The path we’re on:
- Over the past 40 years, the size of U.S. public debt has averaged below 40 percent of the economy, after having peaked at over 100 percent during WWII.
- Today, debt is more than 70 percent of our economy ($11.1 trillion), but is set to continue to rise even after the economy recovers from the recent downturn. The debt is on track to exceed 100 percent of the economy next decade and exceed 200 percent by the 2040s.
- Increased spending on the wars in Iraq and Afghanistan, unpaid for tax cuts, unpaid for stimulus and job creation bills, and the economic downturn have automatically pushed up spending and brought down revenues, increasing debt. In the long-term, debt will rise from other factors: health care and retirement costs growing faster than the economy and an outdated tax code that brings in insufficient revenues.
Consequences of rising debt:
- Rising debt will slow economic growth. Researchers have found that once debt reaches certain thresholds, some of which we have already passed, the economy grows notably slower. A slower economy will reduce our standard of living.
- Ultimately, we will face an economic crisis if we don’t change course – perhaps along the lines of what several European countries have experienced recently.
- Higher debt means leaving the next generation saddled with it, reducing their budget flexibility and the ability of the United States to respond to crises in the future – including economic, natural, and security emergencies.
Benefits of debt reduction done right
- Policymakers need to enact a plan that stabilizes debt as a share of the economy and then puts it on a clear downward path this decade.
- Smart and gradual debt reduction can reverse all of the negative economic and generational consequences of elevated and rising debt.
- A credible plan could help strengthen the recovery by improving confidence and reducing uncertainty, even if savings don’t start until after the recovery.
- Fixing the Debt could restore public faith Washington’s ability to solve problems.
- There are many proposals and ideas for policymakers to pick and choose from, including: the Simpson-Bowles Commission, Domenici-Rivlin task force, the Super Committee discussions, the Biden negotiations, and others.