How to Fix the National Debt, with Pictures!
Friday, November 8, 2013
The federal government spends way too much. On this, those on the left and right should all agree. The disagreement, on spectacular display this October as the federal government shut down for over two weeks, is the degree to which our debt is an urgent problem and how it should be fixed. When we look closely, we see that we’re actually not as underwater as many think. And we could readily solve the long-term problems if we agree to cut back significantly on one major spending category: defense spending.
When it comes to the national debt, conservatives are right that we’re spending too much and that the debt is a problem. But I feel that they’re off the mark in their solutions and in the degree to which they worry about the national debt. The deficit is actually half what it was at its peak during the economic crisis of 2008 and 2009, which was the last budget set under President Bush. The deficit is projected to be about $670 billion for fiscal year 2013, down from a peak of $1.4 trillion in 2009 and $1.3 trillion in 2010 and 2011. This is real progress.
Figure 1. U.S. deficits in billions (source: Congressional Budget Office)
When measured as a percent of GDP (gross domestic product), the national budget deficit is also much lower, at 4 percent of GDP in 2013, as compared to almost 10 percent at its high in 2009. The Congressional Budget Office projects the deficit will fall to 2 percent of GDP by 2015.
However, what really matters when it comes to our debt and deficits is the interest we pay on the debt. For example, if your mortgage rate is 3.5 percent instead of 8.5 percent, it has a huge impact on what you actually pay. The interest rate on our national debt is currently very low, and so the actual payments are very low.
As percent of GDP, the interest we pay on our national debt is less than half what it was in the 1990s under the first President Bush and Bill Clinton. The economy boomed in the 1990s even with the interest payments twice what they are now. There are, of course, a great many factors behind net economic performance in the world’s largest economy, but this recent demonstration of the economic impact of much higher debt payments than we have today is good evidence that our current debt burden is sustainable.
Figure 2. Federal interest payments as a percent of GDP (source: CBO)
So what gives? With the deficit on track to fall by 80 percent from its high in 2009, what’s all the fuss about?
What About the Long-Term?
Well, in the long-term, there is still a problem. The Congressional Budget Office (CBO, a nonpartisan federal agency) projects that the trend starts to turn around again in 2018, and the deficit will, under current policies, return to 4 percent of GDP by 2023. But that’s 10 years from now. And we’ve already seen that 4 percent annual deficits don’t bring the economy crashing down. In fact, the U.S. looks pretty good compared to our peers in Europe or Asia in many ways, as the markets and continued strength of the dollar have shown. We could, and should, have a much stronger economy than we do, but it seems pretty clear that it is not our federal deficit that is the cause of our still-slow economic recovery.
(Many economists, including those at the International Monetary Fund, are now concluding that we have actually spent too little to get us back on track economically. The IMF, long a supporter of “austerity” measures — essentially national belt-tightening — has done a sharp about-face in light of the experience of European countries tackling their own recessions since 2008.)
CBO projects that by 2038 — 25 years from now — our federal debt will reach 100 percent of GDP, somewhere it hasn’t been since World War II. It also projects that interest rates will rise in coming years and that the interest burden from the debt will rise to 5 percent of GDP by 2038, up from about 1.5 percent today. That is a real problem, but it is five years from now before the interest burden even climbs above 2 percent — still well below the 3 percent it was during the mid-1990s. Five years is plenty of time to work on solutions that don’t require hostage-taking.
Figure 3. Federal debt as a percent of GDP (source: CBO)