by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The U.S. economy is at a critical juncture. The Federal Reserve’s very easy monetary policy during the past few years has been the root of both good and ill: reduced unemployment on the one hand and increased financial risks on the other. The danger now is that the inevitable rise in interest rates over the next few years could cause substantial losses to banks and investors that, in turn, could weaken the economy’s overall performance and lead to another economic downturn. …
… For the longer term, the economy faces a serious issue of preventing the projected explosion of the national debt. The ratio of the national debt to GDP has doubled in the past decade, from roughly 35% to about 75%. It is projected to start rising again in the near future, heading to 100% of GDP and higher unless legislative action is taken.
It is impossible to avoid the growth of the government debt by limiting increases in government spending on defense or on the budget items that are labeled as “nondefense discretionary,” i.e., federal-government domestic spending other than Social Security and Medicare. The defense budget is already projected to decline by 2025 to only 2.6% of GDP, the lowest level in the past half-century. Similarly, the nondefense discretionary outlays are already projected to decline by 2025 to only 2.5% of GDP, also the lowest level in the past half-century.
Fortunately, the growth of the debt can be limited and the ratio of debt to GDP can be pushed back to earlier levels without cutting outlays for Social Security and Medicare and without raising tax rates. The key is to slow the growth of those outlays and to limit the spending that is built into the tax code by a wide range of tax subsidies to individuals and businesses. This should be the task of the current Congress and the current President, but I think it will have to wait until after the election in 2016. That, together with tax reforms designed to stimulate faster growth, should be the legislative priority in 2017.