We Are To Blame For Our Nation’s Exploding Debt

3103We Are To Blame For Our Nation’s Exploding Debt

Jeffrey Viksjo CFA

Spending what they don’t have works for politicians at the national level (who don’t need to balance a budget). Cutting taxes and/or increasing spending brings home the bacon and provides job security.

 

History is instructive in this regard. Ronald Reagan increased the national debt by 186% while in office, percentage wise higher than debt increases during both World Wars. Barack Obama increased the debt by 75% (with the distinction of adding the most in absolute dollar terms). Both Bushes, Ford, Carter, Trump and Clinton all increased the debt by more than 30%.

 

President Biden is following suit, so far signing the COVID relief bill (which includes hundreds of millions for municipalities like Buffalo) and proposing an additional trillion-dollar infrastructure package. The programs aren’t close to being paid for, and will dramatically increase the national debt.

 

According to the most recent Gallup poll, just 3% of respondents said the national debt was the most important problem facing the country. While pundits have warned (incorrectly) for decades about the imminent threat to prosperity posed by the national debt, I’ll argue today that we may be nearing a tipping point.

 

  1. The sheer size of the debt threatens to strangle the economy. Relative to the size of the economy, the national debt is now more than four times the level it was when Ronald Reagan first took office. How is the government able to sustain this level of debt? Only one reason: interest rates are at their lowest level in history. While the national debt is exploding higher, interest payments on that debt have stayed relatively constant. That can’t last forever.

 

  1. Interest rates have nowhere to go but up. Locally, and across the U.S., home buyers are willing to pay almost anything for a house (and take on a huge mortgage) because interest rates are so low (lower rates mean more house for the same monthly payment), an exact mirror of what’s happening with the national debt. However, the government’s interest rates aren’t fixed for 30 years. In a realistic rate scenario, interest payments alone could equal 20% of total budget outlays by the end of the decade (up from 5% now), eliminating most discretionary spending.

 

  1. Social Security is at a turning point. Up until recently, Social Security has taken in more than it has paid out each year, accumulating an illusionary huge surplus. However, with baby boomers retiring, Social Security will now pay out more than it takes in. That means the program will begin to tap into its surplus, and the government, who already spent the money, will need to take on more debt to pay back the IOU’s.

 

Voters bear the ultimate responsibility for this state of affairs. We are the ones who keep electing politicians who, with our permission, are more than happy to compromise our future economic strength and our kid’s futures, in order to keep them in power.

 

This article was also featured in The Buffalo News’ “Another Voice” section!

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