"Blessed are the young, for they shall inherit the national debt." – Herbert Hoover, 1936
Once upon a time in Washington, deficit hawks abounded in both parties railing against the impending threat to the economy posed by our ever-growing debt. Paul Ryan, the Republican nominee for vice president in 2012 made it his central issue. But he later departed his post as Speaker of the House having presiding over two of the biggest legislative budget-busters of all time.
Today, it's hard to find anyone, left or right, who gives much consideration other than cursory lip service to the debt crisis in the United States. But without immediate action to tame this beast, we are ensuring a legacy of slower growth and reduced wealth upon the generations to follow.
Pretty much every presidential contender in recent memory campaigned in part on a commitment to reduce the budget deficit and begin taming the national debt. Candidate Trump pledged to eliminate the deficit and pay off the national debt entirely within eight years; instead, total debt has grown by 29 percent during the first 2 years of his administration. But he is hardly alone: President Obama presided over a 74 percent expansion during his two terms, while George W. Bush doubled the debt during his 8 years at the helm.
Although it's not getting much ink (check with your dad if you don't get that reference), we attained another dubious milestone last month as the total gross US government debt exceeded $22 trillion, which includes almost $6 trillion in intragovernmental holdings of trust funds like Social Security. That leaves a whopping $16.2 trillion in debt held by the public, the relevant figure for measuring the burden on the economy and the taxpayers. That figure is colossal, but so is our economy, so a more useful measure is public debt relative to our annual economic output. This metric hit 78 percent of GDP this year, well above our long-term average of 40 percent. Any way you slice it, it's huge.
And getting bigger. According to estimates from the Congressional Budget Office, we are on track to exceed 93 percent debt to GDP within 10 years, assuming that current tax law continues in force. But many provisions in the 2017 tax cut and the 2018 budget bill were made temporary as a legislative gimmick. If, as most expect, these are made permanent, CBO projects an additional $3.4 trillion in debt by 2029, boosting the debt to GDP ratio above 100 percent for the first time since 1946.
Does any of this really matter, since we print our own money? Economists disagree on the exact tipping point, but all agree that higher debt means slower growth, reduced capital formation, higher private sector borrowing costs, and less budgetary room for important priorities like infrastructure and emergencies. The crisis is real and closing in.
What to do? For starters, apply the First Law of Holes: stop digging. A respected budget watchdog group called the Committee for a Responsible Federal Budget proposes the following. First, stabilize the current 78 percent debt ratio by cutting spending and raising taxes by a combined $4.8 trillion. Then start filling in the hole by working steadily back down to our long-term average 40 percent by 2050, requiring another $7.6 trillion in new taxes and spending cuts.
Sounds painful, but waiting just 10 years to address the problem will require 50 percent more in taxes and cuts. And it is mathematically impossible with spending reductions alone.
Tough medicine, but it's time to resume a serious discussion of our obligation to future generations.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co., in Chattanooga.