Columnist Richard Fein: Deficit, debt, the ceiling and our economic future

By RICHARD FEIN

Published: 05-21-2023 8:35 PM

The topic of this column is that the current crisis over the debt ceiling is an outgrowth of a larger problem: The huge and growing national debt.

Let’s start by clarifying some terminology. A budget deficit means that our government spends more money than it collects in taxes in a given year. The national debt is the aggregate amount of all the annual budget deficits. The debt ceiling is the limit on the amount of money the United States government is authorized to borrow to meet its existing legal obligations. This includes including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

If the current debt ceiling isn’t raised soon our economy is likely to experience a long list of dire consequences. Here are some of them: U.S. government bonds will no longer be considered the world’s safest investment and their market value will decline. That will mean higher interest rates to attract buyers for future bond sales . Borrowing costs would go up for businesses making it more difficult to expand production and hire more workers; Social Security, Medicare, Medicaid and all other payments on government obligations benefits would be delayed, reduced or simply not paid at all . The financial stability of corporations and banks will be undermined. A deep recession accompanied by high inflation is a real possibility. In the last recession almost 500 banks collapsed and 17% of businesses ( mostly small ones) went bankrupt according to Harvard Business Review. The problem doesn’t end with our domestic situation. The stability of global finance and trade rests on confidence in U.S. government bonds and the U.S. dollar as a currency.

As serious as raising the debt ceiling is, the more fundamental danger is the national debt itself. Even if the immediate crisis is resolved for this year, it will be back in the near future. In fact, even if the debt ceiling as such is abolished, the underlying problem won’t go away. The current national debt is about $31 trillion, almost double what it was in 2008. U.S. debt to GDP ( Gross Domestic Product) ratio for 2020 was 126.39%. That is, the debt is significantly greater than the total value of all the goods and services produced in our country during that year.

It’s going to get worse. According to the U.S. General Accountability Administration (GAO), without substantive changes to revenue and spending policy, the national debt will continue to grow faster than GDP during the next 30 years. The national debt is projected to rise to $52 trillion by 2033 and interest payments on that debt will be about $1.4 trillion. Let’s assume that our country never pays off the national debt and pays only the interest. Money spent on interest payments can’t be used for other purposes. Spending on infrastructure projects, research and development, education national defense, Social Security and Medicare will have to be limited or even eliminated.

Here’s a realistic scenario: There may come a time when potential lenders simply won’t buy U.S. bonds at all or purchase them only if the bonds pay a very high rate of interest.

The ability of our government to deal with a future crisis would be severely limited. For example, the federal government has provided about $4.6 trillion to help the nation respond to and recover from the COVID-19 pandemic. If our country experiences a similar crisis in the future it will be difficult if not impossible to borrow enough money to protect Americans from the full force of the resulting economic problems.

Over time we may need trillions of dollars to mitigate the effects of climate change. Where will the money come to do what is necessary to give the American people as much protection and assistance as possible?

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Some possible government actions have been suggested. On May 11, the Congressional Budget Office offered 17 options for reducing the annual budget deficit between 2023-2032 and thus slow down the increase in the national debt. Most of them would have to be enacted into law to achieve the CBO goal. Both liberals and conservative could probably find at least one item they like and many they would adamantly oppose. Here are seven of the options: Establish caps for federal spending on Medicaid; set Social Security benefits to a fixed amount; reduce Department of Defense annual budget; increase individual income tax rates; eliminate or limit itemized income tax deductions; impose a new payroll tax.

Here’s my closing thought. The longer it takes to deal substantively with the annual budget deficit and the growing national debt the worse the impact on the American people will be. If we don’t act now our common future will be deep recession, high inflation, truncated social welfare programs and a diminished national defense.

Richard Fein holds a master of arts degree in political science and an MBA in economics. He can be reached at columnist@gazettenet.com.]]>