Why The National Debt Still Matters

WASHINGTON, July 28, 2021 /PRNewswire/ -- The Concord Coalition and the Global Aging Institute (GAI) today jointly released a new paper entitled, Why the National Debt Still Matters. The paper, which is part of a quarterly issue brief series called The Shape of Things to Come, explains why America cannot continue to run up the national debt without placing its future at risk.  It also warns that current CBO budget projections may greatly understate the future debt burden, and hence the dangers of failing to change course soon and decisively.

"At least as worrisome as America's current fiscal trajectory is the fact that so many economists seem unconcerned," said Robert Bixby, Executive Director of The Concord Coalition."

"We are not just talking about the adherents of Modern Monetary Theory (MMT), a fringe school of economics which claims that the national debt is never a burden and never poses risks because the U.S. Treasury can always print more money to finance it," Bixby added. "Even some prominent mainstream economists are now arguing that, in today's low-interest rate environment, the federal government can continue to safely run large structural budget deficits. They even suggest that not to do so would be to rob future generations."

"The truth is that the United States is on a perilous fiscal course," said Richard Jackson, President of the Global Aging Institute and author of the paper. 

"While the federal government may now be able to safely borrow more than most economists once thought prudent, there is no way of knowing how much more," Jackson continued. "Proposals to up the ante on the national debt rest on a reckless gamble that interest rates will remain at historical lows, that the global appetite for U.S. debt will remain insatiable, and that, if these conditions change, the federal government can be counted on to act in a timely fashion to rein in deficit spending. The costs of miscalculation are enormous, and could include a global financial crisis, a domestic fiscal crisis, and the long-term erosion of U.S. living standards."

Key conclusions from the issue brief include:

  • The CBO assumes that interest rates will remain at historically low levels throughout the 2020s. If the CBO is mistaken, net interest costs and debt levels could ramp up much more quickly than the CBO currently projects.
  • Any number of developments could cause a sudden spike in interest rates, including faster than expected economic growth, accelerating inflation, and loss of global confidence in the sustainability of U.S. fiscal and economic policy.
  • If the ten-year bond yield rises to 4.5 percent over the next three years, not much higher than what the CBO was projecting as recently as 2019, Concord calculates that the federal debt held by the public would reach 125 percent of GDP by 2031, compared with 107 percent in the CBO baseline projection. Meanwhile, net interest costs would already be consuming 29 percent of total federal revenue by 2031, compared with 14 percent in CBO's projection. All of a sudden, additional near-term borrowing doesn't seem quite so affordable anymore.
  • Longer term, even though Concord's ultimate interest rate assumptions are no higher than CBO's, the compounding effect of higher interest rates early in the projection period means that the publicly held debt would rise further than the CBO projects, reaching 244 percent of GDP in 2051. By then, net interest costs would be consuming 57 percent of total federal revenue.
  • History teaches two things about government debt and financial markets: first, that there exists some level of debt beyond which new debt will no longer be financeable at tolerable interest rates; and second, that we cannot know in advance exactly what that level is.
  • History also teaches two things about U.S. budget politics: first, that it is easier to cut taxes than to raise them; and second, that new benefit programs, once enacted, are forever.
  • A fiscal cliff looms somewhere over the horizon. But we do not know where it is, and we may not be able to step back from the brink when we reach it.

Neither The Concord Coalition nor the Global Aging Institute disputes that the federal government can safely carry a larger national debt than was once thought to be prudent. Nor do we dispute that there are important unmet needs the federal government could and should address. What we do dispute is that borrowing has become riskless and costless. 

As the U.S. population ages over the next few decades, the federal budget will come under intense pressure from rising retirement and health-care spending. Ideally, America would be approaching this fiscal gauntlet with the national debt low and falling as a share of GDP. Instead, the national debt is near an all-time high and rising. America's leaders urgently need to develop a long-term budget strategy that stabilizes the national debt. If they delay much longer, it may be too late.

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SOURCE The Concord Coalition

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