The Strategic Implications of U.S. Debt

In his testimony before the Senate Committee on Foreign Relations, CFR President Richard N. Haass discussed the “slow motion crisis” that is growing U.S. debt, as well as its principal causes and its consequences for U.S. national security. 

Takeaways:

United States public debt is fast approaching $14 trillion. It is now equal to roughly 75 percent of gross domestic product (GDP) and in a decade will reach between 80 and 90 percent of GDP. Depending on spending and revenue assumptions, it is a matter of when, and not if, debt comes to exceed GDP. This could well happen by 2030.

The mounting debt problem will not only not fix itself but will grow worse. There are at least two reasons for this. First, the principal driver of spending increases—entitlements such as Medicare, Medicaid, and Social Security—will likely become more, not less, of a factor as Americans retire in large numbers and live longer lives. Second, interest rates are near historic lows and are far more likely to rise than fall over future decades.

There are several strategic consequences of growing indebtedness:

• The need to finance the debt will absorb an increasing share of the U.S. budget, meaning proportionately fewer resources will be available for national security priorities including defense, intelligence, homeland security, and foreign assistance, as well as for discretionary domestic spending.
• Mounting debt will raise questions around the world about the United States, and will detract from the appeal of the American political and economic model. It will make others less likely to want to emulate and depend on the United States as questions arise about its ability to come together and make difficult decisions.
• Mounting debt will leave the United States more vulnerable than it should be to the whims of markets and the machinations of governments, including China, that could slow or stop accumulating U.S. debt as a signal of displeasure or even sell debt in a scenario they deem necessary to protect vital national interests. 
• Mounting debt could absorb funds that could otherwise be usefully invested at home or abroad, depressing already modest levels of economic growth. Making matters worse, high levels of debt and debt financing will increase concerns about the government’s willingness to maintain the dollar’s value or, worse yet, meet its obligations. This will cause foreigners in particular to demand high returns on their loans, something that will further increase the cost of debt financing, crowd out other spending, and depress growth. 
• The United States does not want to make high levels of debt the new normal. High debt levels remove flexibility that would be necessary if, for example, there were another financial crisis that required a large-scale fiscal stimulus or an unexpected major national security challenge that demanded a costly response. Keeping debt levels low enough to allow for a surge in spending without triggering a debt crisis seems to be a prudent hedge and worth paying a reasonable premium for.
• Mounting debt will hasten the demise of the dollar as the world’s reserve currency. This will happen as a result of a loss of confidence in U.S. financial management, as well as the related concern that what the United States will need to do to finance its debt will be at odds with what it should be doing to manage the U.S. and, indirectly, world economy.

To help relieve the debt burden, the United States will need to reform entitlements including Medicare, Medicaid, and Social Security; avoid “false solutions” from Congress, such as the sequester and failing to raise the debt ceiling; and increase economic growth in the United States through education, infrastructure, immigration, and tax reforms.