Ignoring Debt Makes it Get Worse

All of us suffer from a tendency to put off until tomorrow what we should do today. Whether it’s cleaning out the garage, going to the dentist, or paying our bills, we find excuses to delay – and delay some more. But when an entire nation fails to go to the dentist – or more to the point, fails to pay its collective bills – we have a real problem.

That, in a nutshell, is what is happening to the U.S. economy. We are living on borrowed money and borrowed time. The federal government is spending almost $400 billion more per year than it is collecting in revenue. We have accumulated $8.3 trillion in debt. Together with unfunded promises for Social Security and Medicare, that’s $156,000 for every single American. That’s a lot of unpaid bills! And we have no plan for putting our fiscal house in order.

Although none of us likes to pay taxes – especially with a system that gives new meaning to the word Byzantine – the longer this goes on, the higher the eventual bill is going to be. This bill will be paid by our children – either in higher taxes, or by reneging on current commitments to pay for their health and retirement. Moreover, the economy our children inherit will be weaker because of our own profligacy.

Why does paying later rather than paying now make such a difference?

First, the accumulation of government debt carries with it the need to pay interest on that debt. Even now, one out of every five of our income-tax dollars must go to pay interest on the national debt. To be sure, there are ineffective or low-priority expenditures in the federal budget, and spending can always be pared, but devoting one out of every five of our hard-earned dollars to paying the government’s interest bill is the most wasteful expense of all. That bill was $178 billion in 2005, three times as much as federal spending on education or on transportation, and it is slated to grow at a much more rapid pace than other spending over the next decade. Without this debt and the taxes needed to service it, every family in America could pay for a nice family cruise to the Caribbean. Caribbean or debt service – tough choice.

Second, we are paying an increasing proportion of this interest to foreigners rather than to our own citizens. A little more than half our debt is owned by people in other countries, primarily the Japanese and the Chinese. The good news is that they believe the United States is a good investment, and we can thank them for keeping our country afloat.

The bad news is twofold: First, Americans are no longer saving money themselves, money that was once invested and saved in good, old-fashioned Treasury bills. For the first time in history, U.S. households are spending more than they earn. Second, and more ominously, the present state of affairs perches the fate of our economy rather precariously on the opinion of other nations. If the Chinese decided, for economic or political reasons, to curtail their financing of our debt, our financial markets would be spooked, and a stock-market crash and recession might not be far behind.

Third, with the government competing for a limited supply of credit, interest rates are bound to rise. In fact, the benchmark rate on 10-year bonds, although still relatively low, has begun to rise. The New York Times reports that a $400,000 adjustable-rate mortgage will soon cost about $1,000 more a month as a result.

Finally, it isn’t right to dump our debt on the next generation. What responsible parent would go out and buy himself or herself a Mercedes, on credit, and tell his 5-year-old: “You can pay it off for me in 25 years”? That’s just about what we’re doing with our nation’s finances: In doing nothing to curtail the growth in debt, we’re effectively leaving the bills to be paid by our children and grandchildren.

You can call it irresponsible, immoral, or just plain stupid – and you’d be right, whatever adjective you chose. It’s time to demand that the president and Congress put a moratorium on any new tax cuts or spending increases. In particular, lower tax rates on dividends and capital gains should not be extended, and the estate tax should not be repealed at this time. That, at least, would get us headed in the right direction.