This is a companion post to “America’s Future – Continued”. It represents my expanded thoughts about Fiscal Policy, one of the core existential threats to our democracy that I outlined in that earlier post:
Fiscal Policy: We have a dangerously high and growing national debt, with deficits forecast to increase by at least $1 trillion every year for the foreseeable future. That is a fiscal time bomb we must deal with soon. Even with the best of intentions and most sincere political cooperation, along with reality based economic planning and decision making, re-establishing sound fiscal management will be very difficult. It requires hard choices in taxation and spending policies as well as a significant level of education for and buy-in from the electorate.
Our existing fiscal irresponsibility has mostly been possible because the United States late in World War II led the effort to define and implement rational international economic and monetary policy. Through its ongoing leadership over the last seven decades the US has generally been (until 2008) a source of international economic stability and a safe haven for financial investment. As a result of that long term stability, we still enjoy the lowest interest rates in the world, and the dollar is the primary reserve currency in global transactions today. Nothing protects our favored nation status though except continuing stable performance. Of late our divisive political situation is beginning to stress that.
In the last couple of decades we have begun playing a dangerous game with periodic political brinkmanship threatening to default on our debt obligations. We are again facing that political and economic catastrophy as I write this. That will eventually catch up with us and lead us to a diminished position in the view of the international economic community; and one actual default, even if only for a few hours, would likely create international panic and probably change the global financial equation indefinitely. Suddenly, we would be seen as economically unstable by the world’s financial institutions. It might even endanger the dollar as the primary reserve currency in financial transactions as well.
But even if none of that happens immediately, after a while (some years perhaps, but soon) our real or perceived political instability as well as our mounting debt load will begin to limit our economic growth. And interest rates are not going to remain as low as they have been for the past dozen years. Future borrowing will become more expensive as existing federal debt matures. That in turn will lead to substantially larger federal debt service expense going forward. As debt continues to grow and debt service expenses grow, less federal revenues will be left to spend on other legitimate domestic financial obligations.
It is clear that during the Covid pandemic balancing the federal budget can’t be the economic priority. However, left unchecked, continued deficit spending at the rate it has been over the two decades before the pandemic, or any level near or above our GDP growth rate, will threaten our longterm national economic stability. Unfortunately addressing and fixing the root cause of this threat can’t happen in today’s political environment.