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Will Growing Government Debt Undermine the American Dream? The Implications of Mounting Federal Debt and Spending for the Debt-Paying Generation
By William Beach and Robert Bluey
Washington’s reckless spending spree of the past several years and unwillingness to confront the mountains of debt coming soon from unreformed federal entitlement programs threaten the economic and social future of the generation currently between the ages of 5 and 30. The 115 million Americans in this Debt-Paying Generation could experience enormous adverse effects from having to pay down the greatest debt in world history. Indeed, the people in the Debt-Paying Generation could end their working lives as the least improved generation relative to the one that preceded them in U.S. history. They will marry later, have fewer children, poorer health, and lower incomes because they must pay the trillions of debt from excessive spending today and from the tsunami of debt coming from unfunded liabilities in Medicare, Social Security, and Medicaid.
Rob Bluey, a member of the Debt-Paying Generation, sat down with Bill Beach to ask him about the debt crisis and the implications for those who, through no fault of their own, will be on the hook for solving and paying for it. The interview follows.
Q: What kind of a fiscal mess are we in? How did we get here and what, specifically, has the Obama Administration done to exacerbate this problem?
A: Everybody has seen the news from Greece. The Greek financial crisis largely is caused by the government’s spending way beyond its revenue inflows. However, Greece is not alone: Spain, Italy, Portugal—indeed, many major, fully developed economies are spending far in excess of revenues year after year.
The United States shares this problem with these better-known fiscal basket cases. So let me start by looking at what has just happened in the past two years.
We are looking at a historic moment in U.S. history. You have to give President Barack Obama, the Democratic leadership in Congress, and the strategists in the White House credit for something: They broke all of the records for increasing the sheer volume of federal spending.
Of course, they had a head start because of the awesome spending increases between 2004 and 2008 and the momentum in spending growth over the last six months of the George W. Bush Administration. President Bush bailed out Wall Street and, one could argue, went too far in those efforts.
However, President Obama continued and expanded the flood of dollars. We have borrowed and spent so far $456.6 billion of the authorized $896 billion for rescuing AIG, for the TARP bank bailout program, and other rescue efforts.
William Beach and Robert Bluey's full report:
Will Growing Government Debt Undermine the American Dream? The Implications of Mounting Federal Debt and Spending for the Debt-Paying GenerationPublished on September 28, 2010 by William Beach and Robert Bluey
Washington’s reckless spending spree of the past several years and unwillingness to confront the mountains of debt coming soon from unreformed federal entitlement programs threaten the economic and social future of the generation currently between the ages of 5 and 30. The 115 million Americans in this Debt-Paying Generation could experience enormous adverse effects from having to pay down the greatest debt in world history. Indeed, the people in the Debt-Paying Generation could end their working lives as the least improved generation relative to the one that preceded them in U.S. history. They will marry later, have fewer children, poorer health, and lower incomes because they must pay the trillions of debt from excessive spending today and from the tsunami of debt coming from unfunded liabilities in Medicare, Social Security, and Medicaid.
Rob Bluey, a member of the Debt-Paying Generation, sat down with Bill Beach to ask him about the debt crisis and the implications for those who, through no fault of their own, will be on the hook for solving and paying for it. The interview follows.
Q: What kind of a fiscal mess are we in? How did we get here and what, specifically, has the Obama Administration done to exacerbate this problem?
A: Everybody has seen the news from Greece. The Greek financial crisis largely is caused by the government’s spending way beyond its revenue inflows. However, Greece is not alone: Spain, Italy, Portugal—indeed, many major, fully developed economies are spending far in excess of revenues year after year.
The United States shares this problem with these better-known fiscal basket cases. So let me start by looking at what has just happened in the past two years.
We are looking at a historic moment in U.S. history. You have to give President Barack Obama, the Democratic leadership in Congress, and the strategists in the White House credit for something: They broke all of the records for increasing the sheer volume of federal spending.
Of course, they had a head start because of the awesome spending increases between 2004 and 2008 and the momentum in spending growth over the last six months of the George W. Bush Administration. President Bush bailed out Wall Street and, one could argue, went too far in those efforts.
However, President Obama continued and expanded the flood of dollars. We have borrowed and spent so far $456.6 billion of the authorized $896 billion for rescuing AIG, for the TARP bank bailout program, and other rescue efforts.
We have effectively taken over Detroit. So far, we have spent $79.7 billion of the $100 billion authorized for the Detroit bailout. We’ve enacted two economic stimulus programs worth $1.1 trillion. That’s a lot of borrowed money. And we’ve passed comprehensive health care reform that has a 10-year cost of $987 billion.
All of this spending is creating debt like we have never seen before in U.S. history. Debt, by the way, has to be repaid. If you are a U.S. citizen, if you expect to live and work in this country, this is your problem. Debt has to be repaid, and you will have a portion of this problem. And if you’re part of the Debt-Paying Generation, under the age of 40, you’ll find that this will reshape your life.
If Anything, the First Two Years of the Obama Presidency Promise to Be Historic
Let’s review some highlights:
Continued Bush policy of bailing out Wall Street = $896 billion ($456.6 billion spent).
Bailed out Detroit = $100 billion ($79.7 billion spent).
Enacted two economic stimulus bills = $1.1 trillion.
Passed a comprehensive reform of health care = at least $987 billion (10-year cost w/o “Doc Fix”).
Data from June 2010
Q: So how big is this problem? President Obama has spent a lot of money and the Democrat-controlled Congress has acquiesced, but what are the obligations to the Debt-Paying Generation?
A: Total debt was $7.5 trillion at the beginning of 2009. I’m talking about debt held bythe public. This is what some commentators call sovereign debt or the debt that you and I and people around the world own of U.S. Treasuries. It’s not debt owed by one agency of government to another agency. It’s what we owe ourselves, and it has to be repaid.
This debt will double in just the next 10 years. It will go from $7.5 trillion to $15 trillion. As compared to the size of the U.S. economy, sovereign debt will go from 53 percent of the size of gross domestic product (GDP) to 67 percent of GDP.
And that’s only the beginning of what is coming. Structural debt from entitlements like Social Security, Medicare, and Medicaid overwhelms anything that you’re currently reading about on the front page of your local newspaper.
We’re about to hit a major crisis with the Baby Boomers retiring. Only about 35 percent of the Boomers are fully prepared for retirement, and this is part of the moral dimension of the problem I just mentioned. We’re looking at unfunded liabilities for Social Security, Medicare, and Medicaid that will require the U.S. government to borrow such large amounts that total debt will equal 320 percent of GDP by 2050. And for the children, unless we straighten this out, by 2083 we’re up to 750 percent of GDP. That’s trillions and trillions of additional borrowed dollars.
The Obligations of the Debt-Paying Generation
•Total debt expected to grow from $7.5 trillion in 2009 to more than $15 trillion by 2020.
That is from 53 percent of GDP in 2008 to 67 percent of GDP in 2019. In 2008, debt equaled 41 percent of GDP.
•Tsunami of debt from Social Security, Medicare, and Medicaid will push total debt to 320 percent of GDP in 2050 and 750 percent in 2083.
Q: People have a hard time rationalizing big numbers. How big is a trillion dollars?
A: You’re right, few people have any sense of how large a trillion dollars is. First off, a trillion dollars is one thousand billion dollars. There’s a fellow that came up to me at a lecture and said, “You just tell them that! Just tell them it’s a thousand billion, and everybody will get it!” I don’t like that one as much as I like the fact that one trillion has 12 zeros. That’s a lot of zeros.
Recently I was talking to about 30 visitors at Heritage, a wonderful delegation of energetic public and private leaders from Mongolia, that little-known country just north of China, and I’m going through this exercise—12 zeros or a thousand billion—and they’re not getting it.
So I say, “How many in here know LeBron James?” Thirty hands go up. LeBron James makes $42 million a year, one of the highest-paid basketball players out there. I ask, “How many years would he have to work to make just $1 trillion?” Answer: Nearly 24,000 years to earn $1 trillion.
Here are some other ways to think about this. The average life is 2.4 billion seconds. An entire lifetime is just a small part of a trillion. A billion seconds ago was some time in 1979. A trillion seconds ago, just think about the magnitude of the difference—29,700 BC.
These are numbers that are truly large. So when we’re talking about $7.5 trillion in public debt right now going to $15 trillion, these are numbers that are unimaginable. They’re enormous. We have an economy right now that’s roughly $15 trillion. It’s a very large—indeed, it’s the largest economy in the world. What we’re talking about now just overwhelms the economy.
How Much Is One Trillion Dollars?
$1,000 billion.
$1,000,000,000,000 (that’s 12 zeros).
At $42 million per year, LeBron James would need to work 23,809 years.
Average life in the U.S. lasts 2.4 billion seconds.
One billion seconds ago = 1979.
One trillion seconds ago = 29,700 BC.
One trillion seconds from now = 33,720 AD.
Q: Now that we understand how much money we’re talking about, can you explain why the debt is such a problem?
A: The graph below shows debt held by the public as a percent of GDP from 1980 through 2020. The period 2010 through 2020 is projected. I love this graph because it tells us we would be in trouble even if George W. Bush had had a third term.
Debt reached its pre-2007 maximum roughly in 1995. We’ve basically just won the Cold War, and we’re paying down the debt. The dot-com bubble starts in the late 1990s. Revenues are coming in from that bubble. Congress is not doing anything particularly pernicious: We have divided government, which the columnist Joseph Sobran says is the only constitution we have left.
George W. Bush takes over in 2001, and debt slowly creeps up until the economy falls apart in 2008. Look what happens under President Bush’s last budget. That’s the blue projected line below. That is, even if Bush had had a third term, we would have had much more debt.
However, look at what President Obama proposes. He takes that debt up to 90.4 percent of GDP in his latest budget. At that level, debt held by the public will be nearly as high as the highest it’s ever been in U.S. history.
Q: How does our debt today compare to the Great Depression or World War II?
A: We reached the highest debt percentage when we were fighting Tojo, Hitler, and Mussolini during World War II: 109 percent of GDP, the most debt we had ever had. Now we’re looking at exceeding that in just a few short years and reaching 180.6 percent in 2035.
Q: We hear a lot about the budget deficit. Will it only get worse in the years to come?
A: The next chart depicts annual deficits from 1962 projected through the mid-2080s. These data come from the Congressional Budget Office. Between 1962 and 2007, these deficits go up and down, with the lowest being a minus 2.2 percent, which occurred during the period when we last had a surplus.
Most analysts will tell you that we can manage with deficits at roughly 2.5 percent of GDP. It’s not a balanced budget, it’s not as good as it can get, but we can work our way through that.
However, look what happens between now and the 2080s. Just look at those annual deficits. Unless we resolve Social Security, Medicare, and Medicaid—the entitlements that are driving our debt—we’ll be up to 45.3 percent of GDP on an annual basis. Nearly half of our entire economic output will go just for the deficit, and every year of deficit adds to total debt.
Q: It seems the deficits have plagued almost every President. Who has done the best job?
A: The chart below shows average annual deficits for each President. There are minus 1 percents for John Kennedy and Lyndon Johnson. Gerald Ford had minus 3.5 percent. Ronald Reagan and George H. W. Bush had minus 4.3 percent. But again, we know we were basically pounding the Soviets into the ground through our defense buildup and destroying the Berlin Wall. That’s a pretty good payoff there. The economic benefits from winning the Cold War come in the Clinton Administration: minus 0.1 percent. Finally, look at George W. Bush at minus 3.2 percent: a big average but not as big as the Reagan and first Bush years.
However, the estimated average budget of a two-term Obama Administration stands at minus 7.8 percent—the biggest of the past 50 years. We’re not looking at a continuation of deficit business as usual. This is a dramatic change in the magnitude of annual shortfalls at the federal level.
There’s another political point to make: It doesn’t make any difference which party runs the whole government or if it’s a divided government.
Q: There’s an assumption that Republicans spend less, Democrats spend more, and divided government is generally the best way to keep both parties in check. Is that true?
A: The chart below shows which party ran the government from 1962 through 2009 and the total amount of spending over that time period. When it’s blue, it means the Democrats have the House and the Senate. When it’s gray, that’s divided government. And when it’s red, Republicans have the House and the Senate. Here’s a test for you: Does the line go up or down? Answer: It always goes up, and no matter who is in control.
Q: Why is it that the Debt-Paying Generation will have to pay the debt?
A: First, the debt is going to be very large. There are three major debt-rating agencies in the world: Fitch, Standard and Poor’s, and Moody’s Investor Services. We believe that each company begins to closely scrutinize the ability of the debtor nation to pay their debt when publicly held debt reaches 90 percent of GDP, and their expectation is that most of the debt will be paid forthwith. On May 14, the International Monetary Fund (IMF) issued a notice to the United States that when they added up the debt of state governments and the federal government, we would exceed 100 percent of GDP in 2015.
So Moody’s is going to be looking differently as you mature and reach your most productive period of life than they looked at my generation. We had debt-to-GDP ratios of 30 percent to 40 percent, and Moody’s and others did not expect us to pay that debt right away. In short, it was a manageable amount of debt relative to the size of our economy.
Academic research shows that the growth rate of the economy slows significantly when you get to 90 percent of GDP and above. So when we say the Debt-Paying Generation is on the hook, we do so with the authority of Moody’s, Fitch, and Standard and Poor’s and current research on the relationship between debt and economic performance.
Q: So how are we going to get out of this mess? If you listen to the liberals in Washington, we’re just going to tax the rich even more, and that’s going to solve everything, but I have a feeling you might think otherwise.
A: There are four ways to pay the debt. You can raise taxes to pay the debt, you can lower spending and use the savings to pay the debt, you can inflate your way out of debt, or we could simply repudiate it.
We had a lot of debt after World War II. How did we reduce that debt? Did we pay it back? Yes, in part, but the biggest contribution to paying the debt was inflation. Indeed, we had massive inflation: 50 percent of the value of the dollars borrowed during the war was inflated away. Inflation undermines your ability to buy the things you need and give yourself a high quality of life. When we had some surpluses in the 1950s, we had a lot more dollars and we could pay that debt at a lot less cost. Raising taxes, of course, is not a good idea if you’re trying to live a prosperous life, because it’ll slow the economy.
Finally, is debt repudiation a good idea? Don’t go down that route, as it nearly destroys your country’s credibility to bondholders. A few countries have tried repudiation—most famously Argentina—and it takes decades to recover from that one policy move. So the only policy action that’s good for you as citizens and taxpayers is for Congress to lower spending. However, the only thing that Congress doesn’t want to do is lower spending. But one of these four has to occur.
Debt Always Has to Be Paid
Payment can be made by:
Raising taxes.
Lowering future spending.
Inflation or dollar devaluation (debt repricing).
Debt repudiation.
Q: How big is this challenge?
A: The chart below shows the amounts that Congress authorized for the AIG bailout, TARP or the bailout for the financial sector, and the economic stimulus bill. Look at the amount of money. We compare these amounts to the unfunded liabilities in Social Security and Medicare.
We have no resources to pay for unfunded liabilities in Social Security and Medicare. In other words, we’re going to have to borrow those amounts over the next several decades just to meet current obligations. Just look at Medicare; it’s like the Jupiter of this whole problem. It’s just simply enormous.
Q: Federal spending is a major focus for Tea Party groups. Do the facts back up their outrage over spending?
A: The graph below goes directly to your point about spending. Quite apart from these extraordinary allocations during the recession and the upcoming tsunami of outlays for entitlements, ordinary spending by the federal government has been consistently greater than the growth of household income. The blue line is median household income growth from 1970 to 2008. In other words, it shows the income growth for the household that’s in the middle of the income distribution. The red line shows the growth of federal spending. Both series have been adjusted for inflation. Look at the inflection point in 2001. The temperature rose dramatically in the patient as of that point.
So what does this mean to you, members of the Debt-Paying Generation? If we don’t get our arms around the debt problem and seriously address the rate of growth in spending, debt will continue to accumulate, and the Debt-Paying Generation—not the Boomers, not the Depression generation—will be facing these dramatically higher tax rates according to the government’s own accounting office.
Q: Are higher taxes inevitable?
A: This last chart shows current tax rates and tax rates we’ll need just to stay even with spending in 2050 and 2082. The middle bar in each case is the tax rate in 2050, and the third bar in each case is the tax rate in 2082. The bottom rate will go from 10 percent to 19 percent by 2050. The middle rate, where most of the Debt-Paying Generation will at least start, will go from 25 percent to 47 percent. And if you’re in the upper-income bracket, you’ll go from 35 percent to 66 percent. But for our children, for my great-grandchildren, the middle rate jumps from 47 percent to 63 percent.
Let me address the Debt-Paying Generation. The accounting numbers are not controversial. The projections are, but the projections are based on conservative trends, so you can’t argue that somebody else’s accounting gets you off this hook. The trends are what they are, and they have been going in this direction for a long time. We’re not looking at a reversal of trend unless we have a reversal of policy.
So, absent a reversal of policy—that is, absent a fix to Social Security, Medicare, and Medicaid—the rate of economic growth in the future will drop well below what it should be. As the economy drops below its long-run growth rate of 3.25 percent per year (after inflation has been taken out), incomes and economic opportunities also will decline below their potential levels. If the average growth rate across your working lifetime is 2.5 percent, you will end up in U.S. history as the generation that improved the least from the time you started to work to the time you started to retire.
Q: What does this mean for young people? Is the American Dream still possible given the dire circumstances you’ve explained?
A: It means you’ll marry later. If you marry later, you likely will have fewer children. Having fewer children means you likely will start your households later. If you buy your first house later, think what that does to the construction business, to the appliance business, to all the businesses that are tied to the first home purchase.
Your incomes will be less because the economy will be slower, in no small part because of increases in taxes on labor and capital. If your incomes grow below potential, that may mean that your health will be poorer than it should be: Income growth and health outcomes are highly correlated. As income falls, health outcomes get worse because people have less access to health care services, and there are simply fewer such services around.
Most disturbing of all, you will give your children less than you received from your parents. The intergenerational endowment from the Debt-Paying Generation to the next generation means that they will have less to work with as they start their working lives. That lower starting point takes a long time to reverse—certainly longer than a single generation.
It’s a very grim prospect, but it can be changed. The IMF on May 14 of this year told us what we had to do. The IMF advised the United States to decrease its structural deficit by 12 percent of GDP between now and 2015. Only one other country got a stronger recommendation. That was Japan—13 percent of GDP cut in its structural deficit. Twelve percent of GDP in 2015, divided by five between now and 2015, means that each year we must drop spending by $390 billion. That’s $390 billion lower a year in spending to avoid a reevaluation of our debt when it hits 100 percent.
If you’re a Republican, a Democrat, a Communist, or something else, that’s the goal. And you’re not being told that by a party leader. You’re being told that by the accounting agency of the industrialized world.
Let’s Get Personal: Repaying This Debt Will Downsize the American Dream
•If you are in your early 20s, the “economic stimulus” debt alone will cost you $280 per month for the rest of your life = buy and trash an iPod a month.
•Your generation’s average tax rate will double, and your children will pay three times as much. That probably means:
First home purchase later in life.
Marriage later in life and later start for families.
Longer time to pay off student loan debts.
Slower earnings growth over your lifetime.
Less savings for education, health care, and retirement.
Smaller wealth transfers to your children and grandchildren.
Q: What are the solutions? Where do we begin to fix the problem?
A: We could start by repealing Obamacare. We make it a consumer-based, patient-focused health care system that saves money. We don’t add to the problem. There’s no room for an additional $950 billion when you have to cut $390 billion every year for the next five. You can’t do that.
We can’t raise taxes, because that slows the economy and makes our debt problem worse. We have to cut spending. We have to at least make a start on Social Security reform, which is the easiest of the great entitlements to fix. You’ve got to tell the bondholders in the world that we’re serious about entitlements, which are the single biggest driver of our structural deficit crisis. For Social Security, a simple change in the way you compute the beginning annual income benefit amount by using a different price index solves a large portion of the unfunded liability problem in that program.
So you can do it, but it’s not my generation that will lead on this because we don’t have as much in the game. It’s your generation. If you’re part of the Debt-Paying Generation, or if you’re a grandparent or parent of that generation with a moral obligation to that generation, the call to action is being made now.
—Bill Beach is Heritage’s chief number cruncher. He is director of the Center for Data Analysis at Heritage, and in that role is responsible for coming up with the models and analysis that guide much of our policy research and inform the conclusions that we come to. He oversees research on taxes, Social Security, energy, crime, education, trade, and many other issues. Under his leadership, Heritage has acquired one of the largest collections of privately held public policy databases in the United States. Rob Bluey is an investigative reporter at Heritage. He directs the Center for Media and Public Policy, where he researches and writes about instances of government malfeasance and corruption. In his more than three years at Heritage, he has made it a top priority for the organization to communicate more effectively using digital media. He hosts the weekly Bloggers Briefing and oversaw the creation of The Foundry blog and daily Morning Bell e-newsletter.
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