According to USDebtClock.org, America’s debt has just reached $16 trillion. This means the nation has added $1 trillion to the national debt in less than 10 months, a rate that is expected to slow only gradually over the next twelve months.
Despite what Democrats say, this level of debt has a significant impact on the national economy. As Kenneth Rogoff explained in June (emphasis added):
In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present”) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more. The cumulative costs can be stunning. The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels. That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates.
Of course, there is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise. The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending. So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline.
While this explosion of debt cannot be solely traced to President Obama – President Bush presided over nearly $5 trillion in debt, and was obviously responsible for the 2008 stimulus, TARP, and the auto bailouts, as well as much of the 2009 deficit – blame should not be shifted from his shoulders. The 2009 stimulus, the takeover of the auto industry, green energy “investments,” and the health care law have all helped bring the debt up by another $5.3 trillion. This has been done in less than half as much time as it took Bush to add nearly-equivalent levels of debt.
What policies would help prevent the coming fiscal collapse from becoming reality? First and foremost, spending must go down in all areas of the federal government. Second, people must be able to find work, which would help reduce deficits through an expanded tax base as the economy grows. Rather than stunt the economy through regulations, President Obama should be supporting a true “all of the above” energy policy, for example.
Democrats also often claim our current levels of debt are not problematic because we had similar levels in World War II. As they accurately point out, our level of debt as compared to the nation’s Gross Domestic Product dropped significantly between 1945 and 1976. However, their argument ignores three aspects of the post-World War II American economy that don’t exist today, as this Reason Foundation blog post points out. These include the complete lack of an entitlements crisis two generations ago that is facing today’s young people.
In short, this week’s mile-marker of $16 trillion does not happen in a vacuum. The economic impact of the debt is already being seen, and unless Congress and the White House (both this year and next) are willing to do what is necessary to balance the budget and get people back to work, these impacts are likely to only worsen.