What Debt Problem?

In the August/September issue of Reason  magazine, Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, confronts claims from the Obama administration that we do not have a debt problem.

You’ve probably heard these claims; even Speaker of the House John Boehner agreed with the president this past March, but it’s just not true. Let’s take a look at our economic prospects for the next ten years.

Right now, public debt is almost 90% higher than it was at the start of the financial crisis in 2008, and the Congressional Budget Office projects that it will grow to 76.2% of GDP by next year. To put this in perspective, at the end of 2007, the federal debt was just 36% of GDP.

The bad news is, it could get even worse. If Congress reverses the spending cuts forced through sequestration, the debt could climb to 83% of GDP.

Oh, and I forgot to mention, none of this includes our massive entitlement programs like Social Security and Medicare. Tack that on, and we are at 106% of GDP!

So why doesn’t the administration see this as an issue? According to de Rugy, “the most common argument is that interest rates are very low and as such it really doesn’t cost that much money to finance government spending through borrowing.”

The CBO assumes that interest rates will grow from the current 2.1% to 5.2% in 2023. That’s an increase of $600 billion each year just in interest payments (more than what the U.S. spends right now on two wars, plus the Departments of Education, Energy and Homeland Security combined).

Keynesians encourage government spending in times of slow growth, but this doesn’t work in a high debt environment. Failing to address this issue NOW is setting us up for higher interest rates, lower growth, higher unemployment rates, and lower standards of living. Our future generations do not deserve this.

Furthermore, if left unsolved, we cannot predict what outcome an inevitable financial crisis could have. Creditors could pull money from the U.S. overnight, sending us into another recession with global repercussions. Congress needs to act now, cutting spending and future entitlement programs, to ensure an economically prosperous future. 

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