Round numbers tend to get people’s attention. A particularly big round number caught everyone’s attention last week when our national debt surpassed the $40 trillion mark. While I have tried to keep us informed of the criticality of our debt problem in this column during the past few years, it has been largely ignored by the American public and the politicians who represent you.
While Democrats like to blame the problem on Republican tax cuts and Republicans like to blame the problem on out-of-control Democrat spending, this is a problem that can be pretty much equally shared among the two parties. According to the fiscal watchdog organization, Committee for a Responsible Federal Budget, the vast majority (approximately 80%) of debt accumulation traces back to bipartisan legislation (i.e., passed with support of both Democrats and Republicans). Of the remaining 20%, approximately 12% can be attributed to laws passed predominantly by Democrats and 8% to those passed almost exclusively by Republicans. While there is enough blame to go around, blame does not address the problem at hand. In today’s column, I will address the problems that this debt is causing, which will get worse if the debt is not addressed. In addition, I will take you back in time to the early 2010s when a solution to this problem was on the table that hopefully can be resurrected before we have a serious economic crisis.
The first thing we need to look at is the problems our nation’s debt is causing to our economy, businesses, and individuals:
- Increasing Interest Rates: As the debt level increases, the government must borrow more to fund its deficits. It does this by selling bonds (like U.S. Treasury securities) to investors, increasing the overall demand for loanable funds in financial markets. As this demand goes up, the price of borrowing (i.e., interest rate) rises. This leads to the “crowding out effect,” which causes….
- Reduced Private Investment in Growth: Higher interest rates make loans too expensive for private businesses and consumers, causing them to cut back on spending and capital projects. With less available capital to go along with the higher financing fees, businesses have less money to spend on new equipment, research, or technology upgrades that improve efficiency, which leads to…
- More Expensive Goods and Services (Inflation): Because businesses are less likely to invest in technologies that make it easier and cheaper to produce goods and services, prices are likely to increase, and shortages may be more likely.
- Stagnant Wages: Since businesses will be facing higher borrowing costs and likely have less money available to invest, this will likely lead to slower wage growth.
- Loss of National Fiscal Flexibility: As national debt levels rise, Congress will have less capacity to make their own tax and spending decisions. High levels of debt will also limit the ability of lawmakers to effectively respond to a natural disaster, security threat, economic downturn, or another national need or priority.
While equity markets are currently “whistling past the graveyard” of this looming crisis, the bond market is not. The bond market’s recent spike in long-term rates is clearly in response to increasing deficits. The 30-year U.S. Treasury yield hit 5.34%, its highest mark since 2007. The current ratio of our deficit to our Gross Domestic Product (GDP) is over 120%, the highest it has been since right after World War II. It is clearly time for our country to get its economic house in order. Unfortunately, we missed a great opportunity to do so less than two decades ago.
In 2010, President Obama created a bipartisan commission, officially named the “National Commission on Fiscal Responsibility and Reform,” better known as the Simpson-Bowles Commission, after its two co-chairmen, former Republican Senator Alan Simpson and Erskine Bowles, President Clinton’s one-time Chief of Staff. The eighteen members of the commission included 3 members of the House of Representatives and 3 Senators from each party. At the time of the creation of the commission, the national debt level was approximately $13.5 trillion (one third of what it is now!)
The commission made a series of key proposals that included:
- Cutting the Deficit by $4 Trillion over 10 years
- Lowering Tax Rates while eliminating most deductions and loopholes
- Slowing the Growth of Spending on both defense and domestic programs
- Making changes to entitlement programs (i.e., Social Security and Medicare) to reduce entitlement expenditures and increase program viability.
Unfortunately, Congress and the President did not have the wherewithal to move forward with the Simpson-Bowles recommendations. While these proposals might cause some short-term pain and compromise, it would have averted the current situation we are in. If the Simpson-Bowles recommendations were adopted, it is estimated our current debt-to-GDP ratio would be about 55% rather than our current 120%, and significantly more funds would be available to stimulate more growth in our economy. We have reached the precipice of a crisis and need to take bold action like Simpson-Bowles recommended to avert a significant financial crisis. The current economic populism of our two parties does not give me much reason for optimism, but I hope a big round number will change their tune.
