THE INCREASE in the national debt over the past 17 years is staggering. And frightening. The graph running above this editorial notes the first date that the nation’s debt added another trillion dollars, going from $5 trillion to over $17 trillion, which it hit last month on October 17th.
Since 1996, the nation’s debt has more than tripled. It has doubled in just the eight years since 2005. It’s a bipartisan monster, growing during both Democratic and Republican administrations. During the eight years when George W. Bush was president, the nation’s debt went from $5.7 trillion to $10.6 trillion. Since the day Barack Obama was first inaugurated, less than five years ago, it increased $6.5 trillion-from $10.6 trillion to $17.1 trillion.
For years, even decades, the pollyannas who call themselves economists (See Krugman, Paul) assured Americans that our national debt was nothing to worry about. And they’re still doing it.
Their reasoning? First of all, the debt isn’t actually increasing as a percentage of the Gross Domestic Product. And second, even if the debt looks kind of big, not to say overwhelming, hey, we just owe it to ourselves! Since most of the debt has been held by fellow Americans.
But today those circumstances have changed. Debt as a percentage of GDP now exceeds all of it-100 percent of GDP, a level not seen since the Second World War, when the country went deeply into debt to win that war. And justifiably so. Imagine the cost in a lot more than money if Nazi Germany had defeated Great Britain and come to dominate all of Europe. Yes, there are times when the country should go into debt, even deeply into debt. As in that life-and-death struggle.
Today’s debt, however, has been amassed largely in what’s called peacetime. And today much of America’s debt is owed not to ourselves but to countries like Communist China. As we borrow ever more from those countries, we take an ever greater economic risk should they ever choose to stop lending us money. And even if they continue to buy our bonds, the interest on that debt amounts to a substantial transfer of income and wealth to countries abroad.
BY THE END of fiscal 2012, interest on that debt was $220 billion, or 1.4 percent of the $16.7-trillion debt at that point. Erskine Bowles, the co-chairman of the deficit-reduction committee known as Simpson-Bowles, has noted that, if interest rates went back to normal levels, the current $220 billion in annual interest would amount to $648 billion every year.
That potential $400 billion-plus a year in increased interest should alarm all Americans, Republicans and Democrats, conservatives and liberals. If $400 billion has to be spent on additional interest, that’s $400 billion that can’t be spent on any number of other pressing needs-from highways and bridges to food stamps and education.
Each year that the president submits a budget to Congress, he is also required to supply a 10-year projection of where the economy will be every year of the coming decade-and the amount of money the government will have to borrow in each of those years to meet its obligations. In his most recent budget, the president projected a national debt of $25.3 trillion by 2023. Interest on that debt would total $763 billion, assuming that interest rates average about 3 percent. But if interest rates approach 5 percent, total interest on the national debt could exceed $1 trillion a year. That figure would be far more than we currently spend on defense.
Even more unsettling, compare the $1 trillion in potential interest payments with the current amount the government collects in all taxes and fees, which was close to $2.7 trillion last year, the highest ever.
When countries default on their national debt, they may confront years of austerity-and decades of being unable to borrow money again. If the United States defaulted on its debt, not only would it create a world-wide economic crisis, but the dollar could lose its position as the world’s reserve currency, now a great economic advantage.
Yes, the country could just hope to inflate its way out of debt. But that way lies inflation on the ruinous model of various South American and African countries, not to mention the classic example of Weimar Germany between the wars. While hyperinflation may allow governments to reduce the real value of their debt, it can also wipe out most people’s savings.
But the greatest danger of runaway inflation may not be economic but political. The hyperinflation in 1930s Germany led to the rise of the National Socialist German Workers Party (Nazis for short), a dictator named Hitler, and a world war that killed more than 60 million people. The road to worldwide disaster can be paved with debt.
DURING THE financial panic of 2008, the federal government came to the rescue as the lender of last resort. But what happens if or rather when the next panic strikes, and government is so deeply in debt it can’t halt a run on the dollar? Who will come to the rescue of our own government?
The best and maybe only way out of the country’s current debt spiral is to make sure the American economy grows faster than the increase in the debt. That way, over time, this growing burden of debt can be reduced. But the way to economic growth isn’t through higher taxes and more spending and a web of ever more paralyzing rules, regulations and restrictions. Or via a maze of Rube Goldberg programs that defy understanding. (See the Patient Protection and Affordable Care Act and Continuing Mess, aka Obamacare.) America’s best and maybe only hope for a way out of this economic death spiral is to encourage, not discourage, investment and economic growth.
Here’s a good first step: Revive the bipartisan Simpson-Bowles plan to balance the government’s budgets, reduce spending, whittle away the national debt, and right this economic ship at last. Because right now the USS Economy is taking on water. A lot of it every year. Everyday. The stakes are great, the hour is late, and the dangers increase as we increase our debt each and every day. Here’s hoping all those aboard this great ship, and especially those on the bridge, will wake up before it’s too late. Instead of just rearranging the deck chairs now and then.
Editorial, Pages 83 on 11/17/2013