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America's Gathering Debt Storm: Making It Personal
The U.S. government's debt is on track to reach 210 percent of GDP by 2048
Last week the Congressional Budget Office (CBO) released new projections showing that, under current fiscal policies, the U.S. government’s debt is on track to reach 210 percent of GDP by 2048, up from today’s 78 percent. Too often, polarized politics and macroeconomic jargon obscure what this gathering storm means for individual people and families. Simple calculations show that the long-term consequences for an “average” family will be devastating if we fail to address our debt challenge.
Consider two exercises, illustrating the corrosive effects of the soaring national debt on a hypothetical family.
First, unprecedented sky-high debt levels will undermine the growth rate of our economy, and thus of household incomes, compared to the growth we would experience if we contain the debt at its current size in relation to the economy. In 2017, pretax household income for the median family was $59,039. Recent history suggests median household income might grow at about 1 percent per year if we don’t degrade the conditions for growth through massive debt or other self-defeating choices. This would bring median income to $80,371 in 2048.
If the national debt stays on its present course, however, it’s probable that it will reduce the growth rate of household income by at least 0.5 percent a year, meaning that median income will rise at most to $69,000. Why? Rising federal spending on entitlement programs will crowd out investment in education, research, and infrastructure, diminishing the growth in the average American’s productivity. Vast government borrowing will crowd out private sector investment in equipment and innovation. And the odds will grow of severe financial crises, which could hold back income growth for a generation as we’ve seen in Japan and now Greece.
So, the “growth effect” will cost the median family at least $10,000 a year by 2048.
Second, it’s likely the U.S. Government will raise taxes drastically as it discovers that deficits as high as the CBO predicts aren’t sustainable.
Suppose Congress raises the effective tax rate on the top 1 percent of earners from 24 to 40 percent, and leaves the taxes of the bottom 20 percent of earners untouched. To bring the annual deficits of the 2040s down from above 10 percent of GDP – the CBO’s estimate – to a manageable 4 percent of GDP with tax hikes alone would require increasing taxes by an average of roughly $10,000 a year on all other American households. This “tax effect,” therefore, takes an additional bite from the well-being of the median family.
Of course, there is no free lunch in economics. Any likely fiscal reform policy would take benefits away from some. Reform might, for instance, reduce Social Security payments to the well off, eliminate tax breaks for well-connected businesses, and increase the cost of some forms of consumption by curtailing lucrative tax deductions. It would certainly reduce the interest payments enjoyed by foreign investors in U.S. Treasury obligations.
But the average American family gains little today from these benefits, and will be better off by as much as $20,000 a year pretax if America successfully addresses the debt challenge.