Tuesday, March 7, 2017

Washington and the Impact of the Unsustainable Debt Scenario

Updated September 2017

As we all know, while Washington has a habit of kicking the "debt can" further and further down the road, eventually, the piper has to be paid.  An analysis on the Peter G. Peterson Foundation website looks at the fiscal and economic impact of the ever-rising national debt, giving us a sense of how Washington is mortgaging the futures of Main Street America.

Let's open by looking at how the total federal debt has grown over the past five decades:

Actually, FRED's data is not quite up to date thanks to the debt ceiling issue.  According to the Treasury's Debt to the Penny website, here's what the debt looks like:

Here's what the total federal debt looks like as a percentage of GDP:

At 104.1 percent of GDP, the total federal debt is just below its fifty-year high of 105.3 percent seen in Q1 2016 and is close to its World War II peak. 

A rising federal debt will eventually have an impact on government programs.  As the debt level rises (and, particularly when the rising debt level is accompanied by rising interest rates), the federal government has two choices to make; reduce spending to cover the rising cost of interest on the debt or increase taxes, again to cover rising interest costs.  Over the next decade, the Congressional Budget Office estimates that interest costs will total $4.8 trillion, money that could well be spent on programs that actually improve the welfare of American families.  According to the Peter G. Peterson Foundation, here's what net interest costs on the debt will look like out to 2027:

Here is a graphic showing how interest rates are projected to be the largest category of federal spending by 2050:

Here is a graphic showing how mounting interest costs will impact the size of the deficit as a percentage of GDP by 2046:

To keep the debt as a percentage of GDP at the same average level that it has been at over the past 50 years (39 percent, in case you were wondering), Washington would have to cut non-interest spending, raise taxes or some combination of the two by a total of 2.9 percent of GDP in 2017.  This would mean a change spending/revenue totalling $6.7 trillion from 2017 to 2026.  Obviously, the longer that the federal government takes to make the necessary spending/revenue adjustments, the more painful they will be for taxpayers and program recipients on a going-forward basis. 

A rising federal debt also has an impact on economic opportunities for Americans.  When measured using real incomes (i.e. after correcting for inflation), the CBO estimates that the projected rise in the federal debt would reduce the real income for a 4-person family by as much as $12,000 in 2046, a 3.4 percent loss in income when compared to a scenario where the federal debt level stabilizes at its current level.

Here is a graphic showing how the rise in the federal debt will impact family incomes on a going-forward basis:

Let's go back to looking at what Washington may have to do to prevent this debt issue from getting further out of control.  As I noted above, to return the debt-to-GDP level to the 50 year average of 39 percent, lawmakers would have to invoke a combination of spending cuts and revenue increases that totalled 2.9 percent of GDP or about $560 billion or $1,700 per person starting in fiscal 2017.  Here are some suggestions from the Congressional Budget Office:

1.) Cut all types of non-interest spending by equal percentages - this would represent a decrease of about 14 percent for each of the next 30 years.  Such a cut would reduce initial annual Social Security benefits by an average of $2,600 for income earners born in the 1950s, who claimed benefits when they turned 65 and who earned in the middle quintile of lifetime earnings.

2.) Increase revenues by equal percentages - this would represent an increase of about 16 percent for each year in the decade from 2017 to 2026.  Such a revenue increase would increase annual household federal taxes by an average of $1,900 for households in the middle quintile of the income distribution.  

It's pretty obvious that the fiscal situation in the United States is not sustainable over the long-term.  Unfortunately, with an intransigent and highly polarized Congress and Executive Branch, it is highly unlikely that any meaningful and long-term progress will be made during the upcoming debt ceiling crisis.  That said, on the upside, there has to be a way that Washington can blame the Russians for this looming fiscal disaster zone.  Like the poop on the carpet, Putin is to surely the cause of this mess one way or another.


  1. It seems ages since the topic of our national budget has been front and center, and while budget issues are fast approaching serious discussions may again be pushed aside by various distractions. The increase in national debt from 3 trillion dollars in 1990 to 5.75 trillion dollars in 2000 garnered far more attention than the roughly 10 trillion dollar leap that occurred during the 8 years Obama was in office.

    Not suffering from our failure to deal with what this massive problem has only reinforced the idea that far too much has been made as to the ramifications of our out of control budget. The budgets and spending plans to fund the government are very important in shaping the country's future and should not be taken lightly. More on this subject in the article below.


  2. House, Senate, and all government agencies should be shut down. No pay until the budget is in the black. No government checks for anything.
    Simple solution. Everyone suffers until things are put right. Everyone participated in making the problem, so everyone shares the pain.

  3. A debt that cannot be paid...will not be paid.
    All this talk about what has to be done is pissing in the wind. The gov is the last place one should expect to actually do the right thing....and the opportunity to actually correct the problem is long past. Look to history ...hyperinflation is the choice of kings, despots and parliaments ...even war is a poor substitute. Keep stackin.

  4. State and municipal debt of over three trillion dollars is seldom mentioned in debt statistics.

  5. Something needs to be said. We are against the existence of irredeemable paper currency... central banking and central planning, cronyism... socialized losses and privatized gains... counterfeit credit... wealth transfers and bailouts...welfare both corporate and personal... all this means is ...

    “The world will soon wake up to the reality that everyone is broke... and of course...you can NOT collect...from the bankrupt... who are owed unlimited amounts by the insolvent... with an unacceptable and worthless currency... against defaulted and "hypothicated-rehypothicated"...collateral...too which nobody is sure who holds title or its worth.”- RGR777...

    The government has always lied about every "financial crisis," including what's happening in Europe right now. And it'll certainly lie about the next one, too.

    "and when that happens ... silver will be worth its weight in gold..."
    Just a reminder of the national debt and interst paid there on ...
    say we take the lowest calculated value of say $20 T