It’s Europe that has the big financial worry, right? The good ol’ U S of A is relatively safe for the moment, right? Guess again. It’s later than you think.
Two recent reports on the subject make for grim reading. The first, The Untold Story of America’s Debt (PDF link), is just out from Deloitte University (a research arm of Deloitte & Touche accountancy) says our debt crisis is bigger than we think, and that solving the problem is much harder than we think. Current projections, scary enough in their own right, depend on favorable assumptions (like cuts to Medicare) that are not realistic at the moment. From the conclusion: “Solutions that focus solely on cutting spending, raising taxes, or improving GDP growth are unlikely to slow the rising U.S. debt.” (By the way, one of the co-authors of the report is William D. Eggers, who is an old friend of mine from his days at the Reason Foundation. You may be more familiar with his brother, Dave Eggers. Fitting: Any serious plan to cut our debt might justly be called A Heartbreaking Work of Staggering Difficulty.)
The second report, USA, Inc.: A Basic Summary of America’s Financial Statements (PDF link), is actually more than a year old but I missed it somehow, and it fits well with the Deloitte report. USA, Inc. comes from venture capitalist Mary Meeker of Kleiner, Perkins out in Silicon Valley, and is an examination of the United States government as if it were a private company. It is unfortunately written dry prose; why don’t they just come out and say that any private company with this record would have its entire management fired if not jailed, and the company forced into bankruptcy restructuring. But there is no getting around the problem:
By the standards of any public corporation, USA Inc.’s financials are discouraging. True, USA Inc. has many fundamental strengths. On an operating basis (excluding Medicare and Medicaid spending and one-time charges), the federal government’s profit & loss statement is solid, with a 4% median net margin over the last 15 years. But cash flow is deep in the red (by almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.’s net worth is negative and deteriorating.
The report takes a turn for the better in the middle:
Take a step back, and imagine what the founding fathers would think if they saw how our country’s finances have changed. From 1790 to 1930, government spending on average accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of GDP.
It’s likely that they would be even more surprised by the debt we have taken on to pay for this expansion. As a percentage of GDP, the federal government’s public debt has doubled over the last 30 years, to 53% of GDP. This figure does not include claims on future resources from underfunded entitlements and potential liabilities from Fannie Mae and Freddie Mac, the Government Sponsored Enterprises (GSEs). If it did include these claims, gross federal debt accounted for 94% of GDP in 2010. The public debt to GDP ratio is likely to triple to 146% over the next 20 years, per CBO. The main reason is entitlement expense. Since 1970, these costs have grown 5.5 times faster than GDP, while revenues have lagged, especially corporate tax revenues. By 2037, cumulative deficits from Social Security could add another $11.6 trillion to the public debt.
The problem gets worse. Even as USA Inc.’s debt has been rising for decades, plunging interest rates have kept the cost of supporting it relatively steady. Last year’s interest bill would have been 155% (or $290 billion) higher if rates had been at their 30-year average of 6% (vs. 2% in 2010). As debt levels rise and interest rates normalize, net interest payments could grow 20% or more annually. Below-average debt maturities in recent years have also kept the Treasury’s borrowing costs down, but this trend, too, will drive up interest payments once interest rates rise.
Sheesh. I think I’ll cheer myself up by going back to reading about the Eurozone crisis.