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The America’s Debt Bomb: A Bold Plan to Stop Washington

The America’s Debt Bomb: A Bold Plan to Stop Washington

The U.S. now sits some $20 trillion in debt, and since 2013 the amount that the country owes has annually equaled or exceeded its gross domestic product – a phenomenon that hadn’t occurred in a single year since the end of World War II.

And with the recent passage of a bipartisan two-year $400 billion budget measure, a GOP-led tax overhaul slated to add $1.5 trillion in debt, and annual deficits north of $1 trillion projected in President Donald Trump’s latest budgetary wish list, Republican-aligned organizations and economic analysts are suggesting lawmakers have put short-term gains ahead of long-term financial stability.

But while politicians in both parties appear to embrace spending – despite regularly paying lip-service to the concept of fiscal responsibility – concerns range about what the country’s mounting debt problem will mean for the future of the U.S. Some argue that continuing down this path will further tie up federal dollars in interest payments, potentially eat into economic growth and leave the country with fewer options should an unexpected recession develop.

“Remember that we’re talking now about deficits going to a trillion dollars. But debt has been rising very significantly. And we are … going to run through the peaks of where we were during World War II on the ratio of federal debt to GDP, which is extraordinarily high,” former Federal Reserve Chairman Alan Greenspan said in a recent interview withBloomberg. “And I think we’re just not paying enough attention to that.”

The Organization for Economic Cooperation and Development estimates America’s general government debt – or its collected financial obligations – in 2015 represented 125 percent of its overall GDP. That’s a far cry from Japan’s 234 percent and Greece’s 183 percent, two countries that are on significantly worse fiscal paths than the U.S. But only five of the 34 economies profiled in the OECD’s database had a higher debt percentage than the United States. Countries like Germany at 79 percent, Sweden at 62 percent, Mexico at 53 percent and Norway at 39 percent were found to be significantly better off.

The OECD also estimated America’s 2015 annual deficit – the amount of spending that year that wasn’t covered by income from taxes or other revenues – at 4.2 percent of the size of its GDP. By comparison, only the U.K., Portugal, Spain and Greece were found to have a higher percentage. Norway enjoyed a 6 percent surplus and China maintained a deficit of less than 0.9 percent relative to its economy after nine straight years of surpluses.

Altogether, the OECD’s data highlights that the U.S. has a substantial debt burden – both on its own and relative to international peers.

Driving a large portion of America’s spending are obligations to Medicare and Social Security, entitlement programs for a growing sector of aging Americans and regular targets of fiscal hawks hoping to retool how the country allocates its money to start paying down its massive debts.

The Trump administration has to this point shown little interest in launching structural entitlement reforms – as, indeed, have many politicians hoping to avoid making a politically unpopular policy decision.

But the administration, in fact, may be aggravating the situation by taking steps to move America’s annual deficits closer to the record highs seen in the early days of former President Barack Obama’s tenure in the White House, when the federal government embarked on an unprecedented series of spending initiatives to pump money into the economy in order to pull the country out of the Great Recession.

“[T]he combination of a substantial increase in federal spending and a significant tax cut are essentially unprecedented at this point in the business cycle and relative to the underlying strength of our fiscal position,” Lewis Alexander, a managing director and U.S. chief economist at Nomura, wrote in a research note this week.

Historically, it hasn’t been uncommon for the U.S. to take on more debt during times of economic weakness. But the ongoing expansion – now eight-and-a-half years old – has the potential to eventually become the longest on record. And although progress has been slow since the U.S. formally exited the Great Recession, it hasn’t been nonexistent.

The fact that such a considerable share of the country’s debt is held by foreign governments – namely, China – is also problematic from a trade perspective, as Chinese bond-buying grants effectively weaken the strength of the yuan against the dollar, giving the country an advantage over the U.S. in international trade markets.

Paying debt servicing costs associated with what America owes is also tying up federal dollars that could be used elsewhere. The U.S. must pay interest on its outstanding debt, and, given the trillions and trillions of dollars that the country owes, those payments are becoming particularly expensive. Pew estimated last year that U.S. net interest payments on debt exceeded $276 billion – more than six times the Trump administration’s $46 billion fiscal 2019 budget request to fund the entire Department of Homeland Security.

Those payments have in some sense remained manageable thanks to low interest rates, but as the global economy recovers and the era of easy money starts to move into the rearview, interest and servicing charges could become more problematic. An official at the Peter G. Peterson Foundation tells U.S. News that interest obligations were already the fastest growing federal program the country was wrestling with even before the recent passage of tax and spending legislation.

In a decade, the foundation estimates, interest payments will represent the third-largest obligation in the federal budget. That means that hundreds of billions of federal dollars that could be funneled into serving American citizens will instead be used to pay off interest on existing debt – perpetuating a cycle that’s ultimately going to constrain the government’s spending options and hit younger Americans the hardest in the event of another financial crisis.

“It’s a very dangerous idea, but it’s the world we live in,” Office of Management and Budget Director Mick Mulvaney said Sunday on CBS’s “Face the Nation,” about the mounting debt and deficit spending in what is otherwise a healthy economy. Mulvaney acknowledged that the White House was forced to agree to lift caps on nondefense spending and commit to worsening the country’s fiscal position to access the military funding that Republicans were trying to lock down.

Analysts – and even some GOP lawmakers, like Sen. Rand Paul, R-Ky. – have lashed out in recent days over what they perceive to be as hypocrisy within a Republican Party that just a few years ago staunchly fought against worsening the country’s debt position, which some argue lawmakers have effectively done through the passage of tax and spending legislation.

But in the absence of a massive influx of government revenues or a politically challenging spending overhaul that would require bipartisan support to take off, America’s mounting debt crisis doesn’t look like it’ll get much better anytime soon.

“We’re dealing with a fiscally unstable long-term outlook,” Greenspan said. “We have to get out of this loop.”

 

 

Source by:- usnews

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