If you didn’t know of Congressman Paul Ryan’s optimism in the American people’s ability to tackle this country’s fiscal problems, you would think Ryan was the voice of doom and gloom. Last week in response to the latest report from the Congressional Budget Office (CBO), The Long Term Budget Outlook, Ryan said,
“It is unclear how many more fiscal alarms need to go off before Washington takes action to avert our looming debt crisis. Earlier in the month in testimony before the House Budget Committee, Federal Reserve Chairman Ben Bernanke emphasized the urgent need for a ‘fiscal exit strategy.’ Last week, Admiral Mike Mullen warned that our debt is ‘the biggest threat we have to our national security.’ Over the weekend, Europeans lectured us at the G-20 summit on the unsustainability of continued profligacy. Today, the CBO reiterated what all but Washington Democrats understand: we are careening off a fiscal cliff.”
If Ryan sounds like a herald bringing news to Pharaoh of another plague upon Egypt, he has good cause.
According to the CBO, public debt will be larger than the entire U.S. economy by 2023. The CBO’s economic models show the standard of living beginning to decline by 2015, and the economic model completely breaks down by 2027.
Already by the end of this fiscal year the federal debt will be 62% of the Gross Domestic Product (GDP). This is up from 40% of the GDP in 2008, and up from the forty-year average of 36%.
It’s not a projected shortage of revenue that is driving the long-term debt. The CBO estimates in an extended baseline scenario that federal revenues will reach 23% of GDP by 2035. This expected increase in taxes is the result of the federal health care reform, growth in the reach of the alternative minimum tax, and the expiration of most of the Bush tax cuts. Even under this scenario, debt would grow to 80% of GDP in 2035. And that’s the best scenario: 80% of GDP. Federal interest payments would grow from 1% of GDP to 4% of GDP in the same period.
Making matters even more difficult for policy makers, the CBO estimates are based upon no increases in discretionary spending. The projected increases in federal spending are in the mandatory programs, “particularly in spending for the government’s major health care programs: Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and insurance subsidies that will be provided through the exchanges created by the recently enacted health care legislation.”
Instead of “bending the cost curve,” under both scenarios outlined by the CBO health care costs will roughly double as a share of GDP by 2035 to 11%. During the same period, Social Security is only expected to grow from 5% to 6% of GDP. Health programs are the cause of 80% of the growth in non-interest spending in the next 25 years.
As Ryan said in his statement, “…the CBO affirmed that the primary driver of the deteriorating budget outlook is Federal health care spending – a problem exacerbated by recent creation of two new health care entitlements and massive expansion of Washington’s reach into the health care sector.”
The debt has consequences. The CBO describes how a Greece-like situation could take the United States by surprise. “…higher debt could raise the probability of a fiscal crisis in which investors would lose confidence in the government’s willingness to fully honor its obligations, and thus, the government would be forced to pay much more for debt financing.20 Interest rates might rise only gradually to reflect growing uncertainty about whether government debt would be fully honored, but other countries’ experiences suggest that a loss of investor confidence could occur abruptly instead.”
The CBO even says they are underestimating the impact of the increased debt. Even in the absence of a crisis, large budget deficits will lead to higher interest rates, more foreign borrowing, and less domestic investment. This will mean lower long-term income growth in the United States. Under one scenario, the “crowding out effect”of the federal debt could result in a GDP per capita 17% lower than under a stable economic condition scenario.
Delay in taking on the national debt problem has consequences, too. The CBO estimates that if action on the debt is delayed for ten years, the debt-to-GDP-ratio would rise an additional 30%. This would result in output 2-4% lower in the long term and capital stock 6% to 10% lower. “In the long run, a 10-year delay would reduce the well-being of all future generations by amounts equivalent to a cut of roughly 1 percent to 2 percent of their lifetime consumption, again depending on the specific policies adopted.”
Ryan said in his statement, “Today’s report exposes the risk of delay, demonstrated by this year’s unprecedented budget failure. We must heed this latest warning and chart a new course to get a grip on Washington’s explosive growth in government spending.”
But Ryan is also an optimist. On Independence Day, Ryan had an Op-Ed that appeared in the Chicago Tribune on America’s first debt crisis at the time our country’s constitution was written. Ryan notes that because of the austerity measures put into place by our founding fathers, the United States was able to pay off the national debt from the Revolutionary War in 45 years. We can do it again, Ryan believes.
“America’s looming debt crisis challenges this experiment in democracy. Political leaders should meet this crisis with the same seriousness and determination they would bring against an invading army. There are no Madisons, Hamiltons and Washingtons to save us from our folly, nor do we need a new Constitution. Yet the courage, imagination, wisdom and public spirit that provided the founders with the plan to end America’s first debt crisis can also supply our needs. We only need leaders who will rise above narrow partisanship to confront our debt challenge and save our exceptional country.”
Of course, the national debt was only 40 percent of GDP when Washington, Hamilton, and Madison paid it off.
By James Wigderson
Special Guest Perspective for MacIver Institute