A remarkable piece of political theater played out this week in Washington. Faced with the relief efforts needed following Hurricane Harvey, more anticipated for Hurricane Irma, and an upcoming national debt limit, the President made a deal with the Democratic leadership to provide relief funding and lift the debt limit for three months. Those asking for more bipartisanship got it. There was even an awkward hug between President Trump and Democratic Senator Schumer at the end of the meeting. “Dogs and cats living together…mass hysteria!”
The debt ceiling is a limit imposed by Congress to ensure that our country lives within its means and doesn’t over-borrow. It’s something of a charade, though, because it always gets lifted in order to avoid a more costly default. As each limit is reached, and the prospect of a government shut-down looms, Washington becomes abuzz with partisan horse-trading for votes necessary to keep the government funded. It really bothers me. It’s not just an economic question but a question of our national character. General Brent Scowcroft was kind enough to write the forward to my book, “Restoring Our American Dream: The Best Investment”. In that forward he wrote,
I am a believer in America’s exceptionalism. We are a unique country because we’re not ethnically or religiously pure. We’re exceptional because we have pursued, much of the time, what I would call “homely virtues” – that you shouldn’t expect anything that doesn’t come by hard work, that you can have a better life than your parents did if you work and learn and improve yourself.
I share that vision of America. But while we have practiced the “homely virtues” through much (I would argue most) of our history, I am concerned that those virtues may be obscured at the moment. I hope they are not lost. We are mortgaging the future of the country to pay for now. The government seems to play short-term gambits for political gain when responsibility and long-term vision are needed.
There is data that gives us reason to be worried. In their 2012 paper entitled “Public Debt Overhangs”, Carmen Reinhart and Ken Rogoff concluded that “the weight of evidence suggests that a public debt overhang [that is, gross public debt in excess of 90% of GDP for 5+ years] does slow down the annual rate of economic growth.” After years of increasing our debt beyond the rate of economic growth, we crossed that 90% threshold in the US in 2009, largely as a response to the Great Recession. The chart below, taken from web site www.usgovernmentspending.com, illustrates the deterioration of our financial standing in recent years.
The ratio of US public debt – to include state, local and federal governments – to US GDP is now within a couple percentage points of where it was at the end of World War II. Unlike the 1940s, though, Americans do not possess broadly distributed personal savings – the result of rising labor participation and suppressed consumer spending during wartime. There is no fast-growing and energized industrial base resulting from technological innovation during the war. There is no national sense of unity and optimism about the future that existed immediately following the war. And perhaps most importantly, we do not have the inflation that existed after the war to lessen the onus of cripplingly high debt.
The Summary of the 2017 Annual Reports from the Social Security and Medicare Board of Trustees note that Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2016. Both will see costs rise substantially more than even the most optimistic GDP estimates through the mid-2030s. This is largely due to the aging population of baby-boomers entering retirement as well as the lower-birth-rate generations entering employment age. The effects could well be exacerbated by more onerous restrictions on immigration. Within 20 years, the combined total of Medicare and Social Security will be over 11% of GDP.
Discipline is needed, and not just from our elected officials. We must show real discipline at both societal and political levels. Whether the Congress addresses the debt ceiling next week or in December is, ultimately, of little importance. As citizens and voters we must become more willing to take responsibility and pay as we go rather than continuing to elect leaders who will put the most money in our pockets in the short term.
It’s a positive step that there is a resolution to the debt ceiling before the last minute. The stalemate in the summer of 2011 was resolved prior to the government shutting down. However, it still cost the US its pristine credit rating and was the catalyst for a 16% market correction in twelve trading days.
Twenty years ago my grandfather worried that at some point the largest debtor nation in the world (America) would have trouble borrowing more money. So far, he’s wrong. In 2026, payments for Social Security, Medicare, Medicaid and interest on the national debt are projected to double to well over $4 trillion. GDP growth cannot keep pace. As I write, the yield on the 10 Year Treasury Note is down to 2.04%. Markets don’t seem as bothered as I am. Have we lost General Scowcroft’s “homely virtues”? Or will we take responsibility and work towards a better future for our children and for America? This problem will not go away, and it certainly will not solve itself.