The Clock is Ticking on America’s Debt

Among the members of our generation, the increasing burden of student loans is quickly reaching crisis proportions. There is, however, a looming crisis that poses an even greater threat to our generation.

Today, the United States has a national debt exceeding $19 trillion.

It would be easy to spout metaphors and factoids in an effort to make the size of this number easier to understand, but I do not think this is necessary. We all understand that the number 19 trillion is, indeed, a very large number.

The problem is that while we frequently hear about how large the debt is, we often do not understand what it means or why it matters. This is especially true when we hear progressive candidates talking incessantly about the need for sweeping new social programs to provide everything from free college to single-payer healthcare.

Before we delve into the crisis itself, it is important to understand the nature of our national debt.

Like a person or business borrow money from a bank, countries will borrow money from other countries to pay for things. As a result, countries who are borrowing money will accumulate a certain level of debt; this is a frequent necessity for countries and is perfectly healthy. Just like with a person or business, however, a country that borrows too much can find itself in serious trouble.

This problem arises when a country owes more money than it can ever hope to pay.

Just like an individual, a government is required to pay interest on the debt. The interest rate is largely determined by a government’s credit rating: an evaluation of a borrower’s reliability regarding the repayment of a loan. If a country’s credit rating is high, the lender will have confidence that the loan is a safe investment and will therefore offer a low interest rate. However, if a country’s ability to pay decreases and they become a riskier investment, the lender will charge higher interest rates to ensure a return on investment.

Now that this is out of the way, let’s look at our current situation. In addition to a $19 trillion debt, the US is projected to have a $544 billion budget deficit in 2016 according to the Congressional Budget Office. (CBO). That means that by the end of the year, about $544 billion will be added to the debt.

This is not the worst part, however. The CBO is projecting that, thanks largely to rising interest rates on the debt, the federal budget deficit will rise dramatically over the next 10 years, reaching $1.4 trillion by 2026.

A cost of $1.4 trillion would make interest payments on the debt the single largest federal expenditure, exceeding both defense and non-defense discretionary spending, as well as Medicare/Medicaid and Social Security, according to White House projections. Given the fact that we are already running a $589 billion deficit, it would be nearly impossible to meet our payment obligations. In an effort to prevent default, the government would be forced to dramatically raise taxes and slash spending across the board.

It is at this point that the debt would reach truly crisis levels, and the United States would be forced to choose between staving off default or accepting the ramifications.

Greece provides us with a good example of what the first option looks like. Thanks to years of spending cuts, public employees have been laid off or had their salaries cut significantly, retirees are faced with far lower pensions, and hospitals and schools are being closed or operated with minimal staff, according to the BBC. Additionally, there have been large tax increases on everything from cigarettes and alcohol to property and gasoline.

The economic calamity that has resulted from these actions has devastated the country.

According to the most recent unemployment data from ELSTAT, a Greek statistics agency, unemployment is hovering at around 25%. Additionally, the unemployment rate in Greece has exceeded 20% since 2011. Perhaps even more striking, between 2008 and 2014 the Greek Gross Domestic Product (GDP) shrunk from $355 billion to only $236 billion according to data from the World Bank Group. In other words, Greece’s economy is only two thirds the size it was in 2008, and a 2015 recession means that things are not getting better anytime soon.

Obviously this scenario would be calamitous for the US and the rest of the world. But what about the other option of default?

If the US were to default on its debt, the first result would a sudden loss of confidence among creditors. In other words, other countries would realize that a loan to the US would be very risky. If this happens, the government will no longer be able to effectively borrow money to meet its domestic obligations as it currently does. In our case, this would mean an immediate need to cut hundreds of billions of dollars in spending because of a sudden lack of borrowed money.

This would not be enough, however. With government bonds becoming worthless as a result of default, the stock market would crash and bring the economy with it. The result, like in Greece, would be a significant loss in tax revenue, making it even harder to fund the entitlement system we have grown accustomed to. Social Security, Medicare, Medicaid, food stamps, etc. would all be forced to operate with dramatically lower funding.

Clearly, both of these options are unacceptable. Therefore, it is imperative that the country move quickly to avoid having to make this choice.

Our first task should be to grow the economy which, in the last several years, has only sputtered along. If we can achieve a sustained period of significant economic growth, tax revenues will grow with it. A strong economy will also produce more and better jobs, decreasing the budgetary burden of entitlements.

To accomplish this, we must accept that the economic policies of the last several years have not been effective in growing the economy. Since 2009, the federal government has imposed new taxes, fees, and regulations while trying to use tax dollars and borrowed money to boost economic output. If meaningful growth is to be achieved, individuals and businesses need to have obstacles to investment taken out of their way.

More importantly, the government must immediately begin cutting spending now, to avoid more draconian cuts in the future. With the baby boomer generation beginning to retire, and people living longer than ever, Medicare and Social Security costs are poised to grow dramatically. The best option is to reform these programs to cut costs, ideally through a free market approach. Whatever the approach, however, it is clear that if we are to save our entitlement programs, we will have to trim them.

A category that many would be far more happy to cut from is military spending. That said, with the renewed threat posed by foreign terrorism it is critical that Washington be extremely careful with cuts. Rather than cutting, however, a more pragmatic approach is to be more careful with future spending. Take the Lockheed Martin F-35 Lightning II for example, an aircraft that is projected to cost over $1 trillion once fully deployed according to the Government Accountability Office.

It should be noted that this was and perhaps still is a promising and important aircraft if the US is to maintain its technological superiority over other world powers. The problem, however, is that the aircraft has been plagued by a litany of issues that have sent the cost skyrocketing and delayed its implementation. Worse still, in a simulated dogfight between the F-35 and the F-16, which was developed four decades ago, the F-16 outperformed what is supposed to be a far superior F-35.

When designing such complex and advanced technology, mistakes and issues are to be expected. When mistakes cost hundreds of billions of dollars amidst a growing debt crisis, however, they are not mistakes we can afford.

As our debt, and the threat it poses, continue to rise, it is critical that we all understand the nature of the threat. We must also accept that this is not a problem that will simply disappear by virtue of politicians neglecting to mention it in stump speeches. This is a problem that will require a concerted effort, a suspension of political talking points, and indeed some hardships if it is to be dealt with properly.

7 thoughts on “The Clock is Ticking on America’s Debt

  1. While your article appears to be well thought out, it is based on an incorrect understanding of economics. Take some time to learn and understand monetary sovereignty and your views of debt and deficits will change dramatically. This is not a matter of policy as much as mechanics. How much and on what we choose to spend is still a valid discussion, but it should be based on an accurate foundation.

    The debt is nothing more than savings in the form of US Treasuries. The government is not “required” to offer interest on US securities. This is merely a policy choice to give money to savers. The “debt” is not a crisis.

    It is also important to note a huge distinction between the US and Greece. Greece was a currency USER, not a currency ISSUER. Greece gave up monetary sovereignty when it started using the Euro.

    Like

  2. Good thoughts. Certainly working to reduce spending important and we cannot continue to be a debtor nation. Glad to see you are focusing on education and poverty. More good minds need to be looking at these increasingly challenging issues

    Liked by 1 person

  3. Arnaud Another great article. My wife and I would like someone to tell us what the interest rate is on the national debt. I wish you could forward this to every college student in America.
    You have such a great insight as to what is hapipening in this great country. As a former Vietnam Veteran You make me feel encourage by this article. PLEASE DON.T STOP WRITING SUCH GREAT INFORMATION. jOHN & Sandy Hinkle

    Liked by 1 person

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