EDITOR'S NOTE: It’s been several decades that critics have been sounding the alarm on America’s national debt—its trajectory, dangerously accelerating toward a parabolic tilt. In 1981, our national debt topped $1 trillion. Now, we’re at $30 trillion. And lawmakers seem largely willing to kick the can down the road, as the allure of fiscal spending takes priority over implementing responsible policy. Similar to how credit card debt is a burden that cardholders must eventually pay off, any addition to the national debt by way of government spending is a claim on Americans’ future incomes. At $30 trillion, that claim is likely going to extend to your children and possibly even your grandchildren. The Congressional Budget Office (CBO) released a report warning of the unsustainability of the current debt burden. The growing national debt will eventually have to be tackled with crippling doses of austerity: higher taxes and reduced government programs like Social Security and Medicare. Yet, it doesn’t seem like Washington cares enough about the future of the American people to even address the problem. How bad is it? The article below summarizes the report in detail. Read on to catch a glimpse of what America’s financial future holds. What to think about: how you might position yourself toward hedging against the potential austerity to follow once Washington realizes that the spending spree must end.
New CBO report shows that the longer Congress waits to deal with the debt, the bigger the problem becomes.
Getting a handle on America's massive and growing national debt will only be more difficult if lawmakers keep postponing the effort.
In a report released Thursday, the Congressional Budget Office (CBO) attempted to attach some math to the difficult policy decisions that lie ahead. Regardless of when lawmakers decide to address the $30 trillion national debt, just stabilizing it (that is, implementing policies to stop it from growing relative to the nation's economy as a whole) will require that "income tax receipts or benefit payments change substantially from their currently projected path."
In short, taxes will have to go up and government services—including benefits from programs like Social Security and Medicare, the health insurance program for the elderly—will likely have to be reduced.
That's hardly a new set of prescriptions. Debt-watchers have been warning for years that benefit cuts and tax increases will likely be needed to have any realistic shot at managing America's long-term debt. (And, remember, we're talking about what's needed to merely stabilize the debt, not reduce or eliminate it).
The CBO report charts three prospective courses based on assumptions about when Congress might start implementing necessary changes to face this tsunami of a problem: by 2026, 2031, or 2036.
If policy makers wait until the end of the decade to raise taxes and cut spending, the best-case scenario would leave the debt hovering around 120 percent of GDP over the long term. Waiting longer means higher debt levels forever and more severe consequences.
"As federal borrowing increased, the amount of funds available for private investment would decline (a phenomenon known as crowding out), and interest costs would increase," the CBO warns. "Perpetually rising debt would also increase the likelihood of a fiscal crisis and pose other risks to the U.S. economy."
A larger amount of debt translates into reduced economic growth in the long run, as the cost of interest payments on the debt consumes dollars that could otherwise be put to productive use. As the CBO notes, persistently high levels of debt can also put upward pressure on interest rates and make it more difficult to combat inflation.
President Joe Biden has tried to portray his recent budget plan as fiscally responsible because it envisions a trillion-dollar reduction in the federal budget deficit, which the White House touts as the largest ever. But that's only possible because the government is emerging from two years in which the deficit hit previously unimaginable highs due to the fiscal and monetary policy responses to the COVID-19 pandemic. When you put Biden's budget plan into a larger context, it's anything but fiscally sound—even with a planned tax on the wealthiest Americans, it projects a $1 trillion deficit this year and higher deficits in the years to come.
(Remember, the debt is the accumulation of all federal budget deficits. Reducing the deficit from $3 trillion to $1 trillion does not reduce the size of the current national debt—it still adds $1 trillion to it.)
There's little hope that Republicans will do much to stabilize the debt either. Despite comically promising to pay off the debt in eight years, Former President Donald Trump was a spendthrift who jacked up the debt by more, per year, in his four years in office than President Barack Obama did during his eight. Imagine introducing a bill in Congress today to hike taxes and cut entitlement benefits. Which political party would have a target on your back faster?
Originally published on Reason.