While President Obama’s proposed FY2011 budget incorporates some modest steps toward fiscal restraint, its bottom-line numbers dramatize the unsustainability of our current course. Consider the following projections for the next decade:
- The deficit never goes below $700 billion and then rises to $1 trillion by 2020.
- We will add $8.5 trillion to the national debt during this period, a pace that does not slow from the first five years (2011-2015) to the second (2016-2020)
- Debt held by the public rises from 63.6 percent of GDP to 77.2 percent, a figure that never stabilizes.
- Net interest payments on the debt rise from $188 billion in 2010 to a stunning $912 billion in 2020—almost at much as total projected spending on national security that year.
- Social Security increases from $703 billion in 2010 to $1,204 billion in 2020; Medicare more than doubles, from $451 billion to $957 billion; Medicaid nearly doubles, from $275 billion to $488 billion.
- These projections assume that total spending for discretionary domestic programs will decline from $553 billion next year to $529 billion a decade later—a trajectory without precedent in modern U.S. history.
Most economists believe that with the recovery still weak and the possibility of a double-dip still real, another year of fiscal stimulus and monetary accommodation makes sense. Beyond that, the United States simply must begin its long-delayed pivot toward long-term fiscal sustainability. This cannot happen unless (1) the fiscal commission the president has promised to create through executive order enjoys bipartisan participation, (2) it comes up with recommendations that seriously address our structural problems, and (3) the Congress acts favorably and expeditiously on those recommendations.
Recent history offers little cause for optimism. But we’re playing with fire. Foreign countries are noticing our governance failures and are beginning to discuss ways of adjusting to them. The dollar’s standing as the world’s reserve currency and our economy’s standing as the world’s leader are both in jeopardy. And if we fecklessly surrender them, we are very unlikely to get them back.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.