Bruce Yandle

Opinion contributor

Almost inevitably, it seems, the last question I receive after giving an economic outlook presentation is about the deficit. Why the last question? I sometimes wonder. Perhaps it’s the same reason the issue seemed to be on the backburner this election season.

Maybe it’s because the size of the federal deficit has little bearing on next year’s GDP growth or unemployment rate. After all, people attending outlook conferences are especially interested in the near term. Or perhaps it’s because President Trump’s trade war and migration battles, generally raised early in Q&A sessions, can have immediate effects on local manufacturing and agricultural operations.

But maybe, just maybe, it’s because most people think the deficit doesn’t really matter. This in spite of the fact that in 2018, according to the U.S. Treasury’s public debt reckoning, we will see “the highest annual debt issuance since $1.586 trillion in 2010, when the U.S. economy was still crawling out of a recession.” But let’s face it, we have been hearing about growing deficits and debt most of our lives, and so far, nothing serious seems to have happened.

Soon we may not be able to pay interest on debt

Whatever the reason for our benign neglect, the now-rapidly growing deficit does matter — and the interest cost of the debt is why it matters. It’s one thing to run in the red. It’s something else entirely to lack the wherewithal to make interest payments, and that’s where we may be heading.

According to the Congressional Budget Office (CBO)’s September estimates, given just before the books were closed for the 2018 fiscal year, the “Big Five” spending categories for Federal government outlays for the year were as follows: Social Security benefits, $918 billion; Medicare, $563 billion; Medicaid, $356 billion; military, $552 billion; and net interest on the public debt, $343 billion.

The federal deficit for the 2018 fiscal year is estimated to be $895 billion, up $222 billion from 2017. Of the Big Five, interest payments have grown the fastest, rising 19.2 percent in 2018. Each of the other categories is up by less than 10 percent.

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There are three reasons why interest costs are rising so much. First, the level of debt has grown significantly in the last year; second, interest rates are higher; and third, inflation is rising, which raises the interest cost on inflation-adjusted bonds.

We can get a sobering view of the deficit spending problem by looking at the CBO’s estimate for federal government spending beyond the Big Five categories. The amount spent for all the rest of government sums to $1.148 trillion — or just a bit less than four times the interest cost of the debt.

Now, let’s play some number games. Assume that all the Big Five expenditures except for interest costs are held constant. Then suppose the average interest rate paid by the U.S. Treasury for all debt outstanding rises from the September 2018 level of 2.86 percent to the September 2008 level of 4.652 percent. Put another way, what if the interest rate on the debt rose by 62 percent?

It's time to cut spending now to avoid disaster

If so, America’s debt interest costs would rise from $343 billion to a whopping $555 billion, which is slightly more than current defense spending. To finance a cost equal to that of a second American military, we’d either have to make painful cuts to all the other categories — in the Big Five and beyond — or borrow even more, which would of course mean more total debt and even more interest costs. That’s not a solution at all.

A quick scan of the possibilities puts us face-to-face with the tough — if not impossible — political challenges. Social Security cuts? No way. Medicare? Come on. Give me a break. Medicaid? Not in your lifetime. Defense? Wait a minute, we just started building it back up. Somewhere else in government? EPA, the big one? Not a lot of wiggling room here.

That’s an oversimplification, but a useful one. Maybe we can dodge the bullet. But we can’t deny that the federal deficit is a serious problem, and one that we the living must face.

We can’t know when the bite will come, but all it would take is for interest rates, driven by inflation and a stronger world economy, to climb toward levels seen just 10 years ago. The Fed has promised three more rate increases in just the next year. Indeed, the CBO is predicting even higher future rates.

The solution? Start cutting the growth of spending now. The economy is booming. Now’s the time to get serious.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson University College of Business and Behavioral Science, and coauthor of September’s “The Economic Situation” policy brief.