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The United States is on a fiscal collision course. Decades of unfunded entitlement promises, demographic changes, and a dysfunctional political process combine to drive the federal budget deep into debt. This poses a threat to the American economy and prosperity. According to projections by the nonpartisan Congressional Budget Office, public debt is projected to approach 100 percent of gross domestic product in the next 10 years and will continue growing on a rapid upward trajectory from that point.
Economists from across the ideological spectrum and from diverse institutions, including the International Monetary Fund, have identified that public debt levels that approach the size of a national economy and that are on an upward trajectory affect growth significantly and negatively. High and rising debt drags down growth. The implications are broad and include lower wages for workers, higher interest costs for the government and the private sector, less private investment in productive sectors of the economy, and much greater risk exposure in the event of a major crisis.
Countries around the world that engaged in unsustainable spending and borrowing, like Argentina and Greece, have defaulted on their debt. While the United States is unlikely to default by becoming unable to pay its creditors because it prints its own money, it can default on the value of its debt in other ways, namely through inflation. Inflation is default by other, less direct means, however. Instead of default on debt by failure to pay creditors sufficient currency, default by inflation occurs by devaluing the currency, thus returning less value to creditors than they had initially loaned money over to the government.
Extreme inflation, especially when it appears suddenly and occurs with significant magnitude, disrupts economic activities and can cause a recession with grave financial consequences for businesses and workers. Moreover, inflation destroys the savings of Americans, taxing them by reducing the value of every dollar in their savings account. The United States can avoid fiscal collapse by adjusting the policies that are driving the country deeper into debt. The primary culprits here are social and economic programs that have been growing out of control for decades.
Approximately two-thirds of federal spending grows on autopilot based on laws that exempt these programs from the annual budget process. Referred to by Washington insiders as mandatory spending or entitlement spending, the list of programs that fall in this category include Medicare, Medicaid, ObamaCare, Social Security, welfare and other income security programs like food stamps and federal housing assistance, as well as student loan programs, and the refundable part of the child tax credit.
As these mandatory programs continue to grow, the portion of the federal budget that Congress appropriates every year, known as discretionary spending, becomes less and less significant in the larger picture of how to constrain federal spending and the growing national debt. Congress has the power to change these spending programs. It is a lack of will rather than a lack of ability that keeps autopilot spending growing unchecked.
Many support welfare reform to ask those receiving assistance to engage in work or prepare for work to attain independence and self sufficiency. Fewer understand the need to adjust benefits like Medicare and Social Security, which require individuals to pay specific taxes during their working years to qualify for benefits in their old age or when they went through a disability that prevented them from supporting themselves.
Despite the different nature of the programs, Medicare and Social Security are by far the most significant drivers of the impending fiscal collapse. As the federal budget becomes further unsustainable, change is inevitable. Lawmakers should approach these changes with deliberation and reform current policies gradually to enable the American people to adjust to them without doing unnecessary harm. Not reforming is not an option.
In the absence of reforming entitlement programs to reflect longer life expectancies with higher eligibility ages, lower birth rates by reducing the cost of benefits for younger generations, and higher health care costs by introducing more choice and market forces in the health care sector, the American people will still pay the costs of the fiscal collapse, be it through higher taxes, greater inflation, and a smaller economy that may put the American dream out of reach for the next generation. We cannot escape from this fiscal reality. But we can face it with dignity and conviction.
Romina Boccia is director of the Grover Hermann Center for the Federal Budget with the Heritage Foundation. This column is part of a series on budget policy and entitlement reform appearing this month in The Hill.