If Washington fails to fix America's debt crisis, states will take action

If Washington fails to fix America's debt crisis, states will take action

A combination of substantial reductions in the rate of spending growth along with a faster growing economy spurred by genuine tax reform is needed in order to avert fiscal disaster in the coming decades. Congress may be unwilling to act. For that reason, state legislators from across the country gathered earlier this month in Arizona to discuss an “Article V” convention to pass a balanced budget amendment to the U.S. Constitution. For years, the American Legislative Exchange Council has supported such an amendment to place meaningful limits on federal profligacy. Federal borrowing is already diverting capital from productive economic ventures. And the continued failure to take action endangers the prosperity of future generations as well.

The bipartisan threat to this nation’s economic health evidenced itself again recently in Washington. At the urging of President Trump, Congress lifted the federal debt ceiling for the next three months. Within hours, the official accumulated debt rose by more than $300 billion, to exceed $20 trillion for the first time in U.S. history. For decades, politicians from both political parties have saddled the nation with a debt load akin to generational servitude. But it wasn’t always this way. Following the successful but extremely costly efforts to win World War II, total public federal debt as a percentage of gross domestic product (GDP) steadily declined from nearly 120 percent of GDP to just under 31 percent of GDP by 1974.

But beginning in 1982, debt levels began to surge. By the end of 1993, debt as a share of GDP had more than doubled to 64 percent. For the next 14 years, an interlude of relative fiscal sanity returned, as debt gradually declined to about 54 percent of GDP in 2001 then gradually increased to around 63 percent of GDP once again by the end of 2007 as the Great Recession commenced. Throughout those 14 years, GDP surged by 55 percent. During the Great Recession, which ended in 2009, the federal debt exploded past 80 percent of GDP, a level unseen since the immediate aftermath of World War II. But during the eight years of the Obama recovery, the situation actually worsened. By the end of 2012, more than three years into the recovery, total public debt as a percentage of GDP reached record peacetime highs, exceeding an entire year’s worth of GDP.

By the end of 2016, debt stood at nearly 106 percent of GDP, a level unrivaled only by the years 1945 to 1947. In fact, the surge in debt during the recovery exceeded the surge throughout the Great Recession. This recovery, though prolonged, has proved tepid, totaling just 18.6 percent real growth at a historically sluggish annualized rate of roughly 2.2 percent. This debt load now amounts to more than $61,000 for every man, woman and child in America. Pundits often blame defense spending and tax reductions for the current debt levels. Neither are to blame. Rather, a lack of spending discipline and foresight created this fiscal havoc. Defense spending, another popular culprit, was not a driver of this expansion, either. As a percentage of GDP, defense spending plummeted from 43 percent during World War II to less than 8 percent by 1948.

After 1969, defense spending never again exceeded 10 percent of GDP. In fact, even during the buildup during the Reagan era, defense spending rose from 6.3 percent of GDP at the end of 1980 to 7.6 percent of GDP in 1986 before gradually declining again. Even during the military buildup following 9/11, defense spending only rose from 3.8 percent of GDP in 2000 to a peak of 5.6 percent of GDP in 2010. Likewise, tax cuts are not to blame. Following the first of the Reagan tax cuts going into effect in late 1981, federal tax receipts only fell slightly as a percentage of GDP, from 18.1 percent in 1980 to 17.3 percent in the final year of Reagan’s second term. Receipts were remarkably stable at an average of 17.1 percent of GDP from 1980 to 2016, while spending has averaged 20.3 percent of GDP. In 2016, the numbers were nearly identical.

Meanwhile, federal spending as a percentage of GDP in the post-World War II era first eclipsed 20 percent in 1980 and remained above 20 percent until 1994. Spending actually declined from 21.4 percent of GDP in 1991 to a low of under 17.4 percent of GDP in 2000. Importantly, during these nine years of spending restraint, GDP grew by 41 percent. This annualized rate of more than 3.8 percent growth was nearly twice pace of the Obama recovery. In other words, for every $1 of annual growth during the Obama recovery, the growth rate experienced in the decade ending in 1991 would have generated nearly $2. Unfortunately, after bottoming out in 2000, federal spending began an upward march culminating with the federal government spending 24.4 percent of the annual economy in 2009. The cumulative impact of this nearly constant overspending has resulted in the suffocating debt load.

Many politicians from both parties pay lip service to the debt but fail to make the tough decisions. Over the past 15 years, this tendency was evidenced by the Medicaid expansion with bipartisan congressional support under President Bush and the Affordable Care Act entitlement enacted with only Democratic congressional support under President Obama. It’s about time for our elected officials in Washington come together to attack the most significant threat to our national economic health: $20 trillion of debt. If Washington doesn’t come up with real solutions to our federal debt, expect state-based efforts like those being discussed in Arizona to continue to gain traction.

Joel Griffith is director of the Center for State Fiscal Reform at the American Legislative Exchange CouncilJonathan Williams is chief economist at the American Legislative Exchange Council.