EVAN HOROWITZ | QUICK STUDY
You’ve heard the fearmongering. America is broke. Government debt already is measured in tens of trillions of dollars and will soon be as big as our entire economy. To top it off, Republicans are poised to pass a tax bill that will add at least another trillion in red ink.
In lieu of panic, though, maybe the more appropriate response is just to shrug. Sure, someday the government’s oversized debt load may get us into trouble. But right now, the situation seems manageable.
Month by month, and year by year, the debt doesn’t actually cost that much. We have interest payments to make — just like the interest you pay on your mortgage or student loans — but those bills are relatively small, and stable.
Which is not to say we should adopt a breezy attitude toward government spending, where Republicans pass giant tax cuts, Democrats pursue Medicare for all, and we pay for it with bottomless borrowing. At some point, there would be a reckoning.
But that point seems awfully far away. For the moment, interest rates are low, investors are eager to lend, and there are valuable things government can do with this borrowed money, like fixing our infrastructure.
So let’s list rising government debt on our to-do list of national problems — but nowhere near the top.
The publicly held debt of the US government now totals about $15 trillion, or just over 75 percent of the gross domestic product. That’s the highest level since the 1940s, and it’s poised to grow.
Yet, compared with other distinguished nations of the developed world, we don’t look half bad. Japan’s debt is more than 200 percent of its GDP, and unemployment there is below 3 percent. The CIA’s World Factbook lists Canada, Singapore, the United Kingdom, and European Union among the other places with higher debt loads than the United States.
Focus on the cost of debt and the US position looks even better. Our annual interest payments currently amount to about 6 percent of all government spending, or 1.3 percent of GDP, according to the White House’s Office of Management and Budget. That’s lower than it was in the 1980s, 1990s, or early 2000s.
How is it possible to have such low payments with historically high levels of debt? Think of refinancing your mortgage. When rates drop, your monthly payments can, too — even if your total loan remains the same. Something similar is happening with US treasury bonds. Rates are quite low, so we can borrow large amounts and pay a relative pittance in interest.
By 2047, the national debt could grow as high as 150 percent of GDP, based on projections by the Congressional Budget Office. The main reason? Rising health care costs, and the growing number of aging Americans requiring ever-more-expensive care.
But there’s a lot of uncertainty in estimates like this, because there’s a lot we don’t know about life in the 2040s.
For instance, if artificial intelligence expands its capabilities, and smart robots take over many of our jobs, then dealing with debt could become a lot easier. Tireless robots would make our economy more productive, which would boost economic growth — giving us more money for paying down debt.
Likewise, if we could find a better way to restrain health care costs, that too would ease the long-term debt picture, making it cheaper for the government to provide care via Medicare.
Of course, the uncertainty of the future cuts both ways. Things could just as easily turn out worse than expected.
For the better part of a decade, the CBO has been warning about the prospect of rising interest rates, for fear it would make debt payments less affordable and eat up a larger share of the federal budget. The fact that it’s been wrong up to now isn’t necessarily a reason to dismiss the concern; the CBO may simply be ahead of the curve.
And even if interest payments stay relatively low, our growing debts still carry costs. Among other things, more government borrowing leaves less money on the table for households and businesses, which can reduce investment and ultimately hurt economic growth.
Then there’s the biggest risk of all: a full-blown debt crisis, where wary investors stop lending out of fear that we may never pay back our debts. Under that scenario, interest rates would skyrocket, forcing massive tax increases or sudden spending cuts — destabilizing the entire US economy.
The mere fact that the United States has its own currency makes this less likely, because we can always print more money if needed. But some economists are still worried, including former CBO director Douglas Holtz-Eakin, who told Congress that he thought “the risk of an eventual fiscal crisis is real,” and that “the budgetary path of the nation guarantees an eventual confrontation with that threat.”
Here’s the deepest problem of all. Say you’re on the skeptical side. You don’t buy the optimistic argument that today’s debt-anxiety is overblown, and that low interest rates have made government debt more affordable. Instead, you want to act now to forestall any chance of a fiscal crisis. What can be done?
Fixing the debt problem requires long-term cooperation between our two increasingly-polarized political parties. No side can do it alone. We know this because the Democrats tried, under President Bill Clinton. A combination of spending cuts, tax increases, and economic growth eliminated the federal deficit in the late 1990s and actually started reducing the government’s long-term debt.
But when President George W. Bush took office, those surpluses helped pay for a package of tax cuts that ultimately drove the country back into the red.
Which is not to blame one party over the other. If today’s Republican Congress put all of its energy into deficit reduction, it’s entirely possible that tomorrow’s Democratic majority would use the savings to expand Social Security or introduce universal pre-k public schooling.
The point is that every effort to safeguard government dollars and pay down the debt creates a pot of money which can be used for priorities that seem more pressing.
Escaping this toxic dynamic seem impossible in the current political climate, so our debts are likely to keep piling up. But remember, those low interest rates and a global search for safe assets have made it easy for governments like ours to borrow cheaply.
Maybe it’s time to stop worrying and learn to love the federal debt.
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