“The federal government’s budget is on the road to hell,” warned Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office. “There is no polite way to describe why the world’s largest economy has placed itself on a trajectory that looks like a third-world debt crisis.”
These blunt words were spoken by Holtz-Eakin in March 2011. Since then, the road-to-hell trajectory has persisted. At the time, federal debt held by the public stood at 63% of gross domestic product. Just six years later, that ratio stands at 77%. And according to the “extended baseline” projection released on Thursday by the same CBO—under Holtz-Eakin’s successor, Keith Hall—debt as a share of GDP should soar to 150% by 2047 “if current laws remain unchanged.”
Let’s put that 150% in perspective. Federal debt as a share of GDP peaked at 106% in 1946, the year following World War II, at which point the ratio rapidly declined. By contrast, as the CBO also explains, 30 years from now that 150% “would be on track to grow even larger.”
Why is this the road to hell? The CBO’s March 2017 report reviews a few compelling reasons. For starters, “the amount of debt that is projected under the extended baseline would reduce national saving and income in the long term.” That’s due to the crowding-out effect: “More of people’s savings would be used to buy Treasury securities, and thus private investments would be crowded out.” That would mean less investment in capital goods—and if that happens, workers would be less productive. With productivity impaired, incomes would be reduced. …
… Naysayers might object that it’s not possible to make a valid prediction over more than a quarter century when it’s hard enough to forecast what will happen next year. But in this case, the CBO’s scenario is too plausible to be ignored. The soaring growth of federal spending for Social Security and the government’s major health-care programs—principally Medicare and Medicaid—should continue to swamp revenue, even after the baby boomers exit the world’s stage. The CBO finds that the debt will keep piling up even though it assumes that all other spending will account for a declining share of the budget. Then add the cost of servicing the soaring debt, and the result is baked in the cake: The fiscal situation is unsustainable.
Those who depend on the current system of elder-care entitlements face a potentially hellish future. Whatever can be said for or against this system, it will surely be subject to Stein’s Law: “If something cannot go on forever, it will stop.”