Overstretch: the long shadow of soaring US debt


While the past year has been dominated by the enormous human costs of COVID-19, the next few years will be devoted to its economic consequences, including the alarming rise in US debt. What is needed is multilateral cooperation – a new “Grand Alliance”.

Congressional leaders failed to strike a bipartisan deal on a $ 900 billion pandemic relief plan on Friday. A government shutdown was only avoided with a 2-day extension.

A prolonged shutdown would amplify the risks of an escalation of the pandemic and economic crisis, in the context of the long-awaited deployment of the vaccine. Biparty tensions are compounded by the impending Georgia Senate run-off run in January that will determine control of the chamber in Congress.

In 2019, Congress suspended the debt ceiling until after the 2020 presidential election. As it sought to avoid a repeat of the debt crises of 2011 and 2013 in an election year, news spending has contributed to Trump’s new military rearmament campaign.

The new Congress must decide the future of the debt ceiling by the summer of 2021.

High debt

By the end of the year, COVID-19 cases worldwide will reach nearly 80 million. Due to total mismanagement, the US figure will be close to 20 million.

As the pandemic continues to spread and the healthcare system is overwhelmed, the Trump White House has incurred record debts at a record rate.

During his campaign, Trump pledged to eliminate the US national debt within 8 years. At the time, the total public debt stood at $ 19.6 trillion. Over the past 4 years, it has climbed to over $ 27 trillion, or nearly $ 8 trillion. It was kind of a feat. What former President Obama achieved in 8 years, Trump did in just 4 years.

Of course, all of the major Western economies incurred record debts during the global pandemic. But the United States is not like other economies. First, it has more cases of COVID-19 compared to any other major economy. Second, the United States remains an anchor global economy. Third, the US dollar dominates international transactions. As a result, excessive US debt will have disproportionate global fallout.

How will Democrats cope with the debt burden?

Instead of focusing on the size of US debt, says Jason Furman, former head of the Obama Council of Economic Advisers, “policymakers should assess fiscal capacity in terms of real interest payments, ensuring that ‘they remain comfortably below 2% of GDP “. This, according to Furman, would ensure adequate budget support and the necessary public investments, while keeping public debt sustainable.

Here is the logic of the argument: As a percentage of GDP, the cost of servicing the US debt has fallen since 2000, even as federal debt has increased. A low interest rate environment makes it easier to repay debts.

So, according to Furman, the Biden administration can manage primary deficits (non-interest spending minus revenue) without “an unlimited explosion of debt.”

Short-term gains, long-term challenges

This is likely the position of the economics team proposed by the Biden administration, which will emphasize both growth and equity.

The team includes former Fed chief Janet Yellen as the new Treasury secretary, her former right-hand man Jerome Powell as current Fed chairman and labor economist Cecilia Rouse as board chair. economic advisers (CEA). CEA members include Jared Bernstein, Biden’s chief economist during Obama’s time, and Heather Boushey, co-founder of the Washington Center for Equitable Growth.

Nonetheless, the likely policy direction, whether implicit or explicit, is predicated on unsustainable indebtedness in the future.

According to recent projections by the non-partisan Congressional Budget Office, federal debt held by the public will surpass its all-time high of 106% of GDP in 2023 and continue to climb most years thereafter. By 2050, debt as a percentage of GDP will rise to almost 200% of GDP. Despite peaceful conditions, it is already at the level of World War II; by 2050, it could be twice as high (Figure 1).

Figure 1 US debt held by the public, 1900 to 2050 (% of GDP)

Source: CBO data (September 2020)

Worse, US debt is expected to grow faster than expected. Current projections do not include the full costs of the pandemic stimulus packages, nor the “necessary public investments” that the Biden administration will seek to promote.

What will be good for the US economy and the global outlook in the short term could prove to be very damaging to both in the long term.

Here’s why: Deficits will more than double, from an average of 4.8% of GDP in 2010 to 19-10.9% from 2041 to 2050, leading to increased debt. Therefore, net interest expenditure will be the source of much of the increase in total deficits over the last two decades of the projection period.

The markets plan on a quarterly basis. Presidential terms barely have a 4-year perspective. As a net effect, the long term perspective is lost in the translation. In the CBO’s projections, spending growth will continue and accelerate to outpace income growth, leading to larger budget deficits in the long run (Figure 2).

Figure 2 Percentage of GDP: expenditure vs revenue

Source: CBO data (September 2020)

Source: CBO data (September 2020)

So what about these “sustainable” real interest rates? Measured as a percentage of GDP, net interest expenditure could almost quadruple over the last two decades of the projection period.

From overbreadth to the new “Grand Alliance”

Along with U.S. banks and investors, the Fed, state and local governments, mutual funds, and pension funds, foreign governments hold one-third of U.S. public debt. The biggest holders are Japan ($ 1.3 trillion), China ($ 1.1 trillion) and the United Kingdom ($ 430 million). To meet its skyrocketing debt, the United States will depend on these contributions.

However, Japan is the most indebted large economy in the world (public debt to GDP exceeds 238%). Due to the maturation, aging and decline of the population, its burden will continue to increase, while the costs of Brexit will penalize the UK economy for years to come.

The Biden administration has vowed to be tough on China, Russia and several other countries, which could translate into increased defense and security allocations – which, in turn, would further amplify the outbreak of the debt, twin deficits and real interest rates.

When the great powers fail to balance wealth and their economic base with their military might and strategic commitments, they risk overextension, as historian Paul Kennedy warned in the late 1980s. to come, it will be a major risk in the United States.

However, nothing is inevitable in life. There is great opportunity amid growing threats. It is multilateral cooperation across all the political differences between the world’s largest economies. It has already been achieved and could be achieved again, as evidenced by FD Roosevelt’s “Grand Alliance” during World War II.

In the 1940s, the war threatened to lead to excessive debt. Today, excessive debt risks wars that will have no winners.

Photo: Rafael Gonzalez


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