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Abandon ‘the Children’

We need a better argument against the massive federal debt

Feb 11, 2013, Vol. 18, No. 21 • By MEGHAN CLYNE
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The debts we face now are not like any debts we have seen before. The U.S. debt-to-GDP ratio has spiked in the past only during wars or major crises like the Great Depression. Only once in our history has our debt as a percentage of GDP been higher than it is now—during and immediately after the massive mobilization for World War II, when it peaked at 108.7 percent. But that figure dropped dramatically in the 1950s, after the war ended and the United States enjoyed the economic boom made possible by the fact that virtually every other industrialized country in the world was in ruins.

Our deficits today, and our projected debt over the next two decades, are not climbing in response to catastrophes. They are not projected to come back down. The Congressional Budget Office (CBO) anticipates that they will rise inexorably, surpassing the World War II record and heading into uncharted territory sometime between 2025 and 2026. That’s when people now in their late teens, 20s, and early 30s will be working, paying taxes, and raising children—well before their children assume responsibility for the nation’s finances.

The main drivers of this debt are entitlement programs, and those, too, will pass solemn milestones on this generation’s watch. Medicare’s trustees project that the trust fund for Medicare Part A, which provides seniors with hospitalization coverage, will go bankrupt in 2024. Social Security’s finances, meanwhile, already slipped into deficit in 2010; the program’s trustees project that they will remain in the red indefinitely.

What’s more, because so much of the federal spending that will drive our growing debt is now locked in—as entitlement programs or as interest payments on existing debt—our fiscal and economic-policy options are increasingly limited. Paying down the debt will require massive structural reforms of major federal programs, the last thing any politician wants to tackle. Hence the series of fiscal-policy “crises” that have been engineered over the past few years. This has left citizens, businesses, and investors laboring under clouds of uncertainty about fundamentals like tax rates and government spending, which can hinder investment, spending, and hiring in the private economy.

These distinctive features of today’s debt problem are poised to exacerbate the two major consequences of excessive government debt: increased borrowing costs and economic stagnation. And those consequences will be most painful for today’s young Americans, not future ones.

Consider the danger of an interest-rate spike. The U.S. government has long been seen as one of the least risky borrowers in the world; the interest rates it charges set the pace for all other borrowing costs in America, including for private loans. Should the government have to pay significantly more to satisfy lenders concerned about its creditworthiness—or about the Federal Reserve inflating away the debt—American students, home buyers, entrepreneurs, drivers, and shoppers will pay more for their loans, too.

America’s creditworthiness will likely be most at risk as our debt begins to reach unprecedented levels—starting around 11 years from now and rising from there. That risk will coincide with the prime borrowing years of today’s young Americans. According to the National Association of Realtors, for instance, the median age of home buyers is 42; the largest age cohort of home buyers is 25-34; and younger buyers (aged 25-44) are more likely than older buyers (65 and up) to finance their home purchases (97 percent versus 56 percent). Americans in their early 30s or younger are thus most likely to be taking out mortgages right around the time interest rates could begin skyrocketing as America’s debt becomes unmanageable.

The same is true of other common types of borrowing. According to the Federal Reserve Bank of New York, the largest share of total student loan debt is held by Americans in the 30-39 age group. Today’s youngest voters, who might hope to go to graduate school in a decade or so, could find that climbing interest rates make student loans unaffordable. Meanwhile, according to the 2010 Survey of Consumer Finances, 72.8 percent of all vehicle loan balances are held by households headed by people aged 30-59, meaning today’s Americans in their early 30s and younger could pay steep interest rates when they are most likely to borrow to buy a car for home or business.

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