In the run-up to the 2008 election, the media has been nearly silent on the issue of the budget deficit. Perhaps it is because in the current term, the federal budget is trending towards solvency: The budget deficit is expected to shrink for at least the next five years, despite the wars in Iraq and Afghanistan. The trend is indisputably going in the correct direction: The federal deficit was approximately $247 billion in 2006. In the fiscal year 2007, by contrast, the federal budget deficit was about $158 billion, a $90 billion improvement.
It may be difficult to see a sum of money seven times the size of Yale’s endowment as anything but astronomical, but the latter figure must be taken in context. The gross domestic product of the United States was more than $13.2 trillion dollars in the fiscal year 2007, meaning that the federal budget deficit is less than 1.2 percent of the American GDP. Historically, a budget deficit of approximately 1 percent of GDP is “typical” of the federal government and not considered especially worrisome.
Unfortunately, what the federal government considers typical will result in fiscal suicide in the long run. Even if President Bush, Congress and the next president stick to the current budgetary plan, which calls for a balanced budget from the fiscal year 2012 onwards, the United States will still have to deal with approximately $9 trillion in accumulated debts and IOUs, much of which dates back to the World Wars. In the decades following World War II, the federal government adopted a policy of paying all interest payments on time (to ensure that America’s credit remained unrivaled) while deferring payment on principal to some indeterminate day in the future. As a result, the United States is in the unenviable position of owing nearly 70 percent of its annual GDP to creditors.
Unfortunately, there is no easy solution to the problem of America’s indebtedness. With two wars each costing tens of billions of dollars and the necessary interest payments on the current debt costing hundreds of billions of dollars, it is unlikely that even a strong bipartisan push towards fiscal responsibility would do more than trim the most egregious fat in the budget. Quite simply put, there is not enough money in the budget to start paying off more than a small fraction of the principal on America’s debt. Raising taxes as Democratic politicians have suggested will do little to raise revenue in the long run, as federal tax revenues are near their (Laffer) potential, as evidenced by the relatively small drop in revenues following the massive Bush tax cuts.
With most spending fixed in the immediate future and minimal extra annual revenue available, only the most dedicated pursuit of fiscal responsibility will result in America’s movement towards a long-term solution to its debt crisis. Nevertheless, pursuing a debt-reducing strategy has become necessary. The U.S. dollar has dropped in value to historically low levels, and, for the first time in years, America is in danger of a significant inflationary episode. One of the largest contributors to inflation is a large national debt, which leads foreign markets to reduce demand for the dollar. A growing debt is one of the surest ways to guarantee that the U.S. dollar weakens enough to cripple the thus-far resilient U.S. economy. With government debt of $9 trillion and total debt of $48 trillion, the situation has become dire.
Thankfully, there is hope. If pork spending is reallocated to paying off the principal on the debt with the budget balanced, the principal will begin to get paid off. Once the principal on America’s debt starts shrinking, the interest payments will reduce, and more funds will be freed up for other purposes, including larger payments on the principal. In other words, doing a little good can set off a positive feedback loop and a beneficial chain reaction.
The key is to start soon — the longer we wait, the larger the principal and, by extension, the interest payments become. Reducing the deficit and balancing the budget are good first steps, but they will only solve the immediate crisis, not the long-term problem. Rather than spending billions of dollars on pork and unnecessary government programs, the next president and Congress need to step up and start paying the principal on America’s debt.
Trevor Wagener is a freshman in Pierson College.