Some Real Debt Talk

Why We Need to Cut the Deficit and National Debt

Americans on both sides of the political isle support cutting the debt and eliminating the deficit. Everyone knows the debt is a problem, but few actually know why or what sort of problem it really is. Republican tax cuts are projected to increase the debt substantially from now to 2030, and the War on Terror and 2008 Financial Crisis haven’t exactly contributed towards reducing debt levels.

Recessions such as the 2008 Financial Crisis have substantial impacts on debt levels for several reasons: GDP falls, government revenues decline, and more people become eligible for government assistance. One unseen consequence of the 2008 recession was that the number of Social Security beneficiaries shot up by several million; elderly people left the workforce in record numbers, driving the deficit up.

Debt can be a great asset, or a great liability. When the government borrows money, it can make investments which deliver a return greater than the interest our government will owe. If the government must borrow money to fund entitlements or social assistance programs, there won’t be a direct monetary return and so the tax payer will be burdened with increased net interest payments.

In 2016, the federal government spent $240 billion on interest, or just over 6.2% of the budget for that year. With interest rates climbing, and the debt more or less frozen in proportion to the gross domestic product, federal interest obligations are slated to climb to nearly $480 billion in fiscal year 2020, over 10% of projected federal budget.

Ten percent of the budget may not sound so significant, but this is more than the federal government spends on welfare, medicaid block-grants, transportation, or education. The rising burden of federal interest payments increases the deficit, making the problem worse; we must counter this by cutting the deficit.

The federal budget almost always has a deficit, and has had one for 5 of the last 50 years. In those 50 years, Bill Clinton and Lyndon Johnson were the only presidents who presided over budget surpluses. Generally, this has not been an issue because the gross national income grows faster than the gross national debt, meaning debt levels decline even with budget shortfalls.

In recent decades, deficits were permitted to reach levels beyond which the economy could grow, causing debt levels to rise. Debt as a percentage of the gross domestic product more than doubled under Reagan and H. W. Bush. In all fairness to these two presidents, the White House has limited control over what spending Congress enacts, and even less control over the course of the economy.

The United States was busy building up its military to compete with the Soviet Union, as well as waging proxy wars all across the globe. In 1991, the US along with its UN alliance repelled Iraqi forces from Kuwait; these events added to the deficit.

How to Curb Deficits and Shrink Debt Levels

The federal government can raise taxes across the board, even if by small amounts, in order to reduce the deficit to more manageable levels. From here, the US can end its costly wars in the Middle East, permitting large cuts to be made to military contingency operations.

Non-discretionary spending is taking up a larger and larger portion of the federal budget, meaning it’s more difficult for the president and Congress to control spending increases; entitlement spending is projected to increase pretty rapidly. In order to curb this, the government can modify the way it measures inflation for elderly consumers, permitting slower increases benefit amounts.

Congress could also modify Medicare to allow it to negotiate drug prices and reimbursement rates the same way private health insurers do, helping to reduce future unnecessary spending on retirees healthcare. The number one way to cut the deficit besides raising taxes is to freeze discretionary spending increases to inflation.

Since the gross domestic product grows on average about twice as fast as prices, the deficit will naturally shrink because revenues will grow faster than expenditures. For example, if entitlement spending grew 4% and all other spending grew 2%, revenues would grow about 1% more than expenditures each year, which equates to a positive shift in the budget balance by 0.2% of GDP annually.

At this rate, the deficit would become a surplus by 2040. Debt as percent of GDP would begin declining after only 5 years, accelerating on average every further year. This would look something like this:

In conclusion, while the debt is a severe issue when ignored, it can be dealt with in a variety of effective ways which don’t necessitate cuts to public spending or even particularly significant tax hikes. All we need is a Congress and White House willing to place debt and the deficit higher up on the list of priorities.

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