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Debt limit nonsense

Some things are stated as fact which are nothing of the kind. Right up until the Congressional deal raising the debt ceiling news anchors were parroting that without it the United States government would default. This is nonsense.

Over the next year the US government will take in around $3 trillion in taxes. The interest payments on its $16.9 trillion debt in that period are estimated at around $240 billion. As long as its income is greater than its debt repayments there is no reason whatsoever why the US government should default on those debt repayments.

It may choose to do so, deciding to anger China rather than domestic recipients of Federal money, but there is nothing automatic about it. But at some point the US government will default on somebody.

Since 2002 US government debt has risen from $6 trillion to nearly $17 trillion, a rise of 183%. Under George W. Bush it increased at $625 billion a year, and in 2008 Senator Obama was moved to declare “That’s irresponsible. It’s unpatriotic.” Under President Obama that debt has increased by $900 billion a year. It now stands at around 73% of GDP, or $131,368 for every man, woman, and child in America. Even with record low interest rates, by 2015 repayments on this debt will come to $50,000 a year for each American family [1].

And the situation is forecast to get worse. The Congressional Budget Office’s September 2013 Long-Term Budget Outlook warns that government spending is set to outstrip revenues in each of at least the next twenty-five years with the gap opening from 2% of GDP at its narrowest point in 2015 to 6.5% of GDP at its widest in 2038, “larger than in any year between 1947 and 2008”. As a result, after a slight improvement between 2014 and 2018, Federal government debt as a percentage of GDP is projected to rise from about 75% to around 100% in 2038.

The CBO identifies the drivers of this increased spending and debt as “increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)”. Spending on the “major health care programs and Social Security”, the CBO writes, “would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years” and “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years”.

The CBO’s conclusion is stark; “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past”. Sadly for the taxpayers of 2038 these are just the changes President Obama and Congressional Democrats steadfastly refuse to consider.

But a refusal to see reality doesn’t make that reality go away. These sorts of figures are unprecedented in peacetime and unsustainable and as the saying goes, ‘If something can’t continue it won’t’. The essential problem is that the US government, as with other western governments, has made spending commitments its tax base cannot support. And a promise that can’t be kept won’t be kept. Drastic change will come to Medicare, Medicaid, and Social Security, not because of ‘evil’ or ‘heartless’ Republicans, but because of math, because there isn’t the money to pay for them.

The desperately sad truth is that Uncle Sam won’t keep his current promise to pay pensions, pay for medical care for the poor or the elderly at a given level because he won’t be able to. This will amount to defaulting on elderly and sick Americans, the only question is whether it happens through some entitlement reform (whether the Democrats want it or not) or through meeting these commitments with devalued dollars (over to you Janet Yellen). Either way, if ‘default’ means a repudiation of a promise of payment this will be America’s default. The US government has a choice about ‘default’ now, it won’t in the future.


[1] The Telegraph, 8 October 2013.

10 comments to Debt limit nonsense

  • Paul Marks Paul Marks

    According to the establishment left (the Financial Times crowd and so on) there is no problem – at least no problem that can not be solved by higher taxes.

    The tax increase of January was not enough – taxes must be increased more, and more, and more……..

    Then all will be well.

    And some wonder why I think talking to these people is an utter waste of time.

    • Your point being what? John Phelan makes the perfectly reasonable point that the US government probably won’t be able to fund it’s spending simply by increasing its debt ad infinitum. Quite right. So it will have to raise taxes.

      If you think he’s gone wrong, pray explain why. I.e. what’s wrong with increased taxes?

      As to the EXACT amount of US debt the world as a whole will be willing to hold at a near zero interest rate in 10 years time, that’s hard to predict. It MAY BE that they’re willing to hold twice as much as now, in which case lucky old US can effectively have the rest of the world supply it with goods and give them silly bits of paper in return.

      As for John Phelan’s claim that having debt equal to GDP would be “unprecedented in peacetime”, that’s also nonsense. The UK’s debt to GDP ratio between 1840 and 1850 was around 50% higher, i.e. the debt was 150% of GDP.

      • John Phelan

        “Your point being what? John Phelan makes the perfectly reasonable point that the US government probably won’t be able to fund it’s spending simply by increasing its debt ad infinitum. Quite right. So it will have to raise taxes.”

        Actually, it will have to cut spending. One estimate of US unfunded liabilities is $222 trillion, taxes won’t cover that.

        “As for John Phelan’s claim that having debt equal to GDP would be “unprecedented in peacetime”, that’s also nonsense. The UK’s debt to GDP ratio between 1840 and 1850 was around 50% higher, i.e. the debt was 150% of GDP…”

        …and falling, not rising.

  • James

    “As for John Phelan’s claim that having debt equal to GDP would be “unprecedented in peacetime”, that’s also nonsense. The UK’s debt to GDP ratio between 1840 and 1850 was around 50% higher, i.e. the debt was 150% of GDP.”

    Government spending wasn’t 50% of GDP back in 1850, as it is now – meaning that there was a much larger productive private sector relative to government debt than exits today. And today, off-balance sheet government liabilities take its debt well above 100% of GDP. Back in 1850, I don’t think HM Treasury was quite as deceptive in terms of what it counted as “debt”.

  • Craig Howard

    If you think he’s gone wrong, pray explain why.

    Because spending must be cut. Raising taxes will just make us an honorary member of the Eurozone.

  • Paul Marks Paul Marks

    Ralph “what is wrong with raising taxes?”

    That is not a real question – what Ralph really means is “raise taxes”.

    As I have said for some time – Ralph Musgrave is a troll.

    People who think there is nothing wrong with raising taxes have no business here.

    • waramess

      Doesn’t sound unreasonable to have a variety of economic views on this or any other right centre or left wing web page.

      Keep trolling Ralph, I might not agree with most of your views but your right to express them…..well.

    • Mark

      That really is a poor reply. Have the temerity to try and answer Ralph’s points rather than effectively telling him to bog off.

  • Paul,

    Your claim that “People who think there is nothing wrong with raising taxes have no business here” is a PURELY POLITICAL VIEW. It reflects your own (presumably Tory) political views.

    Others think there is a good case for raising taxes and spending more on health, education, roads, you name it. Personally I’m not too keen on seeing the public sector take a much bigger share of GDP. But those on the political left want that. I don’t describe my Labour voting acquaintances as “trolls” “idiots” or anything of that sort.

    John Phelan,

    Re that $222trillion figure of yours, you need to give more details to make that point stick. The IMPORTANT question is: how much of that liability arises PER YEAR. If the amount arising per year is say 50% of GDP, then that’s manageable as public sector spending as a proportion of GDP is now up to the 50% figure in some countries. In contrast if it’s 75% of GDP than that’s verging on the ridiculous (especially for the US), and in that case spending or the “liability” would have to be cut.

  • chuck martel

    The best way to make things worse is, in fact, to raise taxes. Anyone who thinks that taking away people’s wealth or income will result in greater government income ignores both logic and history. Increasing taxes has always lowered productivity. No sentient being will work to primarily support the government.

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