Our government spends more than it takes in. The “Official” Budget Deficit was over $1.3 Trillion a few yeas ago, has come down to around $500 Billion today, and is expected to rise steeply again for the balance of the decade.
But the official number doesn’t tell the whole story. Not included is all the US Agency Debt, like
Fannie Mae, that taxpayers are on the hook for. Agency debt growth was tiny compared to the official budget deficits 40 years ago, but today this new agency debt just about matches the official deficit. The two together are growing at over $1 Trillion a year, and it looks likely to worsen in the years ahead.
The National Debt, the sum total of all the annual budget deficits, stands at over $17 Trillion.
Add the Agency debt, and the total is closer to $34 Trillion!
The FED has been suppressing interest rates more than usual since President Obama took office, weighing in with ZIRP (the Zero Interest Rate Policy). Add in the various QEs, and the result is that all this debt pays an unsustainably low interest rate.
Eventually, interest rates will mean revert much higher. New deficits will require interest at the higher rates, and as old debt is rolled over (if you’re in deficit, you’re not repaying maturing debt), the rollovers also have to carry the new higher interest rates.
If rates go up 4% from today’s levels, $17 Trillion would require $680 Billion additional in interest. With the Agency debt, that’s $1,360 Billion. That’s interest which has to be financed, further growing the National Debt.
Clearly, the situation is out of control. But even that does not tell the whole story. Current laws on various Entitlement Programs (Social Security, Medicare, Welfare, etc) have what are called Actuarial Deficits. If the laws stand without change, this is how much we’d need TODAY (earning interest) to pay for all these promises.
Several economists have suggested numbers based on a number of years into the future. Laurence Kotlikoff at Boston University has forecast the total (not stopping at an arbitrary date) to be around $225 Trillion (with a T).
We can play ostrich and ignore the problem until the house of cards collapses. Or, we can accept that there will be some pain, and get to it. The first rule is, when you’re in a hole, stop digging.
Action Item: Pass a Balanced Budget Amendment to the US Constitution, which would include not only the Official Budget but also Agency Debt Growth. Over 10 years, phase in 1/10th of the Actuarial Deficit growth (each year) from the Entitlement and other off budget items. Failure to comply would subject the President and Department Secretaries, members of Both Houses, and all Justices of the Supreme Court to loss of salaries until compliance is restored. Continued noncompliance for more than 3 years would require removal from office and new elections.
Update: Here’s an AEI article on the off budget items.