Capitalism, economy & financial well-being in America

The Spoiler in Our Future – Our Collective Debt

January 1, 2018

The national debt recently reached about $20 trillion, a 120% increase in just the last decade.  That is greater than GDP ($18.6T in 2016) and growing at an ever increasing pace  The Office of Management and Budget projects that the interest on the debt will be close to $500 billion in 2020, and close to $800 billion in 2026.  This assumes continued growth in the economy and modest increases in interest rates.  The situation could be quite worse if the economy suffers a recession – likely to add another $1T to the national debt.  If interest rates increase more than expected, interest on the debt and the debt grow even more.

To put this into perspective, the proposed budget for 2017 is $4.2T.  About 60% or $2.56T is social security and medicare, $300B is interest on the debt.  Only $1.1T is discretionary, and of that a little more than half is military.  Further, the social security and medicare spending are bound to increase substantially as a percentage of the budget, since the boomer generation is just starting to retire.

It is clear that this trajectory is not sustainable.  There are only 2 paths to correct the situation – reduce spending, increase revenue, or a combination of both.  Increasing revenue means significantly growing the economy or increasing taxes, both very difficult, if not impossible in the current environment.  The economy is facing job creation pressure from technology, robotics and AI (another discussion on another day).  Increasing taxes is politically very difficult, plus it has a negative impact on the economy.

The conclusion is that the budget will have to be restrained.  Given the size of social security and medicare budgets and their projected growth, they will have to be addressed for reduction.  This reality will create a political storm that has the potential to deepen the divides in society and the polarization.  This is not a climate that will support an effort to fix the many issues putting our democracy at risk.

Photo by photowuensche

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