The New Red Menace: Deficit Spending

With U.S. Treasury officials predicting that the federal government will reach its $16.7 trillion borrowing limit around mid-October, Washington is girding for another battle over taxes and spending between Congress and the White House.

Regardless of the exact details, recent history should teach us that the biggest loser likely will be the taxpayer.

After World War II, America’s main concern for many decades was the so-called “red menace”: Communism and the Soviet Union. Now we’re discovering that the real red menace is the sea of red ink that Washington has been piling up: the debt.

The problem is mainly political: Washington’s practice of providing benefits today, while postponing payment until tomorrow.

To some degree we all know the story.

During the 70-year period, 1940 to 2010, gross federal debt increased from $43 billion (the equivalent of $670 billion in 2010 dollars) to more than $13.5 trillion: a 24-fold increase. Since then, it has increased at an even-faster rate, hitting $16.2 trillion in November 2012—and more than $16.5 trillion today.

President Obama has spoken passionately about the oppressive debt that students incur in pursing their college degrees. On average, students graduating in 2013 were saddled with about $35,000 in debt. President Obama should be more concerned about their share of the national debt, which now stands at more than $145,000 per taxpayer.

The reason we all should be concerned about the mounting debt is because there’s no end in sight. The recent reduction in the budget deficit is no cause for celebration, as it is only temporary. As a result of many factors—including our aging population and the promises associated with Social Security, Medicare and Obamacare—the government’s annual deficits will continue far into the future, pushing the debt ever higher, unless major tax increases are enacted.

The United States is not alone in the accumulation of debt. Many countries have accumulated even higher levels of debt relative to the size of their economies.

In fact, if we add up the net public debt of all the nations of the world—that is, gross debt minus money that the governments owe themselves, such as Social Security trust fund obligations here in the U.S.—the average in 2009 came to 59.3 percent of GDP. U.S. net public debt in 2009 was slightly lower: 58.9 percent of GDP. Japan’s public debt, by contrast, stood at nearly 226 percent of GDP, Greece’s at 144 percent, Italy’s at 118 percent, and the United Kingdom’s at 76.5 percent. China’s public debt, meanwhile, was just 17.5 percent.

While the United States looks comparatively healthy in the snapshot above, the truth is that only 35 of the 131 countries we studied had debt levels higher as a percentage of GDP than the United States—and many of those countries (think Greece) have suffered major economic meltdowns.

We all know where the United States is heading. A 2011 poll of the members of the National Association for Business Economics listed the federal budget deficit as the No. 1 threat facing the U.S. economy.

They’re right. High levels of public debt slow economic growth for a number of reasons. When the government borrows money, it takes savings from the economy that otherwise could have been channeled into private-sector borrowing and investment. Economists refer to this as “crowding out” private investment.

Another cause for concern is the cost of interest on the debt. The U.S. Office of Management and Budget has forecast that in the year 2017 interest payments on the public debt will exceed the cost of Medicare.

The United States, in other words, is entering dangerous territory. While deficit spending may provide short-term benefits, it’s time to consider the long-term cost in slower economic growth.