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The U.S. and its Debt
Roger C. Altman, former U.S. Deputy Treasury Secretary in 1993-94, and Richard N. Haass, former State Department official and current President of the Council on Foreign Relations, co-authored a piece in the November-December issue of Foreign Affairs titled “American Profligacy and American Power: The Consequences of Fiscal Irresponsibility.” Following are a few excerpts.
“The U.S. government is incurring debt at a historically unprecedented and ultimately unsustainable rate. The Congressional Budget Office projects that within ten years, federal debt could reach 90 percent of GDP, and even this estimate is probably too optimistic given the low rates of economic growth that the United States is experiencing and likely to see for years to come. The latest International Monetary Fund (IMF) staff paper comes closer to the mark by projecting that federal debt could equal total GDP as soon as 2015. These levels approximate the relative indebtedness of Greece and Italy today. Leaving aside the period during and immediately after World War II, the United States has not been so indebted since recordkeeping began, in 1792….
“The result will be an age of American austerity. No category of federal spending will be spared, including entitlements and defense. Taxes on individuals and businesses will be raised. Economic growth, both in the United States and around the world, will suffer. There will be profound consequences, not just for Americans’ standard of living but also for U.S. foreign policy and the coming era of international relations.
“It was only relatively recently that the United States became so indebted. Just 12 years ago, its national debt (defined as federal debt held by the public) was in line with the long-term historical average, around 35 percent of GDP. The U.S. government’s budget was in surplus, meaning that the total amount of debt was shrinking. Federal Reserve officials even publicly discussed the possibility that all of the debt might be paid off….
“But over the first ten years of this century, a fundamental shift in fiscal policy occurred. When the George W. Bush administration took office, it initiated, and Congress approved, three steps that turned those budget surpluses into large deficits. The 2001 and 2003 tax cuts, which will reduce federal revenue by more than $2 trillion over ten years, had the biggest impact. But adding the prescription-drug benefit to Medicare also carried a huge cost, as did the war in Afghanistan and, even more so, the war in Iraq.
“These steps were also accompanied by the outbreak of an especially partisan period in American politics. In Congress, the Democratic center of gravity moved left, and the Republican one moved right. This caused the historically bipartisan support for fiscal restraint to vanish….
“The medium-term outlook is poor. The Congressional Budget Office forecasts $9.5 trillion of cumulative deficits through 2020 – in other words, roughly $1 trillion per year. The deficit-to-GDP ratio should decrease briefly during the middle of this period, as modest economic growth boosts revenues. But as 2020 approaches, it will rise again, back to nearly six percent, the consequence of sharply higher entitlement costs and slow GDP growth. President Barack Obama’s own budget shows this same trend – the first time a U.S. president has ever projected deficits that go back up….
“The bottom line is that it will be extraordinarily difficult to pass a deficit-reduction program of the required magnitude. Obama and congressional leaders appointed the Bipartisan Budget Commission several months ago to recommend a program for achieving primary balance in the federal budget. Whether its conclusions are well received will say much about the prospects for a proactive solution, as will the extent to which Obama makes deficit and debt reduction a priority in the run-up to the 2012 election.
“The United States is fast approaching a historic turning point: either it will act to get its fiscal house in order, thereby restoring the prerequisites of its primacy in the world, or it will fail to do so and suffer both the domestic and the international consequences. It is not completely surprising that the United States is at such a juncture; other great powers throughout history have seen their circumstances reduced. But the reasons for this situation are different from what many anticipated.
“Just over two decades ago, the historian Paul Kennedy published his influential study of the rise and fall of great powers. His thesis of ‘imperial overstretch’ was simple but important: the costs of carrying out an ambitious and expensive overseas policy can undermine the economic foundations of a state. His warning bears some relevance to the position of the United States today, in that the wars in Afghanistan and Iraq have contributed to the economic pressures it faces.
“But imperial overstretch is not the real issue here. The combined cost of the two wars accounts for only 10-15 percent of the country’s annual deficit and much less than that of its cumulative debt, and the principal reasons for questioning the Iraq war several years ago and for questioning the war in Afghanistan today are more strategic than economic. It is fiscal, economic, and political failures at home that are threatening the ability of the United States to exert the global influence that it could and should. In other words, it is not reckless American activity in the world that jeopardizes American solvency but American profligacy at home that threatens American power and security. The American people and their elected representatives postpone solving the country’s debt addiction at their great peril.”