$22 Trillion and Rising—Does Anyone Care?

Last week, when the federal deficit surpassed $22 trillion, there were several references in the media, most of which observed that no one seemed to care. It was just yesterday that the Republican Party, led by Paul Ryan, criticized President Obama on what seemed like a daily basis over the “debt crisis staring us in the face” and for a national debt that was “out of control.” But now, no one seems to care. Larry Kudlow, the director of the president’s National Economic Council, dismissed it as not “a problem.” So what sense are we to make of this?

We appreciate that deficit reduction is a hypothetical problem to most Americans. How can you worry about such a theoretical thing when you are struggling to make ends meet? We also appreciate that no politician wants to talk about it while running for office or governing because addressing it means either raising taxes or cutting expenditures. Neither is popular. One or the other, however, is inevitable.  

Let’s try to simplify the issue. As we describe in our Fiscal Policy Research, there are two risks associated with increasing national debt. Both are real, but the timing of one of them is less certain.

The first is the capacity of the US to borrow. This is the question that can’t be answered with certainty. We can’t know how long markets will accommodate our borrowing and at what level financing will become less available or not available at all. Other countries, as we have described, have reached that point at different debt levels depending on their economic strength, the alternatives of lenders, etc. For example, what would happen if China and Japan decide the US is no longer a good credit risk? While it is not clear at what point this could happen, it is certain that it will if we continue to increase our debt faster than our economic growth. As we have witnessed with other countries, while the timing is uncertain, the consequences are catastrophic.

The second factor is the cost of our debt. Every dollar we spend on interest is a dollar that we cannot invest in other pressing needs like infrastructure, education, preparation for climate change etc. Furthermore, every dollar we borrow from the future further limits the capacity of our children to control their own priorities. According to estimates by the Congressional Budget Office, interest expense will increase over the next decade from 6% of spending to 13%, thereby exceeding several of the largest budget items, including defense and Medicaid. It will also exceed virtually all we spend on education, food stamps, and other family assistance. Every American understands that you can’t spend indefinitely what you don’t have. This problem is real, now, and undeniable.

And, this is the good news. The bad news is much worse. We live in a time of unprecedented low interest rates. Such rates have mitigated the cost of our debt. If, and I would argue, when, interest rates return to average historical levels, the interest on our debt will increase substantially and the projections above will be dwarfed.

Lack of attention to this “debt crisis staring us in the face” by both parties leaves millions of us without representation. While all Americans may not appreciate this risk, our leaders do. It is their job to lead, even if unpopular, and not to sell out our future to their short-term reelection ambitions.