WASHINGTON – In slightly more than a decade, the national debt of the United States will be more than the value of goods and services the country produces in a year, the Congressional Budget Office (CBO) projected in a recent report. The country spends more money in a year than it takes in, and the gap is growing, not shrinking, CBO said.
“CBO’s report is filled with sobering projections that should be an urgent wake-up call for the administration and Congress,” said Michael Peterson, head of the Peter G. Peterson Foundation, one of the country’s top federal budget think tanks. “Annual budget deficits are on track to eclipse $1 trillion in just two years, and continue growing.”
So why do so few people in the public and private sectors seem to care?
The short answer, according to sources interviewed by the Star Tribune, is that nothing really bad will happen for a few years.
V.V. Chari, an economics professor at the University of Minnesota and an adviser to the Federal Reserve Bank of Minneapolis, sees the lack of urgency on the part of politicians and others in leadership as irresponsible fiscal myopia.
“This is not a system that seems willing to take short-term sacrifices for long-term gains,” he said.
At a time when economic recovery from the Great Recession is complete, unemployment is low and the country is not involved in a major military action, traditional strategy has been to bring the national debt down, Chari noted.
Instead, President Donald Trump and Republican majorities in the U.S. Senate and House are banking on economic growth to eventually make up for tax cuts to corporations and individuals that will increase the debt and deficit.
Some economists embrace that philosophy.
“To tax is to depress the economy,” said Edward Prescott, a Nobel Prize winner and adviser to the Minneapolis Fed. “The U.S. has the right amount of debt given the age of its population. I don’t see any big problems.”
At this point, Minnesota’s CEOs have different priorities than the country’s debt and deficit, said Charlie Weaver, director of the Minnesota Business Partnership, a group of the state’s major corporate executives.
“Frankly, I don’t hear a lot about [the federal debt and deficit],” Weaver noted. “It is not a lack of concern. It is that other issues are more pressing.”
Weaver’s members worry about a possible trade war prompted by Trump’s newly imposed tariffs on some Chinese imports and on imported aluminum and steel from Canada, Mexico and the European Union, as well as retaliation to them. They worry about Trump’s withdrawal of the U.S. from the Trans Pacific Partnership trade agreement with 11 Pacific rim countries. They worry that Trump’s immigration restrictions will limit workforce expansion the country needs to grow its way out of debt.
When debt and deficit “start to impact the ability of [individual] companies to grow,” Weaver said, “that’s when it will be a first topic of discussion. Until [companies] see a direct impact, you’re not going to see that. Right now, it’s not going to be in the top three.”
At the Leuthold Group, a financial-research firm based in Minneapolis, chief investment strategist Jim Paulsen looks not at U.S. government spending but at the spending decisions of hundreds of millions of individuals and businesses to judge the country’s economic health.
“On private-sector balance sheets, debt ratios look as good as they have in a number of years,” Paulsen said. “The level of corporate debt to profits is low. There’s tons of liquidity in corporations and households. If we have private sector health, it can take care of the public sector.”
Mark Wright, research director at the Minneapolis Fed, and Chari agree that the short-term risks to business are not serious for the next several years, but they say that without attention, future problems could abound.
“I don’t see a lot of appetite to increase immigration,” said Wright, who called workforce expansion one of the surest ways to stimulate economic growth. Cuts to legal immigration could actually reduce growth, he added.
Without nearly unprecedented sustained levels of growth, Chari and Wright said, taxes on everyone, including businesses, must eventually rise to meet the country’s financial obligations. Either that or deep cuts must be made in programs such as Medicare and Social Security.
Another risk to businesses is that as the U.S. borrows more to keep running, interest levied by America’s creditors will rise, Wright said. As the world’s biggest economy and one with a record of paying back what it borrows, America may always find takers for its IOU’s. But there will come a point where interest payments going up will drag the economy down.
“Private borrowing rates [for businesses and individuals] follow government rates,” Wright said.
“It is not for the Fed to tell the government how to operate,” Wright said. But he stressed that when combining federal debt with state and local government debt — including pension and health care obligations — the country’s debt situation looks “much worse.” Wright rated Minnesota’s debt worries “middle of the pack.”
“We’re not out of the woods,” he said.
Using CBO’s revenue and spending projections, the Committee for a Responsible Federal Budget (CRFB), a think tank chaired in part by ex-Minnesota congressman Tim Penny, pointed to an ominous future: “By 2041, spending on Social Security, health care, and interest will exceed all revenue. That essentially means every dollar Congress appropriates — whether for defense, education, or basic research — will be financed with borrowed money.”
“Action,” CRFB concluded with a play on words, “needs to start yesterday.”