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We’re Closer to a Credit Crisis Than Most People Think

Original Article

Your editorial “Obama’s Debt Boom” (June 6) states that it will be around 2025 when Social Security, health-care entitlements and interest on the national debt would absorb the entire tax-revenue base—leaving the building of roads, basic research and the defense budget to be deficit financed. You also point out that between 2022 and 2025 the federal debt requiring interest service will hit the critical 100% of GDP.

The fact is the U.S. is close to the “bang” point of crisis right now. Government pensions, Social Security, Medicare and Medicaid, and the welfare and education budgets are projected to absorb more than the $2.5 trillion tax-revenue base this fiscal year. Thus, the defense budget, plus general government operations—including police, prisons and courts, transportation, agriculture and basic research—are already being funded by debt-financed deficit spending.

As for the debt-to-GDP ratio, Moody’s and S&P have pointed out that when state and city municipal bond debt and the debt of Fannie Mae and Freddie Mac (now wards of the state) are added to the national balance sheet, public debt today in the United States exceeds 100% of our GDP.

In addition, at the present level of indebtedness, each 1% increase in interest rates adds $116 billion to the budget in terms of nondiscretionary debt-servicing costs. The U.S. has benefitted from the fact that fiscal problems elsewhere are more obvious, but the S&P downgrade last summer was a warning of the close proximity of the bang point, when the credit-worthiness of the U.S. will collapse.

 

Scott S. Powell
Discovery Institute
Seattle

Scott S. Powell

Senior Fellow, Center on Wealth, Poverty, and Morality
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.