What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz

Can Americans make the hard choices needed on the federal budget?

Posted by: Adam Belz under Business trends, Economics Updated: February 21, 2014 - 12:47 AM

Doug Elmendorf, the head of the Congressional Budget Office, came to Minneapolis to speak to the Economic Club of Minnesota on Thursday. He was armed with slides and data, and his message was that the federal budget, thanks mostly to growing spending on older citizens, is on an unsustainable path.

No big surprise, right? We know that. The national debt is $16 trillion and growing.

But the clear nature of the problem is what might surprise you: The nation's budget problems are exclusively about old people, health care, and paying interest on the national debt.

The amount of government spending is actually projected to shrink in coming decades as a percent of GDP, with the exception of three categories, and they completely tip the balance: health care spending, interest payments on the debt, and Social Security.

The growth in health care spending is happening, by the way, with or without Obamacare.

As John Spry pointed out to me, the long-term outlook is even scarier, and the problem clearly becomes health care spending and net interest payments. By 2090, the two categories together will equal nearly 30 percent of GDP annually:

And solving this impending crisis is going to require some hard choices.

“The nation has not made the fundamental choices about the federal budget that it needs to make,” Elmendorf told the Economic Club of Minnesota on Thursday. “Sometimes we talk about the lawmakers not making choices, but more fundamentally we as citizens have not made these choices. And because these choices have not been made, the federal debt remains on an unsustainable path.”

Either younger and middle-aged people are going to pay way higher taxes, the government must cut programs that are already shrinking as a percent of GDP, or older people are going to see their benefits cut. Or it's going to be some combination of the three. As you can see, even now, older Americans are making out like bandits in the federal government sweepstakes of winners and losers.

That phenomenon, of younger households carrying the load for older households, will only increasingly be the case over the rest of the century.

The other big problem, besides paying for health care for older people, is net interest payments, as you can see in the first and second charts. That's because when you have a $16 trillion debt, a tiny increase in interest rates will translate into a huge increase in interest payments.

Since interest rates are at historic lows, the American people are getting a good deal on paying to service their debt. When interest rates start to rise, whap, those payments are going to get steeper very quickly, as you can see in the second chart.

Elmendorf pointed out that in 25 years, in order to keep the debt-to-GDP ratio about what it is today, which I don't think many people would see as a victory, the government would have to cut its deficit by $2 trillion. In order to drop the debt-to-GDP ratio to its 40-year average, probably considered by most as a move in the right direction, the government would have to cut its deficit by $4 trillion in this decade.

And, uh, here's how we could get to that:

Yikes. A one-tenth increase in taxes or a one-fifth increase in transfer payments to old people. Somebody's going to feel the pain, eventually.

You can see all of Elmendorf's slides here:

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