debt held by the public”) equaled about 35 percent of the nation’s gross domestic product (GDP). Today this debt level is 74 percent—or nearly three-quarters the size of our entire economy—and is projected to grow larger from there.
Yet even this is optimistic. It assumes Congress will maintain ambitious spending controls currently written in law, such as tight restraints on Medicare spending imposed by the Affordable Care Act. If Congress fails on even some of its savings promises, according to CBO estimates, debt could explode to twice the size of the entire economy in 25 years.
Even President Obama’s 2010 bipartisan National Commission on Fiscal Responsibility and Reform acknowledged the gravity of the problem, warning: “America’s long-term fiscal gap is unsustainable and, if left unchecked, will see our children and grandchildren living in a poorer, weaker nation.”
The Commission recommended that we sharply reduce tax rates (we haven’t), contain healthcare costs (we haven’t) and make Social Security solvent (we haven’t). In fact, some call for spending more on infrastructure, raising Social Security benefits, and boosting the prices consumers must pay for extensive and onerous regulations.
Indeed, where Congress fails to pass desired spending bills; instead, it often accomplishes goals by passing regulations to control banking, health care, energy and the environment that raise prices for consumers in a still-suffering economy.
We now have over one million regulatory requirements, and we are adding about 21,000 each year. Far too often these regulations are passed without any evidence that they will accomplish anything and, in fact, may make matters worse with unintended consequences. Paying for them is no different from taxation except that the taxes are hidden and often regressive.
Just how deep in debt are we? The nation today has a gross debt level (total deficits minus total payments out of surplus) in excess of $17 trillion and an astonishing gross debt-to-GDP ratio of more than 100 percent.
There are lots of models to project the growth in the debt, but none of them projects a decline. If you add up all of our IOUs and liabilities, as economist Laurence Kotlikoff’s recent research reveals, our true fiscal gap exceeds a jaw-dropping $205 trillion. That’s more than $650,000 of debt for every American alive today. Much of this unseen debt lies in commitments the federal government made to seniors—such as health care and retirement benefits—but for which it has no plan to finance.
Some debt deniers claim we can tax the rich to get out of debt. This is also wholly unrealistic. America’s rich simply aren’t rich enough to pay our massive debts. Economist Antony Davies points out that if we were to impose an effective tax rate of 88 percent on the top five percent of U.S. income earners, we could just barely balance the budget for one year. When France tried to pay off its national debt by imposing massive taxes on its richest countrymen, those citizens revolted by threatening to leave the country and take their riches with them.
Rising debt levels threaten to drown our communities. States and localities that depend on the federal government during fiscal emergencies can no longer do so. But the debt deniers continue to argue that this spending is good for the economy and that every dollar the government spends “multiplies” into more wealth for the economy. They call it “investing.” Considering our fiscal and economic situation, it’s more accurate to call it “profligacy.” Ask any family how building up huge debts by spending more than they make is likely to work out for them.
Economists cannot pinpoint when the debt-to-GDP ratio will make borrowing impossible and force the United States into default, like Greece. However, each day that we ignore the debt, our risk of drowning in it becomes more likely. It is time for the debt deniers to face facts so we can work together to solve this problem—before it’s too late.