US also considers increasing retirement age
While many in conservative circles hailed the latest jump in economic growth, there was little talk of a long-term fiscal challenge which, left unaddressed, will wreak havoc on our economy and the world’s — our skyrocketing national debt that could become unmanageable in coming decades. Director of Defense Studies at the Center for the National Interest Harry J. Kazianis writes about this in the article America’s greatest foe isn’t China or Russia — it’s debt for published in The Hill.
The numbers don’t lie. While recent tax cuts seem to have at least partially fueled strong economic growth, projections by the Congressional Budget Office (CBO) for this year forecast an $890 billion deficit, up from $438 Billion in 2015. If current CBO projections hold, next year the deficit will surpass $1 trillion. The last time that happened was during the great recession. And, according to most experts, unless drastic actions are taken, trillion-dollar deficits will become the new normal — a greater threat to our nation than anything Russia, China, North Korea or Iran could ever dream up.
How close are we to an actual debt crisis? It depends on who you ask.
“While there is no magic number for what will trigger a crisis over the size of U.S. debt and deficits, every day that U.S. debt climbs higher above 100 percent of GDP and fiscal discipline remains lax, (the) risk of a major crisis increases, especially if linked to an erosion in the U.S. dollar’s use as a reserve currency,” explains Scott MacDonald, chief economist at Smith’s Research & Gradings.
How much money America owes its creditors is truly shocking. Total U.S. debt stands at more than $20 trillion. To understand the size and scope of how large this is, that’s more than the total amount of goods and services — what’s commonly referred to as gross domestic product (GDP) — that our nation produces every year. Perhaps worst of all, we pay nothing on the principal, paying only interest on that debt, a staggering estimate of $310 billion for fiscal 2018 alone. That equals the total GDP of many mid-sized economies, such as Colombia or the Philippines.
Perhaps even scarier, from a global perspective, is that some other countries have it far worse. “Measured vs. GDP, the U.S. is better than Japan, Italy and Greece, but not by much,” says Christopher Whalen, chairman of Whalen Global Advisors, who recently served as head of research at Kroll Bond Rating Agency. “We have a stronger economy in terms of income, which is the key measure of economic growth.”
Still, America faces tremendous fiscal challenges over the long term that won’t be easily solvable, thanks largely to demographic trends that helped us in the past but could come back to haunt us in the future. “The ‘balanced budgets’ of the 1990s was due to demographics, not fiscal restraint,” Whalen explains. “The peak in earnings by the baby boomers drove tax revenues higher, not fiscal righteousness in Washington. Robert Rubin claimed to be a ‘deficit hawk,’ but that was all just talk. Not much different from the chest pounding by Trump today.”
Indeed, those same citizens who powered America’s economy are getting older and will begin to collect Social Security and health benefits en masse over coming decades, raising debt and spending to unprecedented levels.
Combine that fact with tax cuts and a growing military budget, and you have the makings of what can be described only as a fiscal tsunami.
From here, if you can imagine it, things could get even worse. As the economy gets stronger, interest rates will rise, forcing the federal government to pay more money on interest payments. One could easily imagine a scenario where interest rates keep rising for several years, along with debt that is never repaid, creating a one-two punch that can only spell doom for America’s economic future.
So, what can be done to stop what seems to be a looming financial crisis, since America seems obsessed with spending more and more money, no matter which party is in power?
“Increasing the retirement age would be a start,” explains Samuel Rines, chief economist at Avalon Advisors in Houston, Texas. “One of the major issues is that much of our deficit spending will be difficult to contain. The revenue side is where much of the solution likely exists — in the form of higher individual tax rates.”
Others agree that reforms could make a difference — but a change in attitude that our nation is a sort of giant credit card is required first. “Reforming Social Security and entitlements would help, as they make up the largest parts of the annual budget,” says MacDonald with Smith’s. “But we as a nation need to start prioritizing what we are spending our taxes on. We are, in a much-used phrase, living beyond our means.”