The American Economy is Booming!
So Why Do We Continue to Run Up Huge Deficits
Instead of Balancing the Budget?
– By Dr./Colonel Tyrus W. Cobb
The American economy is roaring, with all indicators showing historically impressive gains. U.S. GDP grew by 4.1% in Q2 2018, the unemployment rate dropped to just 3.9% in July (with over 157,000 jobs created), and wages rose nearly 5% year over year. More impressively, the stock market reached all-time highs after a dizzying August rally, and corporate earnings are growing at the second fastest pace since 2010. Inflation remains in check, rising only 2.9% in the last quarter and, surprisingly, interest rates are still at historic lows, hovering around 2%.
Given the strikingly positive performance of the American economy, one would think that this would be an optimum time to address a fundamental crisis that looms on the horizon—the rapid growth of our national debt driven by ever increasing annual budget deficits. If there was ever a good time to halt deficit spending, balance the budget, and to pare down our national debt, this would seem to be just that time.
Instead, no matter whether the Democrats or Republicans are at the helm, there seems to be a mutual propensity to spend far more than we take in. As George Will pointed out recently, the national debt in 2007, on the eve of the Great Recession, was “just” $7.5 trillion, and the average interest on it was 4.5% (about double what today’s rate is). But with annual budget deficits expected to reach the $1 trillion mark in just two years, the CBO predicts that our total national debt–which has risen to $16.5 trillion this year—and will go over $20 trillion in just five years—will soar to $28.7 trillion by 2028! And keep in mind that those projections do not take into account the impact of further tax cuts that this Republican-led Congress is considering right now!
However, these deficit estimates may be very conservative since they assume, perhaps naively, that the current caps on defense and discretionary spending that have been passed into law will hold.
But have they in the past? Not at all—in fact, those “limits” have consistently been ignored, and likely will be in the future. Therefore, the dismal projection for our national debt to rise to $28.7 trillion in 10 years is likely a figure that will be exceeded significantly! And interest on that debt will be compounded once interest rates return to normal levels, about double what they are today! That means that the interest cost alone on that projected $20 trillion of public debt would total…stand by for this…over $1 trillion per year!
Are we condemned to an economic future marked by increasing deficits and a spiraling national debt? I’m afraid the answer is yes. This will go on as there is no group demanding a return to fiscal sanity. Since virtually all of us are benefitting from the strong economy, and the nightmare of an economic crash caused by our indulgence seems remote, who is calling for fiscal discipline and balanced budgets?
No one, because that would mean, first, going after the programs that constitute the major spending categories. Hmmm….now that would be…..Medicare, Medicaid, and Social Security, which along with defense appropriations constitute 75% of annual federal spending! Nothing else matters much. As a group of Hoover Institution scholars, led by former Secretary of State and Treasury George Schultz, recently pointed out, as our population ages, the growth in recipients for these entitlement programs will rise, faster than US national income and tax revenues will.
No, sorry, we cannot solve this fiscal crisis by cutting something like foreign assistance, which accounts for less than 1% of the annual budget. What must be done, and soon, is to either significantly raise taxes on the American public or rein in spending on these entitlement programs. If we don’t act now and impose fiscal discipline, there will be no alternative to dramatically raising taxes.
Unfortunately, I really doubt that there is any appetite among the American public to cut our “entitlements”. I also doubt that any current office holder or anyone running for office is going to campaign on a platform of curtailing your benefits.
So it appears that no action will be taken by the Presidency or the Congress of either party until the fiscal crisis really hits. And then…..it may be too late!
– Dr./Colonel Tyrus W. Cobb served on President Reagan’s National Security Council Staff from 1983-1989.