The National Debt Is Coming Due, Just Like We Told You

Guest Post by Nick Gillespie

By 2020, interest on the debt will cost more than Medicaid. By 2025, it will cost more than defense spending. And that’s just the start.

What happens when you borrow the equivalent of your annual income and those low, low teaser rates start to increase? Congratulations, America, you’re about to find out.

The Wall Street Journal reports some non-shocking, non-surprising news:

Wisconsinart, Dreamstime.com

Wisconsinart, Dreamstime.com

In 2017, interest costs on federal debt of $263 billion accounted for 6.6% of all government spending and 1.4% of gross domestic product, well below averages of the previous 50 years. The Congressional Budget Office estimates interest spending will rise to $915 billion by 2028, or 13% of all outlays and 3.1% of gross domestic product….

It will spend more on interest than it spends on Medicaid in 2020; more in 2023 than it spends on national defense; and more in 2025 than it spends on all nondefense discretionary programs combined, from funding for national parks to scientific research, to health care and education, to the court system and infrastructure, according to the CBO.

A quick recap of our dismal national fiances: The U.S. economy generates about $21 trillion in annual activity. Debt owed to the public comes to about $15.5 trillion, but when you add intra-governmental debt (which you should, because it represents actual commitments to pay), the figure is…about $21 trillion.

This is not good, both for obvious and and for less obvious reasons. Among the obvious problems: When you have to pay more in interest, it crowds out your ability to spend on other things. If you’re a government, it also might mean that you raise taxes or inflate your money. (You could also cut spending, but politicians tend to resist that for as long as possible.)

The federal government spends about $4.4 trillion a year, split among several categories, including what is considered “mandatory” and “discretionary.” The mandatory stuff includes entitlements, such as Social Security, Medicare, and Medicaid. Congress doesn’t need to vote on this spending for it to continue. Discretionary spending includes spending on the military, homeland security, schools, and other stuff that does need to get voted on. The percentage of spending that is mandatory has grown from around 30 percent in 1962 to about 62 percent of federal outlays today. Discretionary spending comes to about 30 percent, and interest on the debt rounds out the rest. Government spending will increase whether a divided government does anything or not. And, absent significant changes in current law, what the government spends on will be more and more limited. From a libertarian perspective, less government spending is a good thing, but we’re not really going to get that, even with a gridlocked Congress.

More importantly and less obviously, high levels of national debt exert a downward pressure on long-term economic growth. In a 2012 paper, economists Carmen Reinhart and Kenneth Rogoff define a “debt overhang” as a situation in which the debt-to-GDP ratio exceeds 90 percent for five or more consecutve years. After looking at 26 debt overhangs in 22 advanced economies since 1800, they conclude that “on average, debt levels above 90 percent are associated with growth that is 1.2 percent lower than in other periods (2.3 percent versus 3.5 percent).” These overhangs last a long time—in their sample, the average lasted 23 years—creating a cumulative loss in economic growth that’s “nearly a quarter below that predicted by the trend in lower-debt periods.”

That work has been validated by left-wing economists associated with the University of Massachusetts, who were critiquing an earlier version of Rinehart and Rogoff’s work that had mistakenly found that debt overhangs reduced growth below zero. The critics conclude that “the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent.

Whether or not there is anything magical about 90 percent, there’s every reason to be concerned when the government is spending far more than it can ever collect in taxes. We’re essentially entering an era where “debt overhang” is the new normal and there’s no sign that’s going to change any time soon.

Two percent growth isn’t nothing, of course. But it’s well below the historical average since World War II, and the difference really compounds over the years:

Reason.com

Reason.com

We’re already poorer for lower economic growth, even as the government spends more (and borrows more to cover those costs). The Congressional Budget Office (CBO) says the economy grew by 3.1 percent in 2018, but it estimates that annual growth is going to slow to 1.7 percent annually between 2023 and 2028.

Bonus link: More than seven years ago, Mercatus Center economist and Reason columnist Veronique de Rugy and I explored a way to balance the budget without raising taxes. Check that out here.

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Blah
Blah

Blah blah blah, wok wok wok.

steve
steve

Thank God we have the Fed Reserve to keep us out of trouble and on the right track.

Anonymous
Anonymous

Bonds can be taxed. The tax will be rescinded to AMERICAN TAXPAYERS ONLY BECAUSE THEY ARE THE ONES WHO PAY the interest.

New Dollars will be issued as well.

Brian Reilly
Brian Reilly

There id no intention to retire/reduce Federal debt or spending in any way by either wing of the Uniparty. There is no desire or public clamor to reduce spending. There is no ability to increase tax collections (regardless of tax mix or marginal rates) much above the %of GDP now being collected. As long as there is even a faux market (which is what we have now) for Federal securities, the facade can be maintained. At the moment when that Ponzi scheme fails, and fail it will, the Big Switcheroo wil be on us like a cheap suit.

The scheme all depends on having the yuan, yen, and Euro on the same eneral schedule. Looks to me like they are on track.

Yancey_Ward
Yancey_Ward

It will be a non-linear event. It will work until suddenly one day doesn’t work any longer and no one wants to hold the cash in any form.

Big Ed
Big Ed

We are blindfolded, walking towards the Grand Canyon…Is it the next step???? or 10,000 more steps????

Trapped in Portlandia
Trapped in Portlandia

Actually, Big Ed, we started crawling, then we got up and walked slowly. Eventually, our pace picked up and now we are running in full stride toward the Grand Canyon. If we don’t reach it soon we will get into a real fast car and drive with the speedometer topped out. Thelma and Louise, here we come.

overthecliff
overthecliff

Maff says it is gonna happen sure as the sun rising in the east.

wholy1
wholy1

Regular solution: default, false-flag, civil then world war.

AC
AC

It’s probably going to be massive inflation, their only tool left – so a de facto default, rather than a open default.

comment image

gatsby1219
gatsby1219

It doesn’t matter, it’s all fake anyway.

Todd H.
Todd H.

National debt is largely a fiction that doesn’t equate to personal or business debts.

Here is an idea:
1) From now on, every year the U.S. Treasury calls in early a portion of its government bond portfolio.
2) It replaces the interest-bearing bonds with United States Notes that don’t earn interest and are issued directly by the U.S. Treasury, not the Federal Reserve.
3) Taxes are set to maintain consumer prices at a set level.
4) All future deficits are funded by issuing United States Notes at 0% interest, not borrowing from private banks.
5) Require 100% reserves on demand deposits.
6) Abolish the Federal Reserve and regulate private banks through the Treasury Department.

Result: price stability and no national debt. No government spending on bond interest. Investment would be channeled to profitable enterprise, not risk-free government debt. Responsible private banking with no bailouts.

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