Beware the Siren Song of 'Calm' Fiscal Waters
The United States is steaming ahead into uncharted fiscal waters, with rapidly growing federal debt promising a turbulent economic future. During their recent presidential administrations, candidates Joe Biden and Donald Trump have added trillions to the national debt, leaving America at a critical juncture that demands urgent, bipartisan action.
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For those following this column, the numbers are stark: U.S. government debt is projected to reach a staggering 122% of gross domestic product by 2034, far surpassing levels seen even during World War II. This sharp rise from the current 99% is based on optimistic assumptions about interest rates, inflation, and economic growth.
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The date to watch is 2038, when this debt-to-GDP ratio is poised to surpass the previous record set during the pandemic year of 2020. Unfortunately, the end of the pandemic hasn't quelled the surge in spending.
So far, the U.S. hasn't faced significant repercussions for its leaders' fiscal irresponsibility. This has led some economists to develop optimistic theories suggesting that debt doesn't matter and that deficit hawks like me are merely fearmongers.
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However, the soothing assurances from deficit doves have quieted somewhat recently, as the U.S. experienced its largest inflation surge in 50 years and rising interest rates — which were supposedly a thing of the past — have continued to climb.
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Unfortunately, recognizing the dangers of fiscal irresponsibility doesn't necessarily translate into political will to act responsibly. Therefore, it's crucial to emphasize once again that fiscal stability should be everyone's top priority.
History provides sobering lessons on the consequences of unchecked government debt. Noted historian Niall Ferguson recently wrote in Bloomberg that his studies show all great powers that spend more on debt service than on defense eventually lose their status. Whether it's the British Empire or France's ancien régime, excessive borrowing and spending lead to economic weakness, loss of global influence, and eventual downfall.
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The U.S. is already crossing this ominous line. This year alone, interest payments on the national debt will reach $892 billion, surpassing defense base funding. By 2034, annual interest payments are projected to reach $1.71 trillion, widening the gap into an abyss.
I hope legislators won't think that fixing this issue merely requires increasing defense spending.
The real issue is the substantial share of the budget consumed by interest payments, making austerity the necessary solution.
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High interest payments likely contribute to the Federal Reserve's challenges in reducing inflation to its target of 2%. The more the Treasury borrows from the Fed, the stronger the inflationary pressures.
Interest payments funded by debt slow economic activity further. As the Peterson Foundation aptly summarizes, a higher debt burden affects everyone: "If high levels of debt crowd out private investments in capital goods, workers would have less to use in their jobs, which would translate to lower productivity and, therefore, lower wages."
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Yet the American political landscape remains eerily calm amid heavy fiscal weather. Politicians don't seem concerned that slower economic growth or a debt crisis could impede their priorities, whether tax cuts, climate initiatives, or poverty programs.
They should be worried.
Instead, both sides avoid addressing the root causes of the debt crisis, a perfect storm of rising interest payments and the looming insolvency of Social Security and Medicare. Substantive discussion and action are notably absent.
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This is a solvable problem.
The U.S. has successfully navigated past debt challenges, notably in the 1990s, and the potential political rewards are enormous. However, the risk of being blamed for a crisis triggered by a credit rating downgrade or loss of confidence among international lenders looms large and can occur with surprising speed.
Additionally, the specter of major debt-holders like China dumping U.S. Treasuries adds another layer of geopolitical vulnerability.
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As we stand at this crossroads, will America heed the warnings of history and take decisive action to address its debt crisis? The future of the nation's economic strength and global leadership hangs in the balance.
If we, as citizens, recognize the gravity of the situation and insist on action, policymakers will have little choice but to work toward a sustainable fiscal future. The alternative — following the path of fallen empires — is a fate that a great nation like America must avoid at all costs.
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Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests include the U.S. economy, federal budget, homeland security, taxation, tax competition, and financial privacy. She has been featured on "Stossel," "20/20," C-SPAN’s "Washington Journal," and Fox News. Ms. de Rugy has also been a resident fellow at the American Enterprise Institute, a policy analyst at the Cato Institute, and a research fellow at the Atlas Economic Research Foundation. Read Veronique de Rugy's Reports
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