Read the Beforeitsnews.com story here. Advertise at Before It's News here.
Profile image
By Cato Institute-Recent Op-Eds
Contributor profile | More stories
Story Views
Now:
Last hour:
Last 24 hours:
Total:

America Faces a Debt Abyss but the Politicians Just Sit on Their Hands

% of readers think this story is Fact. Add your two cents.


Ryan Bourne

he US is walking headstrong into a public debt crisis. There’s no other way to sugarcoat the awful near and long-term outlook spelt out by the Congressional Budget Office (CBO) this week.

Yes, the usual caveats about forecasts and how they might be too pessimistic about growth and debt interest costs apply. But whereas the UK’s public borrowing is just over 2pc of GDP and projected to fall in the coming years, the US’s is now expected to blow up to more than 5pc of GDP in the near future.

That means $1 trillion-plus annual borrowing as far as the eye can see, and debt rising to 96pc of GDP in the next decade alone. Truly an unprecedented outcome after such a prolonged period of growth without mass mobilisation wars.

US politicians need to take action soon. Any adjustment will only become more difficult, the bigger the existing debt interest payments.

All Western countries face a long-term debt time-bomb associated with an ageing population, which needs to be defused. But for the US the long term is now. Spending on what are known there as “entitlements” — the equivalent of which here would be, broadly, the state pension and NHS — are set to rise by 1.8pc of GDP over the next decade.

After 30 years, this spending will be about 4pc of GDP per year higher than today, absent cost-saving reforms. You can double that if one considers debt interest costs, giving all the added borrowing. It’s not inconceivable then that public debt would rise to somewhere close to 200pc of GDP over that period — taking the States into Japan territory.

Whereas in most European countries austerity efforts are expected to get debt-to-GDP back on a downward path through to the late 2020s or early 2030s before rising again, the US’s current debt path is exponential. Supply-siders will argue the forecasters are too pessimistic about the impact of recent tax cuts and president Trump’s deregulatory efforts. But, if anything, there is a bigger risk that the outcomes will be worse than expected.

The CBO is legally obliged to model only laws and not second guess what politicians will do next. They assume then expiration of most of the recent income tax cuts in 2025, and for the huge spending increases Congress recently passed to fall out (for an idea of scale, these saw annual military spending alone increase by 1.5 times the UK’s total annual defence budget). If, instead, the CBO had assumed, not unrealistically, that tax cuts will be maintained by future Congresses and new spending totals become the baseline, they find the US deficit would balloon to 7.1pc of GDP by 2028, with debt spiralling to 105pc of GDP.

Former UK chancellor George Osborne talked about politicians needing to “fix the roof while the sun was shining”. Well, the US economy compared with the UK’s has been in pretty rude health, but their politicians seem in denial about the need for action at all. Sure, they tip their hat to the task. Republicans are even considering a symbolic vote in the coming weeks on a “balanced budget amendment” to the US constitution, safe in the knowledge that it has absolutely no prospect of passing. The reality, though, is that Republican demands for tax cuts and higher defence spending coupled with Democrat demands for more spending on everything else has created a political equilibrium with a huge bias for deficits, while both sides insist the other is to blame.

In truth, the buck stops with both parties. It’s easy for Democrats to blame the recent tax-cutting bill. But the data clearly show that, as a proportion of GDP, revenues will be almost exactly the same in five years’ time as before the tax cuts. In fact, the tax-cut effects on the deficit are peanuts compared to the long-term fiscal gap.

The primary problem is spending. Yet neither side has been willing to countenance reforms to the entitlements, which, as a first approximation, entirely account for the trajectory. The recent spending bill, which busted all the caps Congress had imposed on itself, was likewise passed with cross-party support, and signed by the president before he then realised he didn’t like it. Few seriously think that Democrat victories later this year are going to lead to a more fiscally conservative Congress. If anything, the party has been moving in another direction, advocating European-style social programmes with no

Some US commentators dismiss all these concerns about high and rising debt, declaring “we had debt levels like this post-Second World War and then grew quickly”. But after the war the US slashed unnecessary military spending, balanced budgets, benefited from the one-time change in female labour force participation and inflated away much accumulated debt. Most of the debt drivers these days, in contrast, are real health demands or index-linked promises that cannot be so easily overcome or cut.

Nobody knows for sure, of course, what the consequences of continual inaction will be. Economists at the Hoover Institution worry about the possibility of a sudden debt earthquake, whereby a sudden realisation hits short-term bondholders of the unsustainability of the US public finances and the unwillingness of politicians to confront it. In that scenario, rising borrowing costs would blow up the budget deficit further and necessitate sharp austerity.

But another plausible outcome is that a high-debt trajectory simply undermines potential growth, leading the US into a high-debt, low-growth trap, with vast resources used simply servicing the debt. A recent paper by the Dallas Fed found that growth across countries slowed substantially when debt levels were already high and the trajectory was ever upwards — conditions that the US fulfils.

To avoid that fate, US politicians need to take action soon. Any adjustment will only become more difficult, the bigger the existing debt interest payments. Instead, though, they are exacerbating the problem in benign conditions — the height of irresponsibility.

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute.


Source: https://www.cato.org/publications/commentary/america-faces-debt-abyss-politicians-just-sit-their-hands


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!


Order by Phone at 888-809-8385 or online at https://mitocopper.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomic.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomics.com M - F 9am to 5pm EST


Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation.

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)

Oxy Powder - Natural Colon Cleanser!  Cleans out toxic buildup with oxygen!

Nascent Iodine - Promotes detoxification, mental focus and thyroid health.

Smart Meter Cover -  Reduces Smart Meter radiation by 96%! (See Video).

Report abuse

    Comments

    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    MOST RECENT
    Load more ...

    SignUp

    Login

    Newsletter

    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.