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American Profligacy and American Power
The Consequences of Fiscal Irresponsibility
ROGER C. ALTMAN is Chair and CEO of Evercore Partners. He was U.S. Deputy Treasury Secretary in 1993-94. RICHARD N. HAASS is President of the Council on Foreign Relations. He was Director of Policy Planning at the U.S. State Department in 2001-3.See more by Roger C. AltmanSee more by Richard N. Haass
The U.S. government is incurring debt at a historically unprecedented and ultimately unsustainable rate. The Congressional Budget Office projects that within ten years, federal debt could reach 90 percent of GDP, and even this estimate is probably too optimistic given the low rates of economic growth that the United States is experiencing and likely to see for years to come. The latest International Monetary Fund (IMF) staff paper comes closer to the mark by projecting that federal debt could equal total GDP as soon as 2015. These levels approximate the relative indebtedness of Greece and Italy today. Leaving aside the period during and immediately after World War II, the United States has not been so indebted since recordkeeping began, in 1792.
Right now, with dollar interest rates low and the currency more or less steady, this fiscal slide is more a matter of conversation than concern. But this calm will not last. As the world's biggest borrower and the issuer of the world's reserve currency, the United States will not be allowed to spend ten years leveraging itself to these unprecedented levels. If U.S. leaders do not act to curb this debt addiction, then the global capital markets will do so for them, forcing a sharp and punitive adjustment in fiscal policy.
The result will be an age of American austerity. No category of federal spending will be spared, including entitlements and defense. Taxes on individuals and businesses will be raised. Economic growth, both in the United States and around the world, will suffer. There will be profound consequences, not just for Americans' standard of living but also for U.S. foreign policy and the coming era of international relations.
THE ROAD TO RUIN
It was only relatively recently that the United States became so indebted. Just 12 years ago, its national debt (defined as federal debt held by the public) was in line with the long-term historical average, around 35 percent of GDP. The U.S. government's budget was in surplus, meaning that the total amount of debt was shrinking. Federal Reserve officials even publicly discussed the possibility that all of the debt might be paid off.