The federal debt ceiling is set to rise to close to $14 trillion just before Valentine’s Day, which will move America one step closer to default, according to one renowned economist.
“[America] is going to default on its debt,” said David Henderson, editor of The Concise Encyclopedia of Economics and an economics professor at the Naval Postgraduate School in Monterey, California. He is a protégé of Nobel Prize-winning economist Paul Samuelson of MIT, who recently died at age 94.
“At some point, with the raising of the federal debt ceiling level, payments on Medicare, Medicaid, foreign adventures, . . . it just won’t be sustainable,” Henderson said. “Already they are set to be paying, by 2019, $700 billion on interest alone on the debt. The government will not be able to raise funds without paying substantially higher [interest] rates, too, so instead they may [say], ‘Hey, maybe let’s not pay and save a chunk.’ “
The government could do this in several ways, including paying no interest and only some principal, paying some interest on no principal, or paying nothing on interest or principal, Henderson added.
“If it happened, it would happen very quickly,” he said.
Syndicated columnist and longtime political analyst Cal Thomas thinks Congress’s decision to raise the debt ceiling shows the lawmakers do not understand basic laws of economics.
“[Raising the national debt ceiling] is part of a larger problem, and, that is, we continue to spend beyond our means,” Thomas said in an interview for this story. “The world, predominantly China in this case, cannot continue to buy U.S. debt. We should be concerned. No nation can live constantly spending money it does not have.
“There are laws of economics, laws of nature, and if you violate economic laws, you splat economically,” he added. “People and nations cannot live like this.”
Expects Problem to Persist
Henderson says the national debt and federal budget deficits will be perennial issues. Unless many social insurance programs are reformed and more economic deregulation is implemented, there’s little chance America will avoid default, he says.
“We would need a ‘Ross Perot-squared’ politician, in a sense, to fix this,” he said, referring to the billionaire businessman from Texas who ran for president in 1992 as a third-party candidate and received 19 percent of the popular vote, the highest percentage for a third-party candidate since Teddy Roosevelt in 1912. Perot’s major themes were attacks on soaring government spending, entitlement program costs, and indebtedness.
Henderson said he tells his college students “the federal debt and deficit are going to be the major public policy issue for the rest of their lives.” He warns unless the government raises the ages for Medicare and Social Security eligibility and takes other steps to control entitlement program costs, “avoiding the problem cannot be done. Things would have to be aligned just right; otherwise it is more likely for some kind of default.”
Deficits Increasing Under Obama
Thomas notes Democrats who protested President George W. Bush’s budget deficits have remained nearly silent in the face of President Obama’s much larger budget gaps. The federal government ended the last fiscal year with a $1.4 trillion budget deficit, and Obama projects $1 trillion annual budget deficits for the foreseeable future.
“I find it interesting that Democrats expressed much alarm when the budget deficit under President Bush was around $450 billion but now are not raising a peep when it is in the trillions,” Thomas said. “I think there ought to be a referendum or a public vote on whether we want the Congress to continue to mortgage our financial future, because the main problem is the politicians just do not care.”
Bipartisan Vote Buying
Thomas says both parties are guilty.
“They want to buy votes and do not care [about the deficit]. Democrats want to expand entitlement programs because giving more people a government check wins them votes in the next election. Republicans have done the same,” Thomas said.
“Politicians want all the perks of office and are willing to do this to keep their job. That is what it is all about. They need to be able to dole out favors to keep their perks. The Founding Fathers understood this, which is why they were in favor of limited government,” he added.
Henderson agrees politicians lack incentives to combat the budget deficit and national debt. As a result, he says, they are not acting in the nation’s long-term interests.
“There is just no incentive for any individual within the government to care about this,” Henderson said. “Look at how cavalier President Bush was and now also how President Obama is. . . . Then just look at Congress. This is the reason we will get into a default—because we are not acting in the long-term” interest.
Thomas also blames the belief many policymakers have in Keynesianism, the economic approach promoted by British thinker John Maynard Keynes in the 1930s. He advocated government spending and deficits to stimulate economic growth.
He calls it “a cultlike philosophy that encourages debts and says there is only one economic pie and it is all about what share of the pie people take,” he said.
Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.