QUESTION: What are the driving factors behind the federal government’s growing debt burden?
ANSWER: Our growing debt is a direct result of the persistent, structural imbalance between federal revenues and spending.
On the spending side, healthcare programs for low-income households and the uninsured (Medicaid and Obamacare), retirement programs for senior citizens (Medicare and Social Security), and net interest payments largely dictate the trend in higher deficits and debt. How? Society is aging and living longer in retirement, spiraling health care inflation remains unchecked, and despite low interest rates, the U.S. has amassed such a large amount of debt that over the next 30 years, interest payments are projected to be the fastest growing category of spending.
Lackluster revenue growth also plays a role in driving our debt. Revenues are closely correlated with economic growth, but our economy can only grow as fast as it can produce output – the goods and services that others want to purchase (also known as GDP). In turn, output is constrained by the size of our labor force and the productivity of those workers, both of which are growing at a fraction of their historical averages. Why? Women are marrying later and having fewer children, which slows the rate of growth in the labor force. At the same time, government has deferred or ignored needed investments in worker productivity (e.g., education, technology, skill building). Complicating the potential for revenue growth has been a series of large tax cuts. As a result, revenue growth is projected to grow more slowly than spending for the foreseeable future.
Global emergencies like disasters, wars, and pandemics and the government’s policy response can also play a role in driving the debt, but the budgetary effects of these one-off events fade over time. Rather, the core of our debt problem is the underlying mismatch between the services Americans demand from their government and the price they are willing to pay for them.