Can we keep this up? President Franklin D. Roosevelt never thought so.
The 32nd president of the United States said, "Any Government, like any family, can for a year spend a little more than it earns. But you and I know that a continuation of that habit means the poorhouse."
The U.S. is continuing the habit.
The April Treasury Statement of Receipts and Outlays of the United States Government shows the federal government’s monthly deficit was $82.7 billion, compared to only $20.9 billion in April 2009. And April is supposed to be the good month, when individuals are sending in most of their yearly income tax.
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Unfortunately, the weak economy is having an impact. Federal tax receipts for April were about $21 billion lower than the same month last year. Meanwhile, federal outlays (expenditures) for the same month were 14 percent higher than the year before, at $328 billion. Year-to-date the federal government is running a budget deficit just short of $800 billion.
Of course, running a deficit means the government must borrow. Total public debt outstanding now stands at $13 trillion as reported by Treasury Department. The public debt is all federal debt held by individuals, corporations, state or local governments, foreign governments and other entities. This group has now lent the U.S. government an amount equal to 89 percent of the country’s current income.
At some point we must reach the poorhouse like Roosevelt predicted.
U.S. Sen. Mike Crapo of Idaho was asked to help work on the problem. Crapo was appointed to the National Commission on Fiscal Responsibility and Reform. The senator said, “We are on an unsustainable course. Frankly, the American people have this figured out and have had it figured out for a long time.”
The commission held its second meeting last week and heard from economist Carmen Reinhart. Reinhart, along with Kenneth Rogoff from Harvard, conducted extensive research showing that high debt levels bring financial crises.
With more than 800 years of data from 66 countries, the authors found that financial crises are always the result of the same problem — high levels of public or private debt. The cycle begins as asset prices rise and households and government borrow easily. When the prices finally stop rising, or drop dramatically, investors panic, currency values fall and government deficits rise. Today’s financial crisis is no different.
The bigger problem, however, is what happens afterward. Reinhart told the commission that when countries have debt-to-GDP ratios below 90 percent, economic growth is generally unaffected. But when debt rises above 90 percent “growth deteriorates markedly.” For the period 1946 to 2009, the average GDP growth rate in advanced economies like the U.S. was negative.
To reduce the debt, the government will have to tighten its belt. Proponents of a balanced federal budget argue that budget deficits impose a burden on future generations by raising future taxes and thereby lowering incomes. Further, budget deficits crowd out private investment, lowering productivity and economic growth like that which Reinhart and Rogoff found in the data.
Opponents of a balanced budget requirement argue that a government deficit does not preclude investment. Yes, private investment may fall, but fiscal policy includes many important public investments.
The global financial markets are currently judging in favor of the opponents. But it looks as if we have reached an unsustainable level.
Interest rates on U.S. Treasury bills, notes and bonds remain well below their levels of just a few years past. The two-year note, for example, trades at a yield of only 0.8 percent, compared to about 5 percent in 2007. The yield spread, or difference between rates on short-term and long-term debt, is rising, suggesting higher inflation in the future. But the cost of financing government spending is historically low.
If the economy was picking up and the outlook improving, we should see rising interest rates and stock prices. The current low interest rates and volatile stock market suggest the opposite.
The government, like families, must break the habit of deficit spending.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.