By 2020, interest on the debt will cost more than Medicaid. By 2025, it will cost more than defense spending. And that’s just the start.
What happens when you borrow the equivalent of your annual income and those low, low teaser rates start to increase? Congratulations, America, you’re about to find out.
The Wall Street Journal reports some non-shocking, non-surprising news:
In 2017, interest costs on federal debt of $263 billion accounted for 6.6% of all government spending and 1.4% of gross domestic product, well below averages of the previous 50 years. The Congressional Budget Office estimates interest spending will rise to $915 billion by 2028, or 13% of all outlays and 3.1% of gross domestic product… .
It will spend more on interest than it spends on Medicaid in 2020; more in 2023 than it spends on national defense; and more in 2025 than it spends on all nondefense discretionary programs combined, from funding for national parks to scientific research, to health care and education, to the court system and infrastructure, according to the CBO.
A quick recap of our dismal national finances: The U.S. economy generates about $21 trillion in annual activity. Debt owed to the public comes to about $15.5 trillion, but when you add intra-governmental debt (which you should, because it represents actual commitments to pay), the figure is… about $21 trillion.
This is not good, both for obvious and and for less obvious reasons. Among the obvious problems: When you have to pay more in interest, it crowds out your ability to spend on other things. If you’re a government, it also might mean that you raise taxes or inflate your money. (You could also cut spending, but politicians tend to resist that for as long as possible.)
The federal government spends about $4.4 trillion a year, split among several categories, including what is considered “mandatory” and “discretionary.” The mandatory stuff includes entitlements, such as Social Security, Medicare, and Medicaid. Congress doesn’t need to vote on this spending for it to continue. Discretionary spending includes spending on the military, homeland security, schools, and other stuff that does need to get voted on. The percentage of spending that is mandatory has grown from around 30% in 1962 to about 62% of federal outlays today. Discretionary spending comes to about 30%, and interest on the debt rounds out the rest. Government spending will increase whether a divided government does anything or not. And, absent significant changes in current law, what the government spends on will be more and more limited. From a libertarian perspective, less government spending is a good thing, but we’re not really going to get that, even with a gridlocked Congress.
More importantly and less obviously, high levels of national debt exert a downward pressure on long-term economic growth. In a 2012 paper, economists Carmen Reinhart and Kenneth Rogoff define a “debt overhang” as a situation in which the debt-to-GDP ratio exceeds 90% for five or more consecutive years…