The title above comes from Mr. Martin Feldstein’s March 21, 2019 Op-Ed, “The Debt Crisis Is Coming Soon,” in the Wall Street Journal (WSJ). Mr. Feldstein is the former Chairman of the Council of Economic Advisers under POTUS Ronald Reagan, and is currently a professor at Harvard.
“The most dangerous domestic problem facing America’s federal government is the rapid growth of its budget deficit and national debt,” Mr. Feldstein writes.
According to the Congressional Budget Office (CBO), “the deficit this year/2019, will be $900B, more than 4 percent of the gross domestic product (GDP), and more than the entire U.S. defense budget. “It will surpass $1T in 2022,” Mr. Feldstein warns. “The federal debt is now 78 percent of U.S. GDP,; and by 2028, it is projected to be nearly 100 percent of GDP. All this will have serious economic consequences, and the CBO understates the problem,” he added. The CBO “has to base its projections on current law — in this case, the levels of [current/projected] spending, and future tax rules and rates that appear in law today.”
“The levels don’t match realistic predictions,” Mr. Feldstein observes. “Current law projects that defense spending will decline as a share of GDP, from a very low of 3.1 percent now, to about 2.5 percent over the next ten years. None of the military and civilian defense experts to whom I [Mr. Feldstein] have spoken to, believe that will happen, given America’s global responsibilities, and the need to modernize U.S. military equipment. It is likelier that U.S. defense spending will stay around 3 percent of GDP, or even increase in the coming decade. And, if the outlook for defense spending is increased, the Democratic House majority will insist that the non-defense discretionary spending should match its [defense spending] trajectory.”
“If defense, and other discretionary spending stays steady as a share of GDP, the annual deficit will increase by nearly one percent of GDP — from 4.2 percent GDP now, to about 5 percent of GDP ten years from now,” Mr. Feldstein estimates. “At the same time, the tax increases in current law that the CBO assumes will occur during the next decade as some of the recent tax cuts are phased out probably won’t happen. Congress will face strong political pressure to avoid a functional tax increase.”
“What does that mean for the long-run ratio of the federal debt to GDP?,” Mr. Feldstein asks. “Federal debt will probably surpass 100 percent, much sooner than 2028,” he predicts. “If discretionary spending increases, debt growth will jump to 100 percent even quicker. When America’s creditors at home and abroad realize this, they will push up the interest rate the U.S. pays on its debt. That will mean still more growth in debt. A one percent increase in the interest rate the government pays on its debt, would boost the annual deficit by more than one percent. The higher long-run debt-to-GDP ratio would crowd out business investment, and substantially reduce the economy’s growth rate. That in turn, would mean lower real incomes, and less tax revenue — leading to — you guessed it — an even higher debt-to-GDP ratio,” Mr. Feldstein warns.
“To avoid [the coming] economic distress, the government either has to impose higher taxes, or reduce future spending,” or some combination of the two Mr. Feldstein argues. “Since raising taxes weakens incentives and further slows economic growth — worsening the debt-to-GDP ratio — the better approach is to slow government spending. Defense spending, and non-discretionary outlay’s can’t be reduced below the unprecedented and dangerously low shares of GDP that the CBO projects.”
“Thus, the only option is to throw the breaks on entitlements,” Mr. Feldstein writes. “In particular, the government needs to hold back the growth of Medicare, Medicaid, and Social Security. Federal spending on the two major health care programs is projected to rise from its current 5.5 percent of GDP, to more than 7.2 percent by 2029. And, it will only keep increasing after that.”
“The simplest approach is to raise the age of eligibility for Social Security as Congress did in 1983,” Mr. Feldstein argues. “Bipartisan legislation then voted to postpone “full benefits,” from age 65, to 67, allowing earlier benefits at an actuarially reduced level. Because Congress slowly phased the change in over several decades, it avoided any significant political opposition. In the intervening 35 years, the average life expectancy of Americans in their late 60s, has risen about three years. It would be appropriate,” Mr. Feldstein concludes, “to increase the age of eligibility for full benefits from 67 to 70, and index it to life expectancy. Exceptions could be made for retirees with low incomes,” he adds.
In conclusion, Mr. Feldstein writes that “Lawmakers don’t like to cut spending, but they have to do something,” soon. “Otherwise, the exploding national debt will be an increasing burden on our children, economic growth, and our future standard of living.”
Pretty depressing and sobering. Mr. Feldstein has ‘street cred,’ on this very pressing issue. It is shameful that on POTUS Obama’s watch, federal debt went from a total of around $8T when he took office — to nearly $19T when he left eight years later. POTUS Obama piled up more debt in his eight years in office than all other U.S. presidents combined. Yes, there was the 2008 financial crisis — but, did we really need to spend $10T over 8 years to address it? And, U.S. GDP never grew to three percent at any time during his two terms, the first time that has happened since before WWII. But, we are where we are. Higher economic growth is so much better than raising taxes, but with a rising socialist movement in the United States, it is frightening where we might be headed a decade or less from now.
Congresswoman AOC has been warning about climate change and the end of the world in 12 years; but, it is this burgeoning debt that is the greater threat to our way of life. Any new taxes passed from now on should be fenced, or at least a fair portion of them, to pay down our national credit card. We are going to exceed our credit limit in the not too distant future, if we don’t get much more serious about paying it down. Sure, we can just print more money; but, the value of the dollar will implode. Yes, most of the rest of the industrialized world is in even worse shape than us when it comes to debt-to-GDP ratio, with China having a big time problem. The seemingly burgeoning socialist movement in America is frighteningly disturbing. Medicare for all means healthcare for none. Everyone talks about price; but, hardly anyone mentions the quality of care and innovation. Do you hear about anyone preferring the VA over private care? Going to medicare for all will result in a cratering of the quality of health care here in the United States and a stifling of innovation. One way to get health care spending under control is empowering artificial intelligence to greatly enhance the quality of our medical care, while driving down costs. Nationalizing health care will destroy all that. Yes, our system isn’t perfect; but, there is a reason people fly from all over the world to seek medical treatment here — because they have nationalized health care in their home countries, leading to long lines and long waits to see a doctor, and lower quality of care do to a lack of innovation and incentives to provide high quality service.
We have a financial tsunami headed our way and sadly, way too many people, especially our youth, think socialism and more government intervention and control is the answer. How is that working out in Venezuela, China, Cuba, parts of Europe, etc.? It is depressing to think about. RCP, fortunascorner.com.
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