Given that the federal debt is $11 trillion, the government’s debt is already more than four times greater than its income. If the debt-to-GDP ratio rises to 200%, as CBO forecasts for 2037, the situation changes dramatically, with the debt-to-income ratio rising to more than 10. This would be the equivalent of a family who earns $100,000/year buying a $1.25 million house.

A Debt Strategy For The Next 30 Years

 

Alex Brill

 

 

The United States is on an unsustainable fiscal course. This year marks the fourth in a row that the U.S. federal deficit will exceed $1.1 trillion. Since the end of 2007, the federal debt, now $11 trillion, has doubled as a share of annual GDP—from 36% to 73%. The long-term outlook is even worse. 

The deficit is likely to improve in the next few years, but it will then turn upward again due to the projected rise in federal spending on Medicare and Social Security. According to the Congressional Budget Office (CBO), spending on those two programs will rise from 8.7% to 12.2% of GDP by 2037. 

The good news is that U.S. lawmakers and policy experts from across the political spectrum have begun in earnest to outline possible strategies for tackling this looming debt crisis. Unsurprisingly, many suggestions—from the Left and the Right—are misguided or not particularly constructive. For example, a number of left-leaning think tanks have recently supported a “financial transactions” tax that would cause huge distortions, raise far less revenue than projected, and push more of the industry offshore. Similarly unhelpful, some conservative groups have advocated abolishing various small spending programs on the grounds that such cuts will improve the fiscal outlook, even though their elimination would have only a trivial impact on the overall federal budget. 

Given the plethora of ideas being floated, it is critical that policymakers—both liberal and conservative—zero in on a framework that effectively addresses our fiscal challenges and permits specific policies to be properly evaluated. Outlined below are three key principles that are essential to this endeavor and offer concrete policy applications based on these principles. 

First let’s provide some context for understanding the size of the problem.

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