As long as the economy grew faster than the deficit, we could continue to grow the deficit.
Think of it like taking out a loan to finance an investment that delivers future returns. It makes sense to borrow money to finance a future project whose future return exceeds the investment. However, it does not make financial sense to borrow money for something that will go down in value.
The Federal government spends more money than it takes in through “revenue”. As long as the economy grows faster than the deficit, the “borrowed” money is yielding a positive return on investment (sort of).
A problem occurs, though, when the deficit grows faster than the economy – and annual interest grows and grows and grows, gradually taking up more and more of the revenue coming in. This is not sustainable.
Yet since about 2008, the deficit is growing much faster than the economy – and eventually the costs (interest) of the deficit eat up the money available for spending.
This is where we are – as the deficit has exploded since about 2008 (chart from U.S. GAO):
As the US GAO says:
The federal government’s debt is growing faster than the economy—this is unsustainable over the long term.
The current problems began in the 2007-2010 financial crisis and government “bail outs” – then, public health commandeered the country in 2020-2022, shutting down our economic engines. The Federal government decided to sort of print money and mail checks to people to keep things somewhat functional. Ultimately, failed public health policies did not stop Covid but did bankrupt the country as the deficit exploded.
We are now paying the price through inflation (which devalues our dollars). There will be painful cuts to spending and layoffs in government, academics and Beltway Bandits. We are reaching a point where we have no other choice – we must control spending. You may be thinking – we just need higher taxes! But higher taxes eventually choke the economy, slowing the economy down even more.
This issue is not specific to the new Administration – here’s a similar report by the GAO in February of 2024 under the Biden Administration: The Nation’s Fiscal Health: Road Map Needed to Address Projected Unsustainable Debt Levels | U.S. GAO
The new Administration is – for the first time – scouring Federal ledgers to identify where money is actually spent and whether we are seeing a positive return on investment. Much spending is not producing a positive ROI, and much has been identified as fraud.
The process of doing this is painful. We can no longer spend money on wasteful projects – we no longer have a choice. The alternative is we eventually bankrupt the country with massive inflation or a Depression that makes The Great Depression look like a mild country walk.
