Investors Business Daily: Will Our Monstrous Debt Swallow America's Prosperity?

Article in Investor's Business Daily

Debt: We've written about the threat our growing federal debt poses a number of times in past years. But it was usually posed as a hypothetical problem in the distant future. Well, guess what: It's now about to become a real problem. And Americans will discover a tough lesson: There ain't no such thing as a free lunch.

As Jeffrey Goldblum said in the horror movie "The Fly," "Be afraid. Be very afraid." Because, as in the horror movie genre, our monster debt could just gobble up our entire federal budget. Or enough of it that it feels like it's the entire budget.

A recent Wall Street Journal report gave the gory details: Just last year, paying the interest on our $20 trillion in debt took just $263 billion, equal to 6.6% of all federal spending or about 1.4% of GDP. That's low, largely because half of our debt was issued while the Fed held interest rates at zero percent. That's no longer the case, however.

With the Fed now in a tightening cycle, every 1% gain in interest rates adds $200 billion to our annual interest on the debt. With a budget deficit of $779 billion this year, and more like it expected, not only will the debt be growing but the interest payments on it will grow, too.

By 2028, the Congressional Budget Offfice projects the interest will rise to $915 billion. That's 13% of the budget and 3.1% of GDP. And it only keeps rising from there.

Trillions And Trillions Of Debt

The federal government claims we are just over $15 trillion in debt, or roughly 78% of our GDP. But the reality is, we owe nearly $21 trillion, which is all of our GDP. The government doesn't count what we "owe ourselves," namely debt run up to pay off entitlements. But those are debts just as anything else is.

As we noted in recent years, and others have noted more recently, a debt of 90% or higher of GDP is a dangerous thing. It reduces private investment, since it requires enormous amounts of money each year to pay off. As a result, it causes economic growth to slow dramatically.

The Deadweight Burden Of Debt

Don't believe it? Look at Europe. Look at Japan. All stuck in slow-growth ruts they can't get out of. The result of abnormally high debt.

As Reason's Nick Gillespie points out this week — and we've noted the same study in the past — a 2012 study by economists Carmen Reinhart and Kenneth Rogoff looked at the experience of 22 advanced economies with high debt-to-GDP ratios since 1800. The study found that "on average, debt levels above 90% are associated with growth that is 1.2% lower than in other periods (2.3% versus 3.5%)."

It might not seem big, but it is. Over just 23 years, less than a generation, it will reduce expected GDP by 23%. That's a quarter of our standard of living.

That's the economic cost of debt.

Debt: It's About Spending Too Much

We are in the middle of a bad debt cycle. We're spending too much, by historical standards, leaving us with big deficits and rising debt. We can avoid the worst effects, but it requires action now.

We hear frequently that we need to tax people and companies more. But, again, our problems are not tax related. We basically collect about 18% of our GDP as taxes no matter what we do.

No, we're spending too much.

The next Congress isn't ideal to address this problem, given the sudden and alarming shift in the Democratic Party toward socialist thinking — it wants a steep rise in the national minimum wage, socialized health care, radical taxes on the middle-class and the wealthy in the name of "equality." But this is the new Congress America elected.

Many of these elected officials heavily criticized the Republicans for the deficits the Democratic Party and Democratic president rang up during the years of the financial crisis and immediately after. Under President Obama, the debt essentially doubled.

Unfortunately, those who voted for the Democrats to take over the House have voted for a massive tax hike. Because the Democrats won't cut spending. And the House is where all spending originates.

But that's the surest way to reduce the budget deficit to manageable levels. Last year, interest costs in the budget surged 19%. Adding more debt will be disastrous. It's time to cut.

Can We Even Pay The Interest?

"It's one thing to run in the red," wrote Bruce Yandle, a distinguished adjunct fellow with the Mercatus Center at George Mason University, in a recent piece for USA Today. "It's something else entirely to lack the wherewithal to make interest payments, and that's where we may be heading."

Consider this: In September of this year, the average interest rate on U.S. federal debt was 2.86%. Not a lot. If interest rates return merely to the 2008 level of 4.652%, our debt payments would soar from $343 billion to $555 billion a year. That's a more than 60% gain.

Most of the growth in future debt will come from soaring entitlement spending. Both Social Security and Medicare will be deeply in the red over the next 30 years. The CBO estimates a cash deficit of $82 trillion — that's trillion with a "t" — over those three decades.

Irresponsible Choices

Other countries, including even many in Europe, have tackled this problem. To not deal with it in a responsible way that doesn't bring down our economy is worse than irresponsible. It's immoral.

There are lots of ways to do it. Cap spending growth. Kill unnecessary programs. Reform entitlements to make them grow more slowly. Pass laws that encourage Americans to work longer. Or all of the above. But the longer we wait, the harder it gets.

Let's hope that soon we'll have a Congress that will understand that spending our country into bankruptcy is the least patriotic thing they can do. Our children and grand children won't thank them for it.

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