The Great Recession has provided a taste of
the U.S. Treasury borrowed $1.4 trillion,
nearly 10 percent of GDP, and it is expected to
borrow even more this year. Those giant defi-
cits are financing a massive effort to avoid a
repeat of the Depression of the 1930s some-
thing most economists believe to be a good
investment. But the borrowing will hardly
end when the economy recovers. President
Obama's 2010 budget projects almost $9 tril-
lion in additional deficits in 2011-20. By 2020,
trillion-dollar deficits will become the norm
even in years of solid economic growth and
low unemployment, rather than an unpleas-
ant aberration linked to a deep recession.
tirement of the baby boom generation and
the growth of health costs at a rate far faster
than the growth of GDP mean that govern-
ment spending on Social Security, Medicare
and Medicaid (which pays for most nursing-
home care for the elderly) is likely to explode.
By the nonpartisan Congressional Budget Of-
fice's reckoning, spending on those three pro-
grams alone is expected to reach 18 percent
of GDP in the year 2040. That is the average
level of revenues, measured as a portion of
GDP, that the federal government has col-
lected over the past 50 years. So, in this sce-
nario, there would be nothing left to pay for
everything from defense to interest on the debt.
ing deficits are a certainty.
President Obama's State of the Union address
was a veritable panegyric to the virtues of tax
cuts (although he is willing to raise taxes a bit
for the rich in general, and rich bankers in
particular). And now that Republicans have
become defenders of spending every last dol-
lar that Medicare recipients are currently
promised, the prospect of reining in entitle-
ment programs seems more remote than ever.
unrestrained entitlement growth, the federal
debt is projected to reach 100 percent of GDP
by 2023. By 2038, it would reach 200 percent
of GDP.
optimistic assumptions. They presuppose
that interest rates on government securities
will remain historically low, and that the
economy will grow at a historically healthy
clip. Indeed, in these projections, the average
real interest rate (the nominal rate less the
rate of inflation) actually falls from 4 percent
to 3 percent from 2013 to 2024 and remains
there throughout the period this in spite of
the projection that the annual deficits will in-
crease steadily from 2013 onward.
tion) and Peter Orszag (the current White
House budget director) estimated back in
increase in the deficit as a portion of GDP. By
that calculation, one would expect rates to in-
crease by at least four percentage points be-
tween 2013 and 2083. So interest payments
on the debt and thus the average annual