Tag Archives: public debt

Economists Warn We Can’t Ignore National Debt Forever

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With COVID-19 ravaging the country and government pandemic lockdowns devastating our economy, the national debt has understandably slipped to the back of many Americans’ minds. But the federal government continues to fall deeper into the red at a dramatically accelerating rate. Free-market economists interviewed by FEE warned that we can’t continue like this forever without grave consequences.

Even before the potential passage of President Biden’s $1.9 trillion stimulus proposal, the national debt officially exceeded the size of the economy in 2020. This means we will soon owe more than we produce in an entire calendar year. And it’s only going to get worse. The nonpartisan Congressional Budget Official now estimates that we will hit a 200 percent debt-to-economy ratio in 30 years, a truly unthinkable and unprecedented level of debt.

And that’s under “a rosy scenario that assumes no new spending programs, no wars, no recessions, all temporary tax cuts expire, and interest rates remain low,” Manhattan Institute economist Brian Riedl tells me.

“By that point in 30 years, CBO projects an annual budget deficit of 12.6% of GDP (the equivalent of $2.5 trillion today),” Riedl says. “Half of all taxes will go towards interest on the debt. Again, that is the rosy scenario.”

Of course, the government drowning in debt likely isn’t going to affect the average American tomorrow. But while interest rates are at near-zero levels, they can’t continue like that forever, Riedl warns.

“Too many people believe interest rates can never rise again, or do not realize that nearly the entire national debt would reset into the higher interest rates,” he said. “Basically, we are gambling America’s economic future on the hope that interest rates stay below 3% or 4% forever.”

Economist Veronique de Rugy concurred.

“With these debt trajectories, interest rates are going to take off eventually,” said de Rugy, a Mercatus Center senior fellow. “What happens when these rising rates coincide with the Medicare Trust Fund depletion in five years, or Social Security in thirteen years?”

Cato Institute economist Ryan Bourne offered a somewhat different perspective, arguing that the bigger problem is the “longer-term trajectory.”

“Every time a recent major crisis hits the federal debt level jumps, but never falls back at all afterwards,” he said. “We therefore engage in a step up in the level of debt after each crisis, which has worsened our starting point as we are now sailing into an unprecedented fiscal tidal wave of debt as a result of entitlement commitments made to an aging population.”

“Without near-term policy change to entitlements to head that off, there will at some stage be a much bigger reckoning,” Bourne concluded. “But I see no desire to head that off today.”

While the future of interest rates may indeed be uncertain, it is nonetheless projected that Americans will soon have to pay trillions in federal taxes every year just to cover the interest on the debt—all while the problem continues to snowball out of control.

Even before this happens, though, there are real consequences that come with runaway deficit spending. The federal government cannot create wealth out of thin air. Every dollar that it spends or borrows has to come from somewhere else in the economy. (Unless it prints money, in which case it stealth-taxes us all through inflation).

“Deficit spending extracts resources from the real economy and there is no guarantee that the government uses these resources better than the private sector,” de Rugy said.

She also pointed to numerous studies showing that higher debt leads to lower economic growth.

“We are likely already paying for the heightened debt levels in the form of lower living standards,” de Rugy concluded. “And we will continue to suffer if we keep this up.”

So, what does this all mean for Biden’s proposal for nearly $2 trillion more in COVID spending and other big-spending policy proposals? Well, we’ve already spent an astounding and unprecedented $4-5 trillion on COVID relief, much of which proved fraud-rife and inefficient.

In light of this, “keeping our debt under control is a better priority,” de Rugy says. “The more in debt we are in, the harder it becomes to respond to future emergencies, and the more we risk slowing down growth and burdening future generations.”

Meanwhile, Riedl said that some forms of government spending can be necessary during a pandemic, but insisted “that is not a blank check for wasteful or ineffective programs.” Indeed, a new Ivy League analysis found that Biden’s budget busting plan—which contains $300+ billion in unrelated partisan spending—would actually lead to lower growth and wages in 2022.

As for other spending proposals, Riedl pointed to the projected $100 trillion in deficits we’re expected to run over the next 30 years. “Let’s figure out how to pay for that first before pouring gasoline on the fire,” he concluded.

The need to temper Congress’s big-spending ambitions was a point of agreement among the three economists.

“A lot of the Democrat spending proposals clearly go way beyond what’s needed to deal with the actual pandemic problem,” Bourne added. “So I don’t think there’s an economic case for most of this bill—it will merely worsen the underlying public finances without much clear economic rationale, and maybe even harming the recovery.”

Critics are quick to scoff at concerns about the debt and deficits, particularly given the hypocrisy of many Republican elected officials on the issue. But the laws of economics haven’t changed, and there’s still no such thing as a free lunch.

At some point, the consequences of our runaway national debt will become too punishing to ignore.

Brad Polumbo, FEE

Overstretch: The Long Story of Staggering U.S. Debt

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If the past year was dominated by the huge human costs of COVID-19, the next few years will be about its economic aftermath, including the alarming rise of US debt. What’s needed is multilateral cooperation – a new ‘Grand Alliance.’

On Friday, Congressional leaders failed to secure a bipartisan deal on a $900 billion pandemic relief package. A government shutdown was avoided only with a 2-day extension.

A protracted shutdown would amplify the risks for pandemic escalation and economic crisis, amid the long-awaited vaccine rollout. Bipartisan tensions are compounded by the impending Georgia Senate runoff races in January that will determine control of the chamber in the Congress.

In 2019, the Congress suspended the debt ceiling until after the 2020 presidential election. While it sought to avoid a repeat of the 2011 and 2013 debt crises during an election year, new spending contributed to Trump’s new military rearmament drive.

The new Congress must decide the future of the debt ceiling by summer 2021.

Q3 2020 hedge fund letters, conferences and more

High US Debt Burden

By the year-end, COVID-19 cases worldwide will be close to 80 million. As a result of utter mismanagement, US figure will be close to 20 million.

While the pandemic continues to spread and the health system is overwhelmed, the Trump White House has taken record amounts of debt in record pace.

During his campaign, Trump pledged to eliminate US national debt in 8 years. At the time, total public debt was $19.6 trillion. In the past 4 years, it has soared to more than $27 trillion, by almost $8 trillion. It was an achievement of sorts. What former President Obama achieved in 8 years, Trump did in just 4 years.

Of course, all major Western economies have taken record amounts of debt during the global pandemic. But United States is not like other economies. First, it has more COVID-19 cases relative to all other major economies. Second, US remains a world anchor economy. Third, US dollar dominates international transactions. As a result, excessive US debt will have disproportionate global spillovers.

How will the Democrats cope with the debt burden?

Instead of focusing on the size of US debt, says Jason Furman, Obama’s former head of the Council of Economic Advisers, “policymakers should assess fiscal capacity in terms of real interest payments, ensuring they remain comfortably below 2 percent of GDP.” That, Furman believes, would ensure adequate fiscal support and needed public investments, while maintaining a sustainable public debt.

Here’s the logic of the argument: As a share of GDP, the cost of servicing US debt has fallen since 2000, even as federal debt has increased. An environment of low interest rates makes it easier to pay off debts.

So, Furman argues, the Biden administration can manage primary deficits (noninterest spending minus revenue) without “an unlimited explosion of debt.”

Short-Term Gains, Long-Term Challenges

That’s likely to be the stance of the Biden administration’s proposed economic team, which will stress both growth and equity.

The team includes former Fed chief Janet Yellen as the new Secretary of Treasury, her former right-hand man Jerome Powell as current Fed chair, and labor economist Cecilia Rouse as chair of the Council of Economic Advisers (CEA). CEA members feature Jared Bernstein, Biden’s chief economist in the Obama era, and Heather Boushey, the cofounder of the Washington Center for Equitable Growth.

Nevertheless, the likely policy stance, whether implicit or explicit, is predicated on unsustainable debt-taking in the future.

According to the recent projections by the nonpartisan Congressional Budget Office, federal debt held by the public will surpass its historical high of 106% of GDP in 2023 and will continue to climb in most years thereafter. By 2050, debt as a percentage of GDP will amount close to 200% of the GDP. Despite peaceful conditions, it is already at the level of World War II; by 2050, it could be twice as high (Figure 1).

Figure 1 – US Debt Held by the Public, 1900 to 2050 (as % of GDP)

US Debt

Source: Data from CBO (Sept 2020)

Worse, US debt is likely to increase faster than anticipated. Current projections do not include the full costs of the pandemic stimulus packages, or the “needed public investments” that the Biden administration will seek to promote.

What will be good to the US economy and global prospects in the short-term could prove highly detrimental to both in the long-run.

Here’s why: Deficits will more than double from an average of 4.8% of GDP from 2010-19 to 10.9% percent 2041-50 driving up debt. As a result, net spending for interest will account for much of the increase in total deficits in the last two decades of the projection period.

Markets plan on quarterly basis. Presidential terms have barely a 4-year perspective. As a net effect, long-term perspective is lost in the translation. In CBO’s projections, growth in outlays will continue and accelerate to outpace growth in revenues, resulting in larger budget deficits over the long run (Figure 2).

Figure 2 – Percentage of GDP: Outlays Vs Revenues

US Debt

Source: Data from CBO (Sept 2020)

So, what about those “sustainable” real interest rates? Measured as a share of GDP, net spending for interest could nearly quadruple over the last two decades of the projection period.

From overreach to new ‘Grand Alliance’

In addition to US banks and investors, the Fed, state and local governments, mutual funds and pension funds, foreign governments hold a third of the US public debt. The largest holders include Japan ($1.3 trillion), China ($1.1 trillion), and UK ($430 million). To cope with its soaring debt, US will depend on these contributions.

However, Japan is the world’s most indebted major economy (government debt to GDP exceeds 238%). Due to maturing, aging and population decline, its burden will continue to increase, while the Brexit costs will penalize UK economy for years.

Biden administration has promised to be tough on China, Russia and several other countries, which could translate to rising defense and security allocations – which, in turn, would further amplify soaring debt, twin deficits and real interest rates.

When great powers fail to balance wealth and their economic base with their military power and strategic commitments, they risk overextension, as historian Paul Kennedy warned in the late ‘80s. In the coming decades, that will be a key US risk.

Nothing is inevitable in life, however. There is a great opportunity amid the rising threats. That’s multilateral cooperation across all political differences among the world’s largest economies. It has been achieved before, and it could be achieved again, as evidenced by F.D. Roosevelt’s ‘Grand Alliance’ during World War II.

In the 1940s, war threatened to result in excessive debt. Today, excessive debt risks wars that will have no winners.

About the Author

Dan Steinbock is the founder of Difference Group and internationally recognized expert of the multipolar world economy. He has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/