Looming “Debt Hangover” Will Crush The Economy

Rusty Tweed

A time will come when the U.S will inevitably have a debt hangover, it may not be the coming week or next month, but it will soon come. The continued effects of continued lowering of the tax-revenue, government spending, always-increasing interest payments, and increasing compulsory welfare payments will soon be felt, and that is a feeling that will not be a pleasant one.

How we got here

The current national U.S debt that is publicly held is 75% of the GDP. Although that number can be shocking to the average citizen, to economists, they see this number as a good figure. Before the recession of 2008, the national public debt in the U.S was at 35% of the GDP. Over the last decade, the debt has grown by 40%. Why is that the case?

The answer lies in government spending. The U.S government decided that the only way to get out of the recession was to spend. This was championed by the Federal Reserve and a handful of economists who encouraged monetary and fiscal authorities to continue deficit spending and issue more debt to institutions and individuals or borrow in order to spend. That decision worked, but some people argue that there was not enough money that has been spent.

The impact of debt hangover in the U.S economy

Currently, the U.S is undergoing low unemployment rates and a long period of growth that has never been seen in the history of the country. According to the Congressional Budget Office, it was highlighted that by the year 2047, while maintaining the same trend of fiscal policy, the U.S debt ratio will linger around 150% of the GDP. Imagine what is happening between Italy and Greece happening in the U.S; that is how bad the situation can get for the U.S.

The World Bank has put up estimates that every percentage point that goes above the debt to GDP ratio of 77% would lead to a decline in the annual growth by 17 basis points. This can translate to a loss of 12% of the growth of GDP in the next 30 years. Looking at it in another perspective, it would mean that the U.S economy will have stopped growing for over four years.

If you think that is the only consequence of the existing fiscal policy, you are wrong. The flexibility that Congress has on implementing expansionary fiscal policy in economic downturns will be less. Investors will be in need of higher rates of interest to be able to invest in an economy that is increasingly becoming volatile.

When the cycle of net interest payment increases and higher interest rates are resent, the result will be a net interest payment that will eclipse other major spending programs by 2047. If we decide to look at Medicare and Social Security, it will require large investments to keep the short-term solvency.

What the economists say

There are economists who argue that if the economy could be spurred faster than the compounding interest payments, and it ignores entitlement programs, then things would be okay. But spending is not the issue; the problem rests on the revenue and the GOP tax plans which do not help.

The GOP tax plan economics is not hard. When you talk to the Keynesian economists, they would argue that the tax cuts spur economic growth and stimulate the economy. But most of the economists are not supporting the tax plan and the basis behind it, especially when you look at the current economic status. Cutting taxes is not something that is needed at this time.

Most economists believe that the lack of tax revenue will increase the chances of a financial crisis. Estimates by the Dynamic CBO propose that the growth of the GDP due to tax cuts will be dismal and will be below the required levels that are to mitigate the impact of an increased portion of the U.S national debt to GDP.

At the moment, the U.S government is not armed with the right tools to deal with the debt hangover that is looming. Within the next decade, the economy will still maintain the healthy standards. The U.S will not be bothered by the impacts of the existing fiscal policy until the time when it is too late.

The GOP tax plan consequences should not be understated, and it was not only the tax plan that placed the U.S in this state. There needs to be an implementation of reforms that will alleviate the impending consequences of the existing fiscal policy. But sadly, the changes in policy that are needed do not appeal politically.

Revenue needs to be raised by the Congress, and spending should be cut without impacting Medicare and Social Security. There are a number of options that the CBO provides, and they are 115 in total. These options are meant to control discretionary and mandatory spending and stimulate revenue.

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