The first thing most of us learned when we got a credit card was to never pay just the minimum balance. By the time a customer finishes paying off a balance at the monthly minimum, interest accumulated over the years can be as costly as the item itself.
And yet, it is exactly this method of dealing with debt that our political leaders have chosen to emulate.
The national debt as of Friday was about $13.4 trillion, which amounts to about $87,000 for every American worker.
And this is not just the effect of a few years of stimulus spending to bolster the economy through the current recession. The Congressional Budget Office projects that Barack Obama’s 2011 budget will cause deficits to fall until 2014 and rise afterward as Obamacare benefits begin to be paid out.
By 2020, long after the recession is projected to end, we will still be running a deficit of 5.6 percent of GDP, increasing the public debt to over $20 trillion, about 90 percent of GDP.
However, this problem is compounded greatly by the impending retirement of more and more baby boomers and rising medical costs, especially in Medicare. By the end of President Obama’s possible second term, the Government Accountability Office has estimated that these factors will combine so that more than 90 percent of all government revenue will be consumed by entitlement spending and servicing the national debt.
The trends fueling this explosion of public debt will only accelerate in the coming decades. Without any changes beyond those currently forecast, government spending will account for 35 percent of GDP by 2040. Balancing the budget that year (i.e. cutting the deficit to 0 and retaining the same level of debt) would require tax revenues to be increased by 75 percent, or government spending to be cut by 42 percent.
The consequences of failing to corral debt can be extreme. When Russia faced a sovereign debt default in 1998, its stock market fell 75 percent between January and August, inflation topped 80 percent, and the price of food doubled. Such a crisis in the United States is by no means unthinkable if we continue with the status quo.
There are no easy solutions to this problem. The wars in Iraq and Afghanistan may be popular bogeymen, but defense spending over the last decade has been less than any other post-WWII decade save the 1990’s, and has followed a general downward trend since 1945.
Similarly, raising tax revenues is not as easy as simply increasing the tax rate by a certain percentage.
Tax income and tax rates are not related linearly, but in a curve, known as the Laffer curve. As rates go up, economic growth is depressed and taxpayers find methods to evade taxes in greater numbers. Even before the revenue-maximizing tax rate is reached, all rate increases create smaller and smaller corresponding increases in revenues. Empirically, marginal tax rates since World War II have fluctuated greatly, but federal revenues have remained fairly constant around 19.5 percent.
The harsh fact is that previous generations have promised themselves more than we will ever be able to pay for. Over the next 75 years, Social Security and Medicare are projected to be underfunded by 46 trillion dollars. Those who protest reform of entitlement programs as cuts to promised benefits ignore the fact that these benefits will need to be cut eventually.
Delaying reform now means that Americans who are not yet born will have to pay for the retirement of predecessors who lived beyond their means, decreasing their own standard of living before and after retirement.
We used to be a country that strove to create a better future for our descendants.
Today, this attitude has been replaced with one in which citizens wield their ballots to make sure they get what was promised to them, regardless of how much of it they actually paid for or how their decisions will affect the country when they are gone.