Op-Ed: Red Ink Rising
Sphere | Dec. 14, 2009
While many U.S. households are struggling with their own personal debt, citizens face an even larger – although less visible – threat from the mounting U.S. government debt. True, they don't receive a monthly mortgage statement or credit card bill for their share, but the effects will slowly chip away at the American standard of living – or even lead to the next major economic crisis.
In just one year, the U.S. public debt rose from 41 percent to 53 percent as a share of the economy, largely because of the recession. What is troubling, however, is that the debt is projected to reach unprecedented levels very soon. While the debt usually goes up in times of war and economic downturns, it typically shrinks back down once the national crisis is over.
But this time, we face the prospect of ever-growing government debt. The increase will be fueled by an aging population and growing health care costs, as well as Congress' inability to live within its means.
Under reasonable assumptions about what Congress and the president are likely to do, the public debt will grow steadily as a share of the economy, reaching 85 percent by 2018, 100 percent by 2022 and 200 percent in 2038 – though we'll never actually reach that point because a fiscal crisis would hit first.
As with personal credit cards or mortgages, the government cannot borrow for free and must pay interest. Interest payments, now at 6 percent of the budget, will grow to 15 percent by 2018, squeezing out other budgetary priorities. Every dollar spent on interest is a dollar that might be spent on research, education or tax cuts.
Government borrowing also affects the cost of individual borrowing. Our creditors have traditionally seen the United States and its debt as a secure investment. But as concerns about our fiscal stability grow, investors may not want to buy more U.S. debt. The U.S. Treasury will then have to raise interest rates on U.S. bonds to attract the funds we need, further increasing the interest burden on the budget.
But it is not just the government that will pay more – families and businesses will have to pay more, too. Everything from mortgages to school loans will cost more. So will business loans. Companies may not borrow money to expand their operations, and entrepreneurs may be less likely to start new small businesses, the source of most new jobs in our economy. Ultimately, the economy will grow more slowly, wages will stagnate and the U.S. standard of living will drop to well below where it should be.
So how can the United States get its debt under control? The Peterson-Pew Commission on Budget Reform, a distinguished, bipartisan group of the nation's budget experts, has tackled this important question and recommended a path to lower the government debt.
Congress and President Obama should immediately commit to stabilizing our debt at 60 percent as a share of the economy by 2018, rather than letting it grow indefinitely. Sixty percent is an international standard and will help to reassure international credit markets that the United States is serious about reducing its debt. It will be difficult, but we can do it. Other nations from Canada to Australia have done it. Better to suffer a little now than face the fate of other over-indebted nations.
But the economy remains weak and the plan shouldn't be phased in until 2012 – giving time for the economy to recovery. Waiting a little can be actually a good thing. Politicians can develop a plan this coming year, but phase it in gradually, giving taxpayers time to adjust and themselves a bit of political cover in the process.
As former policymakers, we recognize how difficult implementing this plan will be as raising taxes and cutting spending are never politically popular. However, as Americans, we know the cost of doing nothing is high. We believe firmly that high debt should not be our destiny and we believe the voters will accept and, in fact, demand these tough choices from Washington.
