OUR UNSUSTAINABLE DEBT
June 1, 2010
America's financial situation is unsustainable. In 2009, the federal government spent $3.5 trillion but collected only $2.1 trillion in revenue, resulting in a $1.4 trillion deficit, up from $458 billion in 2008.
What's more, with the impending entitlement crisis requiring more future borrowing, the national debt could grow faster than the economy. In 2020, if current trends continue, the country will owe more than $20 trillion, or 85 percent of gross domestic product (GDP), says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.
Why do deficits matter, asks de Rugy?
Debt is very expensive:
- The more we borrow, the higher the cost of borrowing; by 2020 the federal government will spend a projected $900 billion each year just to pay interest on our debt.
- That is more than what the United States spends right now on two wars, plus the Departments of Defense, Education, Energy, and Homeland Security combined.
Large and sustained deficits and debt inevitably cripple economic growth:
- The money the federal government borrows comes from Americans' savings; so does the cash that Americans invest in private sector growth.
- There comes a point where there just are not enough savings to satisfy both masters.
Our growing debt means the federal government has to rely increasingly on foreign investors to pay its bills:
- This reliance can give significant bargaining power to individual foreign governments, such as China, in their diplomatic negotiations with Washington.
- According to Donald Marron, an economist at the Georgetown Public Policy Institute, the willingness of countries like China to finance our debt gives them leverage in negotiations about other issues, ranging from nuclear proliferation to human rights.
A growing debt sends signals to investors that we are becoming riskier borrowers:
- We are constantly rolling over short-term debt.
- When our lenders wise up and start setting our interest rates to reflect the risk we have become, access to capital will become harder for everyone.
- The resulting inflation would reduce the value of each dollar, and introduce high levels of uncertainty into the economy.
- Such a situation means less innovation and less entrepreneurship, and therefore less economic growth and more hardship.
Source: Veronique de Rugy, "Our Unsustainable Debt," Reason Magazine, June 2010.
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