America’s Debt Dilemma: Annual deficits are once again projected to hit $1 trillion, but long-term solutions are elusive.
By Andrew Soergel (usnews.com) / July 20 2018
The U.S. has a debt problem.
Most pressing on Capitol Hill, however, is not the collective $4 trillion U.S. consumers are expected to owe to creditors in non-mortgage debt by the end of 2018 – representing more than 26 percent of their annual incomes, per a May report from the LendingTree online loan exchange.
Nor is it the $1.4 trillion Americans have racked up in outstanding student loan debt – nearly 11 percent of which is at least 90 days delinquent or in default, according to the Federal Reserve Bank of New York.
Indeed, the debt burden that’s received the bulk of the attention among lawmakers in recent months – particularly as they pushed a new government spending bill to the president’s desk following a massive corporate and personal tax overhaul – is the U.S. government’s outstanding tab. America is more than $21.2 trillion in the red, and annual deficits are only expected to swell in the years ahead.
The White House last week quietly conceded that its initial budgetary estimates for the next few years are unlikely to materialize as planned. In February, a preliminary presidential budget proposal projected deficits of $7.1 trillion over the course of a 10-year window. But updated estimates indicate that initial benchmark was off by more than $900 billion, with annual deficits eclipsing $1 trillion as soon as next year.
“This is a striking acknowledgment following almost two years of claims that economic growth unleashed by [tax cut and spending hike] policies will wipe deficits away,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement on Tuesday. “On our current course, debt will overtake the size of the entire economy in about a decade, and interest will be the largest government program in three decades or less. This will weaken both our economy and our role in the world.”
Deficits aren’t entirely new for the U.S. government – in only 11 years since 1940 has America managed to maintain a surplus. Nor is the size of each year’s shortfall particularly novel – the U.S. less than a decade ago registered annual deficits north of $1 trillion as the government attempted to pull the country out of the worst economic crisis since the Great Depression.
What is new is that the U.S. is taking on considerable annual debt and injecting fiscal stimulus into the economy at a time when business is booming. The U.S. economy is in the midst of its second-longest expansion on record, and interest rates – although rising steadily as the Federal Reserve adjusts policy to keep up with inflation – are still relatively low.
“Last time the nation experienced trillion-dollar deficits – during a serious economic downturn, no less – lawmakers took the issue seriously,” MacGuineas said, noting the pay-go laws and spending caps implemented during President Barack Obama’s presidency to keep debt levels under control. “This time around, with the emergence of trillion-dollar deficits during a period of economic strength – when we should be saving for future downturns – few seem to even take notice.”
To be fair, lawmakers on both sides of the aisle have acknowledged a long-term debt problem. The issue has been how best to go about addressing it. Republicans have mostly argued that social spending programs should be curtailed to bring government spending more in line with expected revenues. Rising Social Security and Medicare spending as baby boomers age into their retirement years are expected to put considerable strain on federal budgets in the years ahead, though finding a politically palatable solution to possibly curtailing recipients’ benefits has to this point proven difficult. Democrats, meanwhile have lashed out at tax cuts and alterations that they argue primarily benefit large businesses and wealthy citizens.
Those on the right and within Trump’s administration have taken issue with that characterization – though they’ve taken heat for suggesting newly implemented policies aren’t exacerbating the country’s debt burden. The Committee for a Responsible Federal Budget criticized House Ways and Means Chairman Kevin Brady, R-Texas, on Wednesday, after the lawmaker suggested last week’s White House deficit revisions were “not because of the tax cuts.”
“It’s all on the spending side,” he said.
The committee rated that claim “largely false,” estimating “a combination of tax cuts and spending hikes enacted this year are responsible for four-fifths of the deficit increase – and more than half of that is from tax cuts.”
Meanwhile, Larry Kudlow, director of the president’s National Economic Council, claimed last month during an appearance on Fox Business Network that “as the economy gears up, more people working, better jobs and careers, those revenues come rolling in and the deficit … is coming down, and it’s coming down rapidly.”
The claim garnered a “Pants on Fire” rating from the PolitiFact fact checker, which described the assertion as “inaccurate and ridiculous.” The Congressional Budget Office, for its part, wrote in an April report that it had revised up its deficit calculations for 2018 by $242 billion.
“Accounting for most of that difference,” the CBO said, “is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.”
Nonpartisan analysts suggest the situation ultimately boils down to a mounting long-term debt problem that certainly isn’t being helped by the recent tax overhaul. It also comes at a time when U.S. economic growth is picking up – though it’s worth noting economists at the Federal Reserve and throughout the private sector have mostly avoided significant revisions to their long-term economic projections over the coming years.
One of the tax overhaul’s primary selling points was that it would kick-start economic growth and pay for itself in the years to come. And although analysts believe positive aspects of the tax tweaks have already begun trickling into economic indicators, many have compared the effect to a “sugar high.”
When that high fades, some analysts are concerned that the U.S. will be staring down a recession – at some point in the next few years – without many options for reversing course, especially with long-term interest rates still sitting at levels below historical norms.
And with deficits already considerably swollen, lawmakers may have a tough time justifying spending their way out of the problem. Publicly held federal debt stands at 77 percent of the nation’s gross domestic product – well above where it sat when the Great Recession hit in 2007. As America’s debt obligations and interest payments mount, federal dollars will be tied up that could otherwise be directed elsewhere – namely, into social service programs that have increasingly been discussed as being on the chopping block. And as interest rates rise, the costs associated with paying off that debt become more daunting.
“The last decade has been disastrous for the federal government’s finances,” James Capretta, a resident fellow at the conservative-leaning American Enterprise Institute think tank, wrote in a blog post last month. “The more the federal government borrows and spends when times are good, as they are today, the less room there will be to borrow and spend when times are bad, as they inevitably will be at some point.”
Henry Paulson, the former Treasury secretary under President George W. Bush who was in office when the U.S. first entered the Great Recession, warned at an event hosted by the Brookings Institution earlier this week that “if we don’t act, [the deficit issue] is the most certain fiscal or economic crisis we will have.”
“It will slowly strangle us,” he warned, noting that “this is the time when we need to deal with some of the persistent structural issues that are going to determine our long-term economic competitiveness.”
https://www.usnews.com/news/the-report/articles/2018-07-20/americas-debt-dilemma
