The past four months, I have written exclusively about U.S. fiscal policy. Topics like the budget, spending, and tax reform. I’m planning to conclude this exercise with three or four blogs that summarize what I think is a sensible approach to comprehensive fiscal policy going forward.
I believe the biggest long-term threat to the economy is our colossal national debt. In the years 2001-2015, we more than tripled the national debt. Starting 2001 it was $5.7 Trillion; it’s now about $18.2 T and still growing. The non-partisan Congressional Budget Office (CBO) is projecting that the Gross Domestic Product (GDP) in the U.S. will be about $17.7 T for 2015. This means that our national debt is equal to approximately 103% of GDP.
U.S. debt as a percentage of GDP has risen from 32.5% in 1980, and 55.7% in 2000, to the 103% level of today. Debt to GDP has only been higher during WWII – to pay for that war. We’re clearly headed in the wrong direction.
Among developed countries, only three have a higher percentage of debt to GDP: Japan, which has had a stagnant economy for more than 20 years; Greece, which has the worst and most dysfunctional economy in Europe; and Italy, which has seen its GDP shrink since 2008. How much debt is too much? No one knows for sure, that’s determined by global markets. But unless we take action, the U.S. could suffer some of the same difficult consequences from too much debt as these countries have.
I believe in balancing the budget over the business cycle, but we continue to run deficits even in non-recession years. Many economists say this high level of debt will eventually have a significant negative impact on our economy, and that we may reach a tipping-point for real financial trouble in the next 5-15 years.
It’s imperative that the U.S. begin reducing the national debt as a percentage of GDP. Most economists think a national debt of 65-70% of GDP is sustainable. This can be done over time if we can balance the budget or reduce annual deficits to near zero, and as the economy continues to grow.
For instance, if we could balance the budget by the end of 2018, the national debt would be about $20 trillion by then. If we maintained a balanced budget from 2019 through 2025, and have a GDP growth rate of 3% from 2016 to 2025, GDP would grow to $24 T by 2025, and the percentage of debt to GDP would be down to approximately 83%. If we did the same through 2030, GDP would grow to $27.7 T and the debt would be down to about 72% of GDP (these numbers also assume the CBO projected interest rates of 1.7% this year, and up to 3.6% by 2025).
Unfortunately, it’s not likely the economy will grow at a 3% rate. For all of 2014 GDP growth was a modest 2.4%, and it’s projected to be only 2.3-2.5% this year. Just this week, the Wall Street Journal published a survey of 60 economists who are predicting 2.6% growth in 2016, and 2.5% growth in 2017. However, even if we have less robust growth, with a balanced budget or a small deficit, the debt would still go down as a percentage of GDP.
So how do we grow the economy? How do we balance the budget? These are the two keys to start reducing our enormous national debt. Growing the economy is not always easy to do and there is less certainty to make it happen. But we do have control of what we spend and getting to a balanced budget, if Congress and the administration would make it a priority. Absent that, we face an ever increasing debt and unknown consequences.
I think that it’s due to this inaction that the CBO is projecting that annual deficits will continue throughout the next decade, growing from $396 billion this year, to $1.07 trillion for the year 2025. This would result in a total national debt of an astounding $26.9 T, and depending upon how fast the economy grows, be in a range of about 108% to 120% of debt to GDP. That would put us over the high debt levels of WWII and into uncharted territory.
However, if GDP growth is slower than the CBO is estimating (especially if we have a recession), and/or interest rates are higher, the U.S. national debt could be much larger – possibly an incredible 120-140% of GDP.
Critics of deficit reduction say the national debt doesn’t matter, but many economists disagree. Our debt is growing faster than the economy – an unsustainable path. The longer we wait, the less we will be able to maneuver. The less we can maneuver, the more arduous the task becomes. Now is the time to enact meaningful deficit reduction, while markets are calm and the economy is stable and growing.
I’ll be out of town next week, so my next blog will be in two weeks on October 25.
Links to related blogs:
Fiscal policy: http://www.commonsensecentrist.com/leadership-not-misleadership/
China and U.S. national debt: http://www.commonsensecentrist.com/china-why-deficits-and-the-u-s-national-debt-matter/
China’s emergence as largest economy: http://www.commonsensecentrist.com/a-coming-new-order-in-global-financial-systems/
Greece’s Troubles: http://www.commonsensecentrist.com/what-america-should-learn-from-greeces-troubles/
Budget concerns: http://www.commonsensecentrist.com/the-federal-budget-were-getting-boxed-in/
Deficit reduction: http://www.commonsensecentrist.com/passing-the-buck-really-big-bucks-2/