The nation is betting the farm

The nation is betting the farm
© Greg Nash

Alarm but not surprise. That is the reaction to the recent revisions to the budget and economic outlook released by the Congressional Budget Office, showing the debt exceeding three-fourths of gross domestic product. As Congress returns to Washington from its summer recess, expect no more than hand wringing over the debt with little action. As the economy continues to perform about as well as we have any right to expect, the federal budget continues to deteriorate.

As the Congressional Budget Office reports, during the years when the unemployment rate was below 6 percent, deficits averaged 1.5 percent of gross domestic product. But over the next 10 years with unemployment well below 5 percent, deficits are projected to average 4.7 percent, more than triple that historical average. If the budget is a basket case while the economy does well, what will happen when a slowdown saps tax revenues and raises unemployment compensation and food stamps?

The public debt is already piling up faster than the economy is growing. At the end of fiscal 2018, the debt equaled 78 percent of gross domestic product. The Congressional Budget Office projects that the debt burden will rise every year, reaching 95 percent over the next decade. That would mark the heaviest debt burden since 1946 at the end of World War II. At the time, the United States had borrowed heavily to defend our freedom. The economy was climbing like a rocket, fueled by troops returning to the labor force, while wartime technology and consumers forced saving.

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Today, the United State is borrowing hand over fist to support itself in the manner to which it has become accustomed. It is weighed down by the inevitable retirement of the baby boomers, as the economy grows at a comparative walking pace. The cynical will say that it is too late to fix the problem, and clearly there is no political groundswell for action. But the sooner we act, the better or less worse it will be. The public desperately needs to know what is at stake. Here are two basic realities.

First, and most fundamentally, the nation is betting the farm. Debt at contemplated levels will weigh down the federal budget with interest costs that will preclude basic functioning of government. Add to that the free college, free health care, massive defense buildup, and repeat tax cuts that politicians now blithely promise. Debt service, which is interest on the public debt, is already the fastest growing component of the budget. Over the next decade, debt service will increase by more than half as a share of the economy. That rate is far faster than Social Security, health care, or defense spending. You cannot pave roads or defend the homeland with the dollars owed to Treasury bondholders.

Second, the nation is betting the farm on hopes and wishes. The Congressional Budget Office debt service projections assume that interest rates will remain lower than at any time since World War II, other than the financial crisis itself, simply because interest rates and inflation have remained low for the last decade. Is this the end of economic history? Do not bet the farm. Interest rates and inflation were almost as low from the early 1950s through the middle 1960s, but soared to double digits in the 1970s. The more time without action now, the higher the debt will climb, costing us even more interest at the eventual higher rates.

In 2029, the Congressional Budget Office projects $807 billion of interest on more than $29 trillion of debt, for an effective interest rate of 2.75 percent. In 1999, a perfectly calm year, the Treasury paid $230 billion interest on $3.6 trillion of debt, an effective interest rate of 6.33 percent. If effective interest rates in 2029 are the same as in 1999, debt service costs would rise by more than $1 trillion in that one year alone. That $1 trillion increase easily exceeds the projected total national defense spending in 2029. Indeed, this is the roughest of estimates, but the numbers are huge, undeniable, and shocking. Any increase in interest rates will then completely decimate the budget along with the economy.

In sum, our budget policymakers are putting the United States economy in peril unless interest rates never ever rise again. If you went and took a similar bet in Las Vegas, your family would rush to court to have you declared incompetent first. Think about that as you communicate with your elected leaders in the coming campaign season.

Joseph Minarik (@JoeMinarik) is senior vice president at the Committee for Economic Development. He served as chief economist at the Office of Management and Budget under President Clinton and is the coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”