Debt, Deficits and Dangerous Economic Times Ahead

When President Barack Obama signed the American Recovery and Reinvestment Act on February 17, 2009, among other things he declared that …

“While we need to do everything in the short term to get our economy moving again, we must recognize that having inherited a trillion dollar deficit, we need to begin restoring fiscal discipline and taming our exploding deficits over the long term.”

But when do we actually begin this process? Since January, we have seen a ballooning of government spending, the stimulus package, health care “reform” and numerous banking and corporate bailouts. Our government, which forecasted 10-year budget deficits of $7 trillion in January, now tells us it is likely more on the order of $9 trillion. The federal deficit for fiscal year 2009 is now estimated at a jaw dropping $1.42 trillion, the highest level since World War II. October’s deficit is estimated at $177.4 billion. Left unchecked, deficit spending and increasing national debt will stifle further economic growth and prosperity.

Deficit spending matters. Here’s why. Not since 1835, under President Andrew Jackson, has the United States government been able to claim both a balanced budget and all national debt paid in full. Each year since, and regardless of whether controlled by Democrats or Republicans, Congress has spent more money than it takes in, resulting in a budget deficit and an addition to the national debt. It has covered the shortfall by borrowing, largely through the sale of various types of government securities (US government debt instruments). The government has to pay interest on this debt. Interest on our national debt is now the fourth largest expenditure in the budget, exceeded only by Defense, Social Security and Medicare spending. In fiscal year 2008, $451 billion went to interest payments on the nation’s debt. Interest payments on debt equate to approximately $40,000 for every man, woman and child in this country.

If these facts weren’t troubling enough, here’s another gem that should cause every American concern. Gross Debt (which is defined as national debt plus all intra-governmental debt such as the Social Security Trust Fund) has increased from 33% in 1980 to 58% in 2000 as a percent of Gross Domestic Product (GDP). The current projection, likely to increase as these things often do, is that Gross Debt will be 98.1 % of GDP in 2010. This is a fiscally unsustainable path. Eventually, we will have to choose between dramatic spending cuts, unprecedented tax increases, or bankruptcy.

These deficits and the growth in national debt harm the economy when they do not stimulate the economy or when they reduce private investment. A “crowding out” effect takes place as private investment spending decreases in response to the increase in government borrowing. This has the obvious effect of stymieing economic growth. Permanent economic growth is only achieved in the private sector. While targeted government spending may stimulate the economy in the short term, it will not result in permanent increases in growth or employment. Take for example the American Recovery and Reinvestment Act (ARRA) of 2009. In testimony to Congress on October 22, 2009, Christine Roemer, Chair of the Council of Economic Advisors, noted that, of the stimulus “spent” through September, 2009, one third of the expenditures was for state fiscal relief ($43.8 billion) and one third was direct government spending ($40.4 billion to directly impacted individuals in the form of unemployment benefits, food stamps and hot-lunch programs). These payments will not result in permanent growth to the economy. These payments, particularly those to “bail out” state government deficits, do not create permanent jobs; they simply stop the hemorrhaging and postpone the program cuts that are likely necessary.

It’s one thing to have our national debt backed or financed by our own citizens; it’s quite another to have it held by foreign governments. Our deficit spending appetites have exploded so dramatically that increasingly the US government has had to look outside our borders for debt financing. Foreign governments, who held 13 % of our total debt in 1998, held 25% of our total debt in 2007. What is most troubling about this development is that foreign (or external) debt represents a net reduction in the resources that are available to grow consumption in the United States, and thus grow the economy. External or foreign debt is expected to grow as long as foreign governments continue to have confidence in the United States economy. Bottom line, as a nation, we are becoming more dependent on foreign governments for our economic welfare, and often these nations neither share our goals nor have our best national interests at heart.

Increasingly, foreign debt-holders, such as China and Japan, are weary of our government’s spending appetite. If these governments feel less secure about our prospects, they will lose faith in our economy and demand higher returns (interest rates) to buy our debt. Higher interest rates mean that we will each have a higher burden to pay off the debt and less money to invest or save in order to achieve future economic growth. Simply stated, more and more of our resources will be directed to pay interest obligations, never mind trying to pay down debt. And what happens if these nations decide that the United States is not a good bet, no matter what the return? They will no longer buy our debt. The result is equivalent to bankruptcy, pure and simple.

Our staggering national debt threatens our standard of living, now and in the future. Not only are we are on the verge of enslaving our own generation, but we also put the economic well being of our children and grandchildren at risk. Moreover, our inability to make hard choices and confront our spending demons, our ballooning deficits, indeed our national debt, makes this not just an American problem but a global problem as well. The United States economy has been the engine driving the prosperity of many other nations. History will not be kind to us unless we recognize the financial peril we face and take resolute action now that is worthy of the great nation we are.