How to Reduce the Debt Burden for Future Generations

January 14, 2013

The federal debt is increasing at an alarming rate and its burden to future generations is a legitimate, growing concern. However, simply paying down the debt is not the best option for policymakers to pursue. Instead, lawmakers need to make it easier to pay the interest on the debt to decrease the burden on future generations, says Steve Conover in The American.

Many political discussions give attention to only three topics in the fiscal debate: paying down the debt, increasing tax rates and cutting entitlement spending. However, neither option is a serious effort to reduce the debt. Instead, politicians need to focus on making the debt easier to pay off with growth strategies.

  • Paying down the debt requires a budget surplus, which no one expects considering the current economic forecasts.
  • Increasing tax rates will increase the debt burden by stifling private sector innovation and growth.
  • Furthermore, cutting entitlement spending will reduce the rate of increasing debt, not completely eliminate it.
  • However, if the economy were to grow at a real rate of least 3.5 percent or more it would allow the government to pay off its debt.

The best ways to reduce the debt is through perpetuity, paying interest forever and never pay a dime of the debt principal. This method is conducive to a solid growth strategy because it allows the government to acquire cash, invest it, and then pay interest to creditors out of future income streams.

Advocates of paying down the debt up front make the argument that since homeowners have to pay off their debt, the federal government should do the same. However, home mortgages provide the option of perpetual interest only, allowing families to roll the debt over to younger generations while covering interest obligations.

The United States also employs the perpetual debt method. However, because the debt principal is growing quickly, so will interest obligations if interest rates go up, which appears likely considering the long-term economic outlook.

Source: Steve Conover, "How to Reduce the Debt Burden for Future Generations," The American, January 3, 2012.

 

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