Why Do We Have a Skyrocketing National Debt and How Can We Fix It?

Politicians from both parties would have you believe that the national deficit is primarily caused by the policies of a sitting president.  They would argue that the deficit is driven by ideology and ineptitude.  The truth is--as usual--much more nuanced and complex.  Behold, why we have a national debt and why its about to get much, much bigger.

The National Debt currently stands at a little bit over 14 trillion dollars.   That's a lot of money.  Fortunately the American economy is huge, and believe it or not a debt of 14 trillion dollars is not insurmountable.  In fact, during WWII the national debt relative to the size of the U.S. economy was significantly higher. The problem is that for the foreseeable future, projected U.S. government expenditures are expected to significantly exceed projected revenues.  In simple layman's terms this is known as a structural deficit.

Many people would like you to believe that one man--the president--is responsible for the national debt.  The reality is much more complex than that.  As the graph above shows both President Obama and President Bush created policies (approved by Congress) that directly impacted the size of the debt.  President Bush helped increase the debt by decreasing taxes without decreasing services from the federal government and through the increased costs in military spending brought on by the wars in Iraq and Afghanistan. President Obama increased the debt with the passage of his stimulus plan (which was comprised of 40% tax cuts and 60% spending increases),his continued funding of foreign wars, and his extension of the Bush era tax cuts. Yet even without the deficit spending of both presidents, the U.S. debt was already on a course to skyrocket in the coming years.

The reason for the projected skyrocketing deficit is twofold.  First off, our country is rapidly aging as the baby boomer generation begins to retire.  In the coming years a huge block of formerly productive workers will no longer contribute to the growth of the American economy.  A generation of declining birthrates and a restrictive federal immigration policy has created a scenario in which there are not nearly enough workers to replace the retiring baby boomers.  This will make it nearly impossible for the American economy's GDP (Gross Domestic Product) to continue to grow at the rate necessary to insure that federal revenues exceed expenditures.

The second cause of the structural deficit is our entitlement spending problem. Social Security, Medicare and Medicaid are known as the big three of entitlements.  The big three entitlements, along with national defense, make up over 50% of the federal budget. Entitlements are programs that baby boomers paid into while they were members of the workforce.  For decades the federal government took money out of their monthly checks to pay for the programs.  The problem is that the federal government did not save a dime of the entitlement money but rather spent it on government services during the productive years of the baby boomer generation.  In other words, no money went into a proverbial piggy bank. This wouldn't be a problem except for the fact that declining birth rates have ensured that there won't be nearly enough workers to support the retiring boomers in the coming years.

As you can see at the current trajectory, the structural national debt is expected to go up significantly in the coming years. In addition, the percentage of federal expenditures going to entitlement spending will continue to go up.  By 2020 it is projected that without running a deficit all that the federal government will be able to pay for is entitlements, interest on the debt and some national defense.  By the year 2030 all that it will be able to afford is entitlements.  And after that it won't even be able to afford paying out all entitlements.  You get the picture.

Options for Solving the Debt Crisis

There are really only four ways that we can fix the national debt.  Each is problematic in its own way.

1) Raise Taxes - The government could raise taxes and this in itself could potentially solve the debt crisis.  The economic problem is that taxes that are too high will lead to anemic economic growth, high unemployment and a lower standard of living.  Politically it is nearly impossible in this country for the government to raise taxes at the federal level.  (In fact, the last candidate to admit that he wanted to raise taxes was Walter Mondale in 1984 and he lost to Ronald Reagen in 49 out 50 states). The legislative tactic in the Senate known as the filibuster virtually ensures that as long neither party has more than 60 members, taxes cannot be raised. So even if this appears to be an economic solution, at this time it is certainly not a political solution.

2) Decrease Entitlement Spending - Entitlements are known as the 3rd rail of American politics, which means that if you try to touch them you will die (or at least lose reelection).  Study after study has shown that seniors are unwilling to give up any of their entitlements, and most politicos agree that getting seniors to agree to cut entitlements is even more politically difficult than raising taxes.

3) Increase Worker Productivity - Theoretically if we can create a workforce that is the most highly productive in American history, it can create enough goods and services and tax revenue that we won't need to do option #1 or #2.  Although this would be the perfect scenario, politicians can't simply clap their hands and tell America to become more productive.  Making a productive workforce takes time and is hardly an exact science.

4) Inflation - The government could just simply start printing off money and creating hyperinflation. This would solve the debt crisis but it would more or less make the U.S. and possibly the world's economy collapse. Hyperinflation has been tried around the world many different times with disastrous results.

So What's the Solution?

The only practical solution is to raise taxes and cap entitlement spending, which at this point is politically impossible.  However, as the structural deficits continue to mount and American voters continue to see the national debt go up under both Republican and Democratic administrations, hopefully they will understand the economic necessity of a leaner yet (ironically) more expensive federal government.