As Budget Battle Rages On, a Quiet Cancer Grows
If Washington's leaders need a reason to get serious about the long-term-deficit problem—now—here it is.
As the U.S. figures out how to lower its deficit, it does so at a time when it's paying $200 billion in interest in 2011 alone. WSJ's Gerald F. Seib foreshadows bad times ahead if Congress doesn't immediately make inroads into the deficit.
There is a cancer eating away at the budget from within, one that steadily drains American wealth, sends much of it overseas and only gets worse over time. It is the interest America pays on its national debt.
This year the U.S. will spend more than $200 billion—roughly the gross domestic product of Chile—merely paying off that interest. That's nearly as much as it will spend to provide health care to poor citizens through the Medicaid program.
By comparison, the spending debate now raging in Washington, over whether to cut discretionary programs by $20 billion or $60 billion this year, is about chump change, and misses the real long-range threat almost entirely.
Sen. Tom Coburn (R., Okla.) at a deficit-panel meeting in December.
That's because the interest burden gets worse—much worse—as time goes on and spending grows, not so much in the programs now being discussed as on Medicare, Medicaid and Social Security. Without a change, in 10 years the federal government's net interest bill rises to $928 billion annually. That would be 17% more than the government would pay to provide health care to the elderly through Medicare that year, and 82% more than the cost of all non-security discretionary spending programs combined.
After that, unless something is done, the interest bill becomes truly debilitating. By 2080, the country would be spending more than 10% of its entire gross domestic product—that is, more than 10 cents of every dollar of goods and services produced—just to pay interest. Over time, this represents a giant transfer of American wealth overseas, particularly to China, where much of America's debt is held.
Sen. Tom Coburn, a Republican of Oklahoma and member of the national deficit commission President Barack Obama appointed, summarizes the danger this way: "Our threat is that our destiny will not be controlled by us."
Sen. Coburn, who has become a kind of one-man alarm bell warning about the dangers of debt in general and the insidious force of interest payments in particular, notes that the situation could be even worse than it appears, because current projections assume that interest rates will remain reasonably low.
If interest rates rise more than expected, he warns, the situation could become catastrophic. "The chances of a downward spiral are high, not low," he says. Sen. Coburn is concerned enough that he voted for the commission's recommendations on attacking the deficit, even though they included tax increases he doesn't like.
Compared to the focus on the mushrooming cost of entitlement programs—Medicare, Medicaid and Social Security—this mounting interest bill doesn't get much attention. It should.
When the government pays for health care for its poor and elderly, a valuable social benefit is delivered. When Americans get a Social Security check, the money by and large stays in circulation in the American economy.
The same can't be said for interest payments, which take money out of the private economy, sending much of it to foreign investors who hold American Treasury bonds and provide no services in return. A recent study of the debt sponsored by the National Academy of Sciences cites one credible projection that, by 2030, the U.S. could be transferring 7% of its entire economic output, or $2.5 trillion, to foreigners every year to service its debt.
The really sinister part of America's interest bill is that it just gets worse the longer Washington waits to act on the budget deficit. The math and the logic are simple and unavoidable. Big deficits require taking on more debt, which in turn adds to the interest payments required to service that debt. In short, it's a Ponzi scheme.
And the cost of delay comes not merely in dollars and cents, but in lost opportunities. Every dollar spent servicing the debt is one dollar less to spend on health care or invest in education or use for social programs. Liberals ought to be at least as worried about the mounting debt as conservatives are, for it presents a genuine long-term threat to the programs they most cherish.
The good news here is that the interest demon can be brought under control. The budget President Obama presented last month contains enough deficit reduction to reduce interest payments by $325 billion over the next decade. The problem is, it presumes some new taxes on the wealthy but doesn't propose any serious new reductions in the cost of entitlement programs.
If Washington can get its arms around those entitlement costs sooner rather than later, a virtuous cycle of lower interest payments can begin to replace the upward spiral. Waiting comes at a cost, measured in wasted billions of dollars.
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