What condition worsens every year with unknown consequences for economic and social stability?
One answer might be global warming. Another might be U.S. government indebtedness.
The U.S. government has accumulated debt of $19 trillion and the amount grows by the day. The Congressional Budget Office projects a deficit of $544 billion in 2016, up from $439 billion in 2015.
Publicly held debt now equals 76 percent of GDP. This is the highest ratio since the aftermath of World War II. It is also far higher than the 40 percent of gross domestic product as recently as 2009.
Looking at the next 10 years, the Congressional Budget Office believes annual deficits will hold near today’s levels for a while followed by rapid increases starting in fiscal year 2019. By 2026, the annual deficit could be $1.4 trillion per year. Excluding debt held by the Social Security systems, the accumulated deficit will rise by $10 trillion.
The debt-to-GDP ratio is projected to be 86 percent.
The increases in deficits and debt are partly the result of demographics. More Baby Boomers will receive Social Security and Medicare payments. Outlays for these and other “mandatory” programs are expected to rise from $2.4 trillion in 2016 to $4.1 trillion in 2026.
The increases are also driven by debt servicing costs. Today’s low interest rates are not expected to last. As higher interest rates are applied to an increasing debt load, net interest payments are projected to rise from $253 billion in 2016 to $839 billion in 2026.
It should be noted that these projections assume 10 years of slow but steady economic growth of about 2 percent per year. No allowance is made for the near certainty that at least one recession will occur during the forecast period with a concomitant increase in the deficit. Nor is any allowance made for the possibility of more rapid growth which would increase tax revenue and decrease the deficit.
To some observers, deficits are a non-issue. Interest rates are low. Debt servicing costs are well below historical averages. They believe the government should be borrowing more at today’s low rates, not less.
In a sense, this is correct. At today’s low rates, government should borrow all the money it can for as long as we can. The U.S. should extend its debt maturities to lock in rates for the next 30 years. It might also be wise to accelerate infrastructure spending since it will probably be cheaper to finance today than it will be to finance tomorrow.
Extra deficits today might be acceptable if there was a plan for smaller deficits or surpluses in the future.
But there is no evidence from the Congressional Budget Office projections or past behavior that any such plan will materialize.
How large can deficits grow before they become a problem? Nobody knows. As with global warming, the deficit “temperature” keeps rising. Someday the consequences may be severe. We ignore the problem at our peril.