October 18, 2011
Are we willing to let the debt go continually higher under current policies? Emmons says that there really is no escape through indefinite borrowing and rolling over the debt. By refusing to make tough choices, eventually our government will be raising revenue primarily to pay interest on the debt.
William Emmons: As I said, the other unpalatable alternative is don't raise taxes, don't cut spending, but just let the debt accumulate and wait for whatever might happen down the road. And so, you know, why is that a problem? The U.S. government can borrow now at incredibly low rates. The U.S. government pays almost nothing to borrow money for a few months, a few years. Even to borrow for 30 years the U.S. government pays only a little bit more than 3 percent annual interest. What's the problem?
Well, we can't say for sure, but historical evidence suggests that that can't go on forever. You can't continue to run up larger and larger debt. So the point is, if the budget deficits and the debt just keep rising, at some point—we don’t know when—but at some point we have to expect, it would only be prudent to expect, that investors might refuse to buy that debt, that they would back off and say I just don't have confidence that they will continue to be able to pay the interest on that debt. And if that day comes and the Treasury can no longer borrow or it can only borrow at punishingly high rates as, for example, Greece is facing right now, what do they do? Well, they have to make some very drastic adjustments. They have to raise taxes which Greece is doing, they have to cut spending which Greece is doing, or even default on the debt which, of course, is the last alternative. We hope that doesn't happen, but it could come to that. So that's why we don't want to go down that road because we think there's really no escape through just borrowing indefinitely.
So here is a long-term projection under this alternative scenario. If we do go down this road, never make any tough choices, always just roll over the debt and borrow to cover our shortfalls year by year. This is how the breakdown of federal outlays might look over the long term. So a couple of things I think should probably jump out at you. Number one at the bottom, healthcare spending rises and rises. Okay? So Social Security is larger than any other particular program today, but Social Security doesn't have that huge growth in the long term that healthcare spending does. What I'm calling everything else, besides these items that I specifically mentioned, will be a shrinking portion of federal outlays.
But, of course, the big kahuna up there is the interest on the debt. That as you run deficits and the debt goes higher and higher and higher—that was that yellow slice that just kept growing—interest becomes really the only thing that the government raises revenues to do is just pay interest on the debt. In terms of the percentage, it's the same information now expressed as a percentage of total outlays, eventually the interest just pushes out everything else. So you can see why at some point even the citizens of the country might say that's pointless that we're paying all these taxes simply to pay bondholders. And many of them are going to be, of course, non-Americans. Already half of the U.S. debt is held overseas. So not a very palatable option.