The Subtle Threat Posed By The Growing National Debt

Oct 20th, 2018 | By | Category: Featured Issues, Politics & Current Events

The significant tax cut passed by the Republican-controlled Congress last year is a source of pride and joy for the Republican Party and especially for President Trump.  The Republican Congress is now seeking to make these tax cuts permanent.  (They are set to expire in 2025.)  Overall, Americans are seeing more in their paychecks and business leaders are paying less, in some cases far less, in corporate taxes.  The escalator of financial gain is headed upward and there seems to be no end to the “good life” provided by the tax cut.  But, there is a subtle, almost imperceptible threat inching its way into this national euphoria—interest on the growing national debt.

The brutal facts distill down to this reality:  The national government will soon pay more in interest to service its massive debt than it spends on the military, Medicaid or infrastructure programs.  There are two principal causes to this new normal of financing the rapidly growing budget deficit:  1. The tax cut has resulted in a significant drop in tax revenue; 2. Steadily rising interest rates make the debt more expensive.  People often forget that as interest rates rise, the cost of a mortgage or a commercial loan naturally goes up.  But so does the cost to the US government when it goes to the debt market to offer its Treasury bonds, certificates and notes.  Bottom line:  less money is coming into the US Treasury and more is going to service the debt because of rising interest rates.  Thus, for example, there is no money left to fix the crumbling infrastructure of the United States (roads, airports, port facilities for trade, etc.).  Another subtle reality looms:  When the next financial crisis comes (and it will come), there are fewer options for the national government to meet such a crisis because it is already paying dearly to simply service the national debt.

How serious is this new normal?

  • Within the next ten years, the cost of the soaring the national debt will be $900 billion in annual interest payments (13% of government spending), larger than most other categories of the federal budget. During the next fiscal year’s budget alone, the debt service cost on interest payments will hit $390 billion, nearly 50% higher than in 2017!  Rising interest rates, a tax cut that further increases the national deficit, and an irresponsible Congress and president that in February raised spending by $300 billion over two years significantly increasing the financial pressure on the national government.  The actual deficit for the next fiscal year (revenue vs. expenses) will grow by an additional $1 trillion dollars.  Given that the total public debt of the United States now stands at nearly $16 trillion, a small increase in interest rates costs the government billions.
  • As Nelson D. Schwartz demonstrates, “In the past, government borrowing expanded during recessions and waned in recoveries. That countercyclical policy has been a part of the standard Keynesian toolbox to combat downturns since the Great Depression.  The deficit is soaring now as the economy booms, meaning the stimulus is pro-cyclical.  The risk is that the government would have less room to maneuver if the economy slows.”  And as Jeffrey Frankel, a Harvard economist, argues, “Aside from wartime or a deep downturn like the 1930s or 2008-2009, this sort of aggressive fiscal stimulus is unprecedented in US history.”  As the economy weakens, the US government will find it much more difficult to cut taxes or increase spending.  Charles Schultze, chairman of the Council of Economic Advisors in the Carter administration, once commented on the danger of federal deficits with this anecdote:  “It’s not so much a question of the wolf at the door, but termites in the woodwork.”
  • The Republican Party, which now controls the Presidency and the Congress, gives every evidence of being unprincipled. During the Obama presidency, Republicans castigated the administration complaining bitterly and persistently about the growth of the federal deficit.  The deficits of the Trump presidency are now comparable or even greater.  However, the argument of the Party is that the current tax cuts will pay for themselves even though the Congressional Budget Office maintains that they will add $250 billion to the deficit each year from 2019 to 2014.  The tax cuts are not self-funding.

How did we get into this mess?  Columnist David Brooks argues that there are two basic positions about how to manage the American economy—the cyclicalists and the structuralists.  For the cyclicalists, America is operating well below capacity.  To energize the economy, the government must borrow and spend more.  Although the current federal deficit is about $1 trillion per year, many cyclicalists believe that debt should be $1.4 trillion per year!  Brooks summarizes:  “The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing.”  Those who are critical of this position believe that cyclicalists are simply ignoring core issues that must be addressed.  To not do so is self-defeating.  That is where the structuralists come in.  There are major, fundamental structural flaws in the American economy. Fixing these structural problems should be the priority, not papering over them with more debt.  What are those structural problems?

  1. The nature of globalization and technological change. Hyperefficient globalized companies need fewer workers.  Therefore, unemployment rises while “superstar salaries surge” and lower-skilled wages stagnate.  As Brooks puts it, “the middle gets hollowed out and inequality grows.”
  2. There are structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling behind.  Although unemployment is now at record lows, many companies simply cannot find enough skilled workers.  We are simply not training Americans for the jobs of the 21st  The human capital deficiency in America is at crisis proportions.
  3. Most basic to the structural problems of the US is politics. Brooks writes:  “Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, [thereby] making the economy less dynamic.”   The political climate in Washington is so serious that many politicians place their personal ideology over the national good.

What has been the result of these structural issues?  Along with other matters, these structural problems have retarded growth and wages for decades.  Consumers therefore tried to compensate by borrowing more.  Politicians tried to compensate by “reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into less productive and more sheltered parts of the economy—mostly into health care, government and education.”  The current model under which America is working is broken.  This nation cannot compensate for structural economic weaknesses with more tax cuts.  The level of government spending is not the main factor in determining how fast an economy grows. As Brooks argues, “If that were true, then Greece, Britain and France would have the best economies on earth.”  Running up larger deficits without fixing the structural problems will not restore long term, sustainable growth.

The Republican Party is now pursuing a bankrupt set of public policies.  Larger deficits, fueled by deeper tax cuts and growing interest rates, are unsustainable.  The Party is ignoring the structural problems facing the US.  We need someone to lead this nation who understands the systemic structural problems and can provide solutions that recognize the global nature of our economy and the technological change, which is redefining our economy.   We also need someone who understands the crisis in human capital we are facing and the catastrophic political dysfunction rampant in the American political culture.  Neither political party seems to understand these structural problems and neither thereby is able to lead.  The subtle nature of our growing debt as a nation will eventually impact our capacity to fund the military and the entitlement programs (e.g., Social Security, Medicare, and Medicaid) that are exploding as our population ages, leaving almost no money left for our massive infrastructure needs, education and other entitlement programs.  As a nation, we are ignoring a reality that could eventually become a self-destructive end.

See Nelson D. Schwartz in the New York Times (26 September 2018) and David Brooks in the New York Times (8 May 2012).

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