Worry Grows About Federal Debt

June 8, 2010

Back from vacation, I see that on June 4, Bloomberg's Caroline Baum wrote a great column about how bad the prospects are for U.S. government finances, "I Want It All, Even Better If You Pay for It."

Pointing to CBO director Douglas Elmendorf's observation that the government is ignoring the reality of taxes and spending, Baum blames politicians who promise more and more generous government benefits, especially to retirees, with no realistic concept of how to finance them.

The U.S. can't afford to provide everyone with food, clothing and shelter, not to mention medical and child care, college tuition, a low-interest mortgage and a Social Security check until death.

And she thinks "devout Keynsian" economists are wrong when they urge Congress to borrow and spend even more than it already has.

Baum thinks it may already be too late to stop ballooning debt and interest payments from causing long-term economic damage. According to a plausible CBO estimate, interest payments will reach nearly $1 trillion per year by 2020, and federal debt will reach 90 percent of GDP, a level that economists Reinhart and Rogoff call a threshold beyond which economic growth slows significantly.

As if the politics weren't bad enough, demographics are making the problem worse. The latest Social Security Trustees report predicts that the ratio of workers to retirees will drop from the current 3.2-to-1 down to 2.2-to-1.


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