The 'Tipping Point' of American Debt

The 'Tipping Point' of American Debt
By David Paul Kuhn

Question: You meet with your accountant. She tells you, "A panel of financial planners went over your books. You're living way beyond your means. At this rate, you will reach a tipping point. It's unclear exactly when. But if you keep it up, you will lose everything and saddle your children with historic debt." What would you do?

(A) Ignore your accountant.
(B) Go home and rant about frugality. Tell your family, we must cut back. But you don't want to go first. You contribute too much income already. They don't want to go first either. They were promised stuff. You don't want to disappoint. So you delay. Assign another panel to think about it. After all, credit offers are still coming. That Chinese bank is the best! And you love your lifestyle.
(C) Change your lifestyle.

Uncle Sam's bean counters offered a sober warning this week. The non-partisan Congressional Budget Office reported: "Growing budget deficits will cause debt to rise to unsupportable levels ... there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis."

This is your government at work.

The budget report offered nothing new. Rather, it was an authoritative summary that was refreshingly free of political agenda.

Simply put, our debt has reached historic proportions. Federal debt, held by the public, will constitute 62 percent of the nation's gross domestic product – GDP is the size of the economy – by the close of the 2010 fiscal year. This ratio exceeded 50 percent only once before, during and shortly after World War II.

The soaring debt predates the financial crisis. The national debt increased by about two-thirds from George W. Bush's inauguration to early September 2008. Yet the big spike came with this recession. Debt increased about a third in two years. It stands at roughly 13 trillion today, according to Treasury records. Why did this happen? GDP declined. Government spending soared.

The serious policy debate is not over whether the government should have stepped in. It is concerned with the extent and method of that intervention. After all, just this week, two leading economists reported that the Bush and Obama administration measures likely did forestall a second Great Depression.

Economists Alan Blinder and Mark Zandi, who have advised both parties, calculated that absent the government's measures, about 8.5 million more jobs would have been lost – on top of the roughly 8 million actually lost. Those policies include: the Wall Street bailout, the emergency Federal Reserve lending and asset purchases, the bank stress tests and the stimulus.

But what if another crisis comes? Will we have the wherewithal to intervene at this scale again? Will our debt cause its own crisis?

"Rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises," the report read.

The budget report paints several dark pictures. Best estimate: "growth in spending on health care programs and Social Security" will cause debt to equal about 80 percent of GDP by 2035.

Worst estimate: the debt ratio reaches 90 percent of GDP by 2020. That might happen if Congress enacted "expected" measures, from rising Medicare payments to physicians to extending the Bush tax cuts. By 2035, amid the "spiraling cost of interest payments," the ratio would be 180 percent. Catastrophic levels.

Even the best scenario is unsustainable. We may not know the tipping point. But we do know – from Argentina to Greece to the historic lessons of the British and French empires – that the United States is on the road to debt perdition.

Or as former Clinton White House chief of staff Erskine Bowles recently said, the national "debt is like a cancer." Bowles is one of the leaders of Barack Obama's bipartisan debt commission. The commission will offer its report in December.

Furious partisan debate will surely follow that report. Democrats don't want entitlement cuts. Republicans don't want tax hikes. That's the historic impasse. (See answer "B" above.)

That impasse has bolstered cynics for decades. Budget commissions have failed to spark serious action since the early 1980s. The bipartisan Concord Coalition has strived (to little avail) since the early 1990s to win "responsible fiscal policy." It had its share of statesmen at the helm. But statesmen seem sadly scarce when actually at the helm – when they are in office.

We have some time. The tipping point is not tomorrow. But problems arise before that point. Without hard choices, the debt crisis will not only impact our economic power but also our physical power. As historian H.W. Brands told me a few months back, "sooner or later, every country gets the foreign policy it can afford."

Sooner or later, on all matters, this nation will be forced to consider not only what it wants but also what it can afford. (See answer "C" above.)

David Paul Kuhn is the Chief Political Correspondent for RealClearPolitics and the author of The Neglected Voter: White Men and the Democratic Dilemma. He can be reached at david@realclearpolitics.com and his writing followed via RSS.