The national federal debt now stands at $19.9 trillion (not
counting state and local debt). The 2016 GDP (Gross National Product – the
value of all goods and services created in the entire nation in 2016) was $18.56
trillion, so our national federal debt is now 107% of our GDP, well into the
danger zone by most economists’ estimates. More than that, if we continue on
the current deficit path we will be at 150% of GDP within a decade – that’s the
range Greece is in now, and we can all see the fiscal troubles that nation has.
Clearly we need to reduce it.
And by the way, the government “rolls over” the debt
constantly. That is, Treasury bonds are
sold with maturities ranging from 90 days to 30 years. When these come due, the
Treasury sells new bonds to pay off the old bonds, not something your average bank
would allow an individual to do. The risk is that if someday buyers lose confidence
in the fiscal integrity of the United States and don’t show up to buy new bonds, we would suddenly
owe back the face value of the old bonds, with nothing to pay it off with.
Where should the federal debt be? Ideally of course we would
pay it all off so that we would have the maximum borrowing capacity the next
time we have a financial meltdown (and there will be next times; bet on it!).
But that ideal is almost certainly politically unattainable. This chart shows
the recent history of the national debt as a percentage of the GDP, including the sharp increase first
under President Bush and then almost doubling again under President Obama:
Suppose we aim to reduce the national debt to around 60% of
GDP, or about $11.1 trillion, which is the average size of the debt relative to
GDP from 1940 through 2015. And suppose we aim to do that over a reasonable
period, say 20 years. That means we have to (a) immediately reduce the annual federal
deficit to zero (stop borrowing half a trillion dollars a year), and (b) pay
back just over half a trillion dollars a year for the next 20 years.
Remember from part I of this series of posts that ALL
discretionary spending (ie – everything except interest on the national debt
and the mandatory spending – mostly Social Security and Medicare) currently
amounts to $1.11 trillion, of which about $600 billion is military, and of
which about $550 billion is borrowed each year.
In essence to get back to a reasonable federal debt level we
would have to cut the federal budget by a bit more than a trillion dollars a
year, half to reduce borrowing to zero and half for our payback schedule over
20 years. Congress will never do that of course, but it does give a clear
indication of how bad a state we are in.
And it does suggest that there are lots of “nice to have” things that we
simply can’t afford unless we are willing to pay substantially higher taxes.
Of course neither political party is about to either raise
our taxes substantially, nor cut almost all discretionary spending. President
Trump’s draft 2017 budget sharply reduces funding for most federal agencies,
and lots of people in both parties whose special interests would be hurt are
calling it irresponsible.
Well, it is irresponsible, but not for the reasons they
think – it is irresponsible because it doesn’t cut nearly enough, as the
analysis above shows. But it probably cuts about as much as is politically
possible at present, and even these cuts may not survive Congress. Of course if
Trump’s economic policies do manage to lift economic growth from the anemic 2%
of the Obama years up into the 3½-4% range, tax revenues would go up and the problem
would get somewhat easier - unless, of course, Congress just can’t resist spending
the additional tax revenue instead of paying off the debt, a likely outcome.
No one is quite sure of the original source of this quote,
and it exists in a number of different variations, but it certainly applies
today:
“A democracy cannot
exist as a permanent form of government. It can only exist until the majority
discovers it can vote itself largess out of the public treasury. After that,
the majority always votes for the candidate promising the most benefits with
the result the democracy collapses because of the loose fiscal policy ensuing,
always to be followed by a dictatorship, then a monarchy.”
Posts
