and why we should all demand more from the macroeconomists than they have produced in the last 30 years.
Roger C. Altman and Richard N. Hass have written a wonderful essay on American debt: American Profligacy and American Power for Foreign Affairs. You have to be a subscriber to read it all, but even the summary is worth squinting at. Here’s the breakdown:
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.
Then, on top of this, the financial and economic crisis struck in 2008, and the United States confronted the possibility of a 1930s-style depression. Washington correctly chose to enact a large stimulus program and rescue tottering financial institutions. So far, such efforts have worked, at least to the degree that a depression was averted. A recovery (albeit one that is halting and weak by historical standards) is under way. But the gap between spending and revenues has widened much further. Revenues, which had averaged 20 percent of GDP during the 1990s, fell to nearly 15 percent, while spending reached 25 percent in 2009. The deficit for fiscal year 2009 hit a staggering $1.6 trillion, or nearly 12 percent of a GDP of just over $14 trillion. In nominal terms, it was by far the largest in U.S. history. The deficit for 2010, at $1.3 trillion and nine percent, was nearly as huge.
To the endpoint:
It is important to understand the impact of all this debt. As it grows, interest rates inevitably rise. As they do, the U.S. government’s annual interest expense — the cost of borrowing money — will rise from one percent of GDP to four percent or more. At that point, interest expense would rival defense expenditures. And it would exceed all domestic discretionary spending, a category that includes spending on infrastructure, education, energy, and agriculture — in effect, anything other than entitlements and national security. The U.S. Treasury would need to borrow a staggering $5 trillion every single year, both to finance deficits and to refinance maturing debt.
An HSR person told me that the US HSR system would “just” cost a mere trillian, and it would only be 1 percent of GDP over 15 years. Only! Nobody is getting any money for anything unless American leaders start acting like grownups–and soon.