Avoiding the debt discussion won't make it go away.
Although many (including politicians) want to pretend they don’t, deficits and debts do matter. More than ever in fact, as debt has grown much faster this century than economic growth both within the U.S. and globally. Hundreds of examples of history across time and geography show the consequences of over-indebted societies and governments. Events can evolve slowly for a time, without serious consequence, until they don’t. When changes come, when tipping points arrive, when Black Swan events happen, history can be rewritten in an instant.
So my question for the presidential candidates is whether or not each has a clear plan to bring about a balanced budget (by business-level accounting standards) and a plan to reduce the U.S. debt?
Below is a graph from an article I wrote in May of this year showing the amount of U.S. federal debt outstanding along with the yearly interest payments on that debt. According to the U.S. Treasury, the amount of debt outstanding has now increased to nearly $19.7 trillion. (That reflects about $14.2 trillion of debt held by the public and $5.5 that has been borrowed from the Social Security Administration with promises to repay that debt.) We see that despite the miniscule average interest rate the government currently pays on its debt (about 2%), because of the enormous size of that debt, the government and its taxpayers are on the hook for over $400 billion in yearly interest payments alone. (About half of U.S. Treasury debt payments go to foreign bondholders, with China and Japan being the largest holders of U.S. debt. Most of the rest is held by financial institutions.)
The $400+ billion in yearly interest payments on debt reflect past overspending by past presidents and Congresses. The money for these interest payments that are taken from taxpayers is wasted. It does not go to any government function. It does not go to any programs for the needy. It does not go toward national defense, towards education, healthcare or infrastructure. The future promised benefits in the areas of pensions, medical costs, welfare payments, and other “unfunded liabilities” the government has promised will only steepen this curve if nothing substantial is done to government programs and promises.
Are today’s political candidates talking about this? Have they released their plans to balance federal, state and local government budgets? With the federal budget in particular, balanced budgets should be the minimum goal. Unfortunately, because of the already enormous size of the debt as well as ballooning future spending promises, budget surpluses may be required for long term solvency.
And yes, people won’t like it. Studies continually show that most taxpayers are in favor of government cuts “in theory”, but when it comes down to specific programs, the majority of the population is unwilling to cut nearly every government program. While it may go against their unspoken code as a politician of promising the sky while avoiding any discussion of the truth, every year the discussion is delayed will result in deeper problems.
“Normal” interest rates will mean abnormal deficits and debt accumulation
As I’ve written about before, the extent of U.S. government debt (as well as state and local government debt) is now so extreme that the Federal Reserve will never be able to “normalize” interest rates, despite Federal Reserve official pronouncements of such intentions. However, if interest rates do rise in the future to “normal” levels, or higher (high interest rates would typically be expected with governments with high debt levels), already large federal deficits would quickly double or more. Higher yearly deficits would then result in more rapidly growing debt and the cycle would escalate.
If interest rates were immediately “normalized” tomorrow, with medium-term government interest rates reaching its 50-year historical average of about 6%, then the interest on the U.S. federal debt would increase to about $1.2 trillion a year (actually over a few years as old debt is retired for new). Yearly additions to government debt would increase by about $800 billion from existing levels. While in recent years yearly budget deficits have been reported to be under $500 billion (as if that is cause to celebrate), those stated deficits reflect some sleight-of-hand accounting not subject to business standard accounting. According to John Williams at www.shadowstats.com, once promises of future expenses (unfunded liabilities) are included, with GAAP-standard accounting, current yearly budget deficits are already in the trillions of dollars.
But just looking at yearly additions to the federal debt as published by the U.S. Treasury itself, since 2010 – after the recession was said to be over – yearly additions to debt have averaged over $1 trillion per year for the last six, including more than $800 billion a year for the last four. If we recent budget deficits were combined with increased interest payments from higher, “normal”, interest rates, budget deficits would explode.
Unfortunately, the situation is worse because budget deficits that don’t include interest payments will also likely to continue climbing because of Baby Boomer demands on Medicare, Social Security and other programs. If we assume just 5% a year increase in the budget deficit, along with the additional interest costs from higher interest rates, government debt would expand rapidly. Compounding this into the future would result in over $100 trillion in U.S. federal debt within two decades (see chart below). Will the U.S. economy have quintupled during the same time? Of course not. In such a scenario, interest payments on the debt alone would surpass $4 trillion in just 15 years, higher than the entire federal budget today. Long before such a point, servicing that debt would have become impossible, with the result of default or hyperinflation, and some form of government and financial collapse.
Every million, billion or trillion dollars of overspending today that is added on to the debt rolls represent higher interest payments and higher taxes from future taxpayers. That includes taxpayers who had absolutely no say in how that money was spent. Taxpayers are now paying interest on the debt from the massive “Stimulus” bill from 2008. In fact, since the U.S. government has had outstanding debt since the mid-1800s, taxpayers are effectively still paying interest on debt from government spending in the 1800s (Although old debt has continually been recycled into new, the retired old debt is added onto new debt, with the resulting effect as if the old bonds had never been retired.)
Given eleven trillion dollars ($11,000,000,000,000) in deficit spending over the last decade by the U.S. government it is hard for an average taxpayer to feel that the government is being responsible with its spending. When lawmakers cannot even do a relatively simple (though admittedly not easy) task like balance their budget, how can they possibly tackle any of the more complex societal and economic challenges?
Last year Japanese Prime Minister Shinzo Abe made a bold promise to balance their budget by the year 2020 (not including debt interest payments, a balanced budget limited to what is called their “primary” budget). Now, his plans for doing so mostly involve rosy tax increase assumptions without significant spending cuts, along with highly unlikely economic growth assumptions, so he is very unlikely to succeed. However, and disregarding other foolish monetary experiments the country is engaged in (see my last article for more), Mr. Abe at least shows the intention of balancing his government’s budget. He has made it a goal of his and he has actually made a plan to achieve that goal, even if it is unlikely to succeed. And the fact that he has publicly stated this goal and his intentions will probably encourage others in his government to act with more fiscal restraint than they otherwise would. And even if he and his government don’t succeed in balancing their budget it will most likely result in an improving budget deficit along with some long-term financial improvement for the Japanese economy.
In contrast, the current 2017 White House budget forecasts large budget deficits (and no recessions!) for each of the next 10 years. In fact, despite government statistics that tell us that inflation has only averaged 1.5% for the last eight years, planned government spending are for increases of about 5% every year, more than three times the rate of inflation. This is the discipline shown by a government that has added more than a trillion dollars of debt a year for the last 10 with a resulting $20 trillion debt overhang.
In a few months the level of outstanding federal debt in the U.S. will reach $20 trillion. Will that be enough to get Congressmen and planners to make fundamental changes in the U.S. budget? Unlikely. What about when the debt hits $30 trillion, $40 trillion or $50 trillion? Will that get them thinking more about the long-term future of America than their next reelection campaign?
The last two U.S. presidents and their Congresses did nearly nothing to control runaway spending and debt. They took the easy way out and left the problem for future leaders. Do the leading Presidential candidates of today have an actual plan for how to achieve a balanced budget within their first term of office?
Today’s political leaders, at every level, have the potential to make hard choices and make a lasting change that will benefit generations. What do the political candidates of today want their legacy to be? That they created a sustainable budget, along with a debt-reduction plan, and one that allowed future generations to participate in an economy where their tax dollars were used for productive purposes. Or will they reinforce the stereotype that today’s politicians don’t care about anyone but themselves, their allies and their political parties? That they are not careful with how they spend, and overspend, taxpayer dollars? That they’re unwilling to make difficult decisions that make them unpopular, especially with their political and financial supporters? That doing the easy thing is much more common than doing the right thing? Perhaps the legacy of today’s politicians will be that they left the critical and challenging problem of fiscal responsibility for future leaders who were less concerned with winning political battles and more concerned with doing the right thing--even when that thing isn’t easy.