(1) The U.S. economy is in the midst of a long-term slowdown. Despite low unemployment, annual economic growth averaged only 1.6 percent for the years 2008 to 2018, half the 3.2 percent average from 1950 to 2018. Two causes are usually cited: the retirement of baby boomers, which reduces growth in the labor force; and a slump in productivity growth — that is, efficiency.
(2) Budget deficits, estimated at roughly $900 billion for 2019 and $11.6 trillion for 2020-2029, can’t be blamed on recessions, which typically increase government spending (for unemployment insurance and the like) and reduce taxes. Deficits reflect an unwillingness to pay higher taxes or cut spending.
(3) Government priorities have shifted dramatically from defense to health care and retirement. Though well known, the scale of this transformation is still startling. In 1969, defense represented 45 percent of federal outlays; Social Security and health benefits were 19 percent. For 2019, defense’s share is 15 percent and the health care/Social Security share is 49 percent. By 2029, the defense share is projected at 11 percent, the health care/retiree share at 56 percent.
(4) Interest costs could explode. Until now, low rates have kept interest spending down. But that may soon end, if — as seems likely — both deficits and interest rates rise. In 2018, net interest costs were $325 billion, about 8 percent of federal outlays. The CBO projection for 2029 is $928 billion, or nearly 13 percent of outlays.
(5) The outlook may be worse than the CBO projects. Its estimates include some admittedly optimistic assumptions. For starters, there’s no allowance for a recession. Everyone knows there’s going to be another recession, but the (understandable) practice has been not to try to predict it. Similarly, it’s hard to imagine that Congress will acquiesce to the squeeze on defense and some domestic programs that are embedded in the spending projections.
What we have is an inherently unstable situation, though we do not know — and probably cannot know — how or when the possible dangers will materialize. The basic instability arises because, as our national debt goes up, the capacity to service it goes down. If the economy’s growth rate, which is the ultimate source of debt repayment, were much stronger, the danger would not be so great.
But, of course, the economy’s growth rate has weakened. The largest threat is probably some sort of panic whereby investors lose confidence. They dump Treasury securities in financial markets, sending interest rates up and making the burden of debt even greater. This is hardly inevitable, but it is not impossible either. To believe otherwise is wishful thinking — imprudent at best, reckless at worst.
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