[DISPATCH] Federal Debt: Direction, Drivers, & Dangers

[wcm_nonmember]

In this Dispatch…

• What are the greatest drivers of national debt?
• What does Congress propose to tackle the national debt?
• What do solutions to the national debt problem mean for Americans?
• And more…

This content is for subscribers only. To continue reading, please log in or subscribe here. [/wcm_nonmember]

[wcm_restrict plan =”fo-osint”]

Federal Debt: Direction, Drivers, & Dangers
Source Description: Congressional Joint Economic Committee, 8 September 2016

(Admin Note: FO‘s Dispatch reports are synopses of Congressional hearings.  We track the schedules of Congressional committees and sub-committees, take notes on the proceedings, and then produce a report on relevant points and issues.)

EXECUTIVE SUMMARY

The current book value of US national debt is nearing $20 trillion, an unprecedented figure that doesn’t cover the future’s unfunded liabilities.  The current drivers — poorly controlled federal spending, an unwillingness to take serious steps to tackle this serious problem, rapidly expanding ‘entitlement’ spending, and weakness in the US economy — aren’t slated to be solved in the near future.  The national debt is currently around 71% of the entire Gross Domestic Product, and is already severely limiting the federal government’s response to solving a debt crisis.  And this number doesn’t include $100 trillion of unfunded liabilities.  The solutions are becoming increasingly bleak and threaten the quality of life for Americans.

Current Trends in the National Debt

The US will incur negative consequences for its national debt.  Those negative consequences include increased annual spending on interest, reduced flexibility to deal with new crises or to pursue new opportunities, and ultimately an increased risk of a fiscal crisis.  There is also a possibility that Medicare Part A – which pays for hospital services – will be bankrupt in a decade due to the fast paced growth of its budget, an effect of a growing senior population.  In addition, Social Security trust funds will eventually be exhausted, as the government is already borrowing money to pay the Social Security Trust Fund.  As a result of the Budget Control Act of 2011, there have been forced budget cuts for the military, FBI, National Park Service, and other government organizations.  Congress is rightly concerned the ballooning national debt will eventually hurt the US economy and the society at large.

The budget process is broken.  The current budget process does not formally engage the debt problem, and it cannot comprehensively address major federal spending areas like healthcare.  Congress assumes that the federal debt will exceed the size of the economy by 2033.  For the Congressional budget process to function properly, the Joint Economic Committee says difficult decisions must be made, but have no been made in the past due to the unwillingness of the President and Congress.  There needs to be a budget process that rewards enforcing long term debt stability, which will engage Congress to do their jobs concerning the national debt.  The budget process should provide a structure for policy makers to confront the trade-offs in the budget, make decisions, and reach consensus about priorities.  These changes will eventually decrease the amount of federal debt of the United States.

Proposals for new debt reduction program.  A few ways to make the budget process more stable and efficient starts with the Budget Committee itself.  Some proposals include forcing the Committee to set short- and medium-term fiscal goals for the deficit and debt as a percentage of the GDP. There are three elements for a long run debt reduction program. These include (1) restoring social security solvency, (2) adjusting Medicare and Medicaid gradually so it does not weigh so heavily on federal health spending, and (3) adjusting the tax system to revenue increases.  Proposes to a debt reduction program will potentially decrease the amount of federal debt and increase revenue gradually.
Analyst Comment

The rising debt is a serious problem, and unless Trump’s tax plan increases federal revenues, we’re likely going to see another jump in the national debt, just as George W. Bush’s tax cuts increased the national debt.  It’s a shame that the Congress, who presided over the largest annual revenues in history, is now in part proposing adjustments to the tax system to increase revenues.

And then we add state and local debt of around $3 trillion nationally, and the $100 trillion in unfunded liabilities, which includes the $3-5 trillion of unfunded state and local pensions, and there’s going to be a real mess on our hands in the future.  These pensions are predicated on a 7-10% annual return in the market, which is unlikely to happen (although the S&P 500 is up over 10% in 2016), and with the number of retirees increasing, state and federal governments have no soft landing solutions left.  This trend most likely confirms more federal bailouts, and perhaps future presidents campaign on that platform.  Those bailouts come from Federal Reserve’s balance sheets, so it’s difficult to see a future where the US doesn’t effectively default through printing trillions of dollars.  A devalued currency means a substantial reduction in American purchasing power and quality of life.

[/wcm_restrict]

Photo via Cafe Credit