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Heading for Trouble
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Worse yet, we have put ourselves in this fiscal hole at exactly the wrong time, because we are committed to paying enormous amounts in Social Security and Medicare as the huge baby boom generation starts to retire over the next few years. This means that the future of our economy and way of life may be dramatically affected by the choices we make today for managing the nation’s finances. And if we delay facing up to these choices, we will likely experience even more difficult economic conditions in the years to come.
To understand how we got into this mess—and what we’ll need to do to get out of it—we don’t need to understand the technical aspects of the federal budget, but it is extremely helpful to understand at least a few key points.
The Deficit and the Debt
The first point to understand is that we are really talking about two tightly interrelated problems here, the deficit and the debt. The short-term problem we face is that the federal government routinely runs a deficit – that is, in most years the government is spending much more than it takes in.
Deficits require the government to borrow money to cover its bills, and the government is routinely running big deficits, not just for emergencies or during recessions, but for everyday operation expenses. This adds to the long-term problem, the ballooning national debt, which is the total amount owed by the federal government. And just as when there's a huge balance on a credit card, interest payments continue to grow.
So if the government can’t cover its bills it runs a deficit. And every time it does this, it increases the national debt, which is like having a huge balance on your credit card. (Find out more about the two kinds of federal debt).
One of the key concepts economists use when they’re talking about the federal deficit and the national debt is how big these numbers are in relation to the gross domestic product (GDP), which is the total value of all goods and services produced in the United States. In effect, this means the size of our deficit or debt in relation to the total size of the U.S. economy.
Most economists say this is an important benchmark and the best measure of how the deficit and debt are affecting the rest of the economy. The larger these are in proportion to GDP, the greater the impact they’re likely to have. The national debt, for example, could start taking up too much investment cash that could otherwise be put into private industry, pushing up interest rates for everybody.
Current projections by the White House budget office and the Congressional Budget Office show the deficit and the debt both declining in relation to GDP over the next few years. Those projections, however, make some major assumptions, such as that there will be no new spending programs over the next few years. The projections also largely ignore one looming problem, which is the next concept you need to know.
The third term that gets thrown around is unfunded liabilities, or fiscal exposure, a much larger number than the official national debt. Whereas debt is money we’ve already borrowed, fiscal exposure is how much we’ll need to spend in the future to keep the promises we’ve made, such as to Social Security and Medicare recipients.
See the Government Accountablity Office's estimates of fiscal exposures in 2007 here:
In this chart, fiscal exposure dwarfs the national debt, $42 trillion to $10.8 trillion. Combine the exposure, the debt and various other liabilities, and the Government Accountability Office estimates we face about $53 trillion in unfunded liabilities over the next 40 years. Spending on Social Security, Medicare, interest payments on the debt and other mandatory spending already outstrips defense and domestic discretionary spending, and would completely crowd such spending out within a generation if nothing is done.
In sum, because we fail to live within our means we’re mortgaging our future and preparing to leave a big mess to young people and to future generations. That’s why it's vital to face up to the nation’s finances and do something while we still have time. These are daunting problems – but fortunately, as anyone who has ever dug him or herself out of debt knows, they’re not impossible.
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»A new report finds the main problem in getting the public to deal with our fiscal problems isn't opposition to tax increases or spending cuts -- it's their lack of trust in the government to spend their money wisely.