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The national debt is over $34 trillion. It’s time to tell the truth about the U.S. government’s finances: News: The Independent Institute
If anyone living in the United States in the decades immediately following World War II had predicted the self-inflicted financial mess the U.S. government now finds itself in, no one would have taken that person seriously.
For most of American history, until the mid-1970s, annual federal spending and revenue were roughly in balance—the exceptions being wartime. Compare that to the federal deficit in fiscal year 2023, which exceeded 1.7 trillion dollars, an amount larger than Mexico’s total economy (the 12th largest in the world). This exceeded US$ 1 trillion again in the first eight months of the current fiscal year and, according to the latest forecast from the Congressional Budget Office, released on June 18, it will reach close to $2 trillion by the end of fiscal year 2024.
This fueled a massive increase in federal debt, which now totals US$ 34 trillionabout $6 trillion more than the gross domestic product (GDP) of the United States, the value of all goods and services produced by the United States’ 330 million residents in a year. If we count Social Security and Medicare liabilities, the total debt is several times greater than GDP.
The consequences are worrying. Politicians like to use euphemisms to describe what they are doing. Government spending, in today’s vernacular, is called “investment.” Government spending, however, crowds out investment, which explains why private investment, the equivalent of 4.8% of GDPis 30% lower than in 2000.
At the same time, the purchasing power of the U.S. dollar, a reflection of both the federal government’s finances and the Federal Reserve’s money printing, also declined: more than 50% since 2000.
As a result of this economic mismanagement, the US government will pay close to 900 billion dollars this year only in paying interest on the national debt – and, according to projections from the Congressional Budget Office (CBO), which assume an idyllic scenario with no major wars, recessions and financial crises, debt service will continually increase to around 5.3 billion dollars. until 2054. It was hard enough to sustain a debt of 106% of GDP during World War II when the country’s savings rate was 24%, but sustaining a much higher level of debt at today’s rate Savings rate of 3% defies the imagination.
This catastrophe has been prepared for a long time. In 1993, for example, the annual deficit amounted to 3.8% of GDP, and the debt, which seemed astronomically high in a “mere” US$ 4.4 trillionwas Lilliputian by today’s standards.
The trend goes back further than that. The growth of the U.S. government in modern times is the story of post-World War II America. President Dwight Eisenhower appears to have been the last individual in the post-World War II era to understand that the welfare state, the war state, and tax cuts not supported by harsh spending cuts are incompatible with a fiscally sound government. responsible, or at least with governments of reasonable size. government. His predecessor, Harry Truman, who financed the Korean War effort, left Eisenhower with a level of federal spending equivalent to 18.5% of GDP. Between then and nowboth parties, with short-lived exceptions, have exponentially increased defense and domestic budgets.
Lyndon Johnson raised spending to 19.6% of GDP; Richard Nixon and Gerald Ford to 21.5%; Jimmy Carter to 21.8%; George W. Bush to 21.9%; Barack Obama to 24.9% (before bringing them back to 21.9%); Donald Trump to 31.3% (during the COVID-19 crisis) and Joe Biden to 31.7%, although this is now down to 22%.
Between 1950 and 1970, total debt (including government, household, corporate and financial debt) remained stable at around 150% of GDP. After Nixon ended what was left of the gold standard in 1971, it was all over. Since then, the total debt grew almost 5,600%more than double the US economic growth rate.
There was a time, even in the midst of the Cold War, when government leaders, despite their international responsibilities and the onerous legacy of the New Deal and the Great Society that no one dared reverse, understood the need for fiscal discipline and for containing the growth of government.
Between 1947 and 1966, the budget was balanced in 12 years, while the rest of the time there was an insignificant average deficit of 0.07%. Compare that to the 12 years under Presidents Ronald Reagan and George HW Bush (mostly with a hostile or partially hostile Congress), which ran an average deficit of 4% due to increased defense spending, the abandonment of domestic containment – a Johnson’s “bread and butter” legacy. ” years and the Nixon-Ford presidencies’ reversal of most of the economic principles they had previously championed – and the unfunded tax cuts influenced by Arthur Laffer’s notion that the tax cuts would pay for themselves. Discipline disappeared from Eisenhower, who insisted on cutting spending before cutting taxes.
The new millennium has distorted things even further, with the annual deficit from 2002 to 2023 averaging 5% over the two decades, 20% higher than nominal economic growth, which average of 4.2%. President Obama, under whom the deficit was double the Congressional Budget Office’s original projections, began the spending spree, with Presidents Trump and Biden taking it to new levels.
Now it all comes down to this. Unless a new generation of leaders has the courage to cut “untouchables” like the defense, education, justice and homeland security budgets, and privatize the Social Security program (as more than 40 countries have wisely done), more Sooner or later, the current trajectory of federal finances will lead to an extremely ugly situation. If you think things are bad now, wait.