Despite the recent news about strong short-term growth, those who are most familiar with the cycles of the U.S. economy are all warning about a common danger to future growth and stability. What is driving long-term concerns for the top economic minds? Rising national debt.
Unfortunately, policymakers who should be steering us in a better direction are asleep at the wheel while the accelerator is stuck. The result is that we are speeding in the wrong direction.
The new chairman of the Federal Reserve Board of Governors, Jay Powell, recently advised Congress, “We really need to get on a sustainable fiscal path, and the time to be doing that is now.” He knows that the debt is currently on an unsustainable course, spiraling towards levels never seen before. Most importantly, he fully recognizes the negative ramifications of growing debt.
On her way out, Powell’s predecessor as head of the Federal Reserve, Janet Yellen, was particularly blunt about the situation. She warned lawmakers that the long-term forecast of skyrocketing debt is “the type of thing that should keep people awake at night."
What should really induce restlessness is that the long-term outlook that Powell and Yellen referred to is now even worse. New numbers are in, and they underscore the damage being done as policymakers disregard the admonitions from experts and press on with irresponsible policies.
Last year, the nonpartisan Congressional Budget Office (CBO) projected debt held by the public would reach 93 percent of gross domestic product (GDP) in 10 years. The latest estimate has debt reaching 96 percent of GDP in a decade, exceeding the size of the economy by 2031 and hitting a new record by 2034. These dubious milestones will be reached even sooner if recent tax cuts and spending increases are continued, with debt potentially surpassing the economy by 2027. At the same time, federal budget deficits are now expected to permanently exceed $1 trillion within two years. The previous forecast saw trillion-dollar deficits returning in 2022.
Why has the outlook deteriorated to the point that debt may now exceed the size of the economy in just a decade and trillion-dollar deficits as far as the eye can see will begin soon? Because instead of fixing the debt, policymakers opted to make matters worse.
CBO estimates that policies enacted since June 2017 added roughly $2.7 trillion to the debt through 2027. The biggest culprits are the tax cuts approved late last year and the budget deal reached earlier this year.
Debt at such high levels and still growing ever larger is a serious threat to economic growth. In fact, International Monetary Fund Managing Director Christine Lagarde recently warned that rising deficits and debt will reduce the U.S. economic growth rate in the near future.
Business leaders are also concerned. Starbucks Chairman Emeritus Howard Schultz recently stated, “I think the greatest threat domestically to the country is this $21 trillion debt hanging over … America and future generations.”
Higher debt and lower investment will hit the wallets of all Americans. CBO estimates that average income would grow more slowly due to rising debt than if it were put on a downward path. And higher interest rates due to larger debt mean families will pay more for home, automobile, and student loans.
Congressional Budget Office Director Keith Hall has this warning, “The prospect of large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges.” This includes lower wages, increased likelihood of a fiscal crisis, and reduced flexibility to respond to unexpected challenges like a recession.
Regarding the latter point, CBO notes that higher debt will make it more difficult to borrow as the government combats a recession. This brings up a very important issue. Debt usually spikes because of a recession or other major event. With debt already very high by historical standards, a new crisis could quickly put our debt into uncharted territory.
It is deeply troubling that policymakers have actively made the long-term debt outlook far worse despite the warnings from leading economic authorities. Our leaders need to listen to reason and stop the fiscal irresponsibility now.