Financial Crisis Looming Due to Mounting Federal Debt: Experts

The U.S. is in “terrible shape” financially and is “flying blind in mountains of debt” that will cause future generations to “reap the whirlwind of an irreparable economic disaster” unless immediate action is taken, according to some witnesses and members of the House Budget Committee.

Witnesses testifying at the March 29 hearing on the country’s financial outlook uniformly recommended cutting the size of the federal budget deficit and reducing the national debt, which has reached $31.4 trillion, the largest dollar amount in history and the largest percentage of the nation’s gross domestic product since World War II.

Even some Democrats, who have uniformly defended President Joe Biden’s recent spending initiatives and proposed 2024 budget, acknowledged that the growing national debt poses a serious financial problem though they urged moderation in making spending cuts.

“Deficits and debt are projected, especially in the next decade, to reach levels that, simply, none of us would be comfortable with,” said Ranking Member Brendan Boyle (D-Pa.).

“So we’re seeing a similar picture. And we do have very different ideas as to where the solutions lie.”

Slowing Spending

Chairman Jodey Arrington (R-Texas) blamed the current inflation on the “avalanche of new spending” under the Biden administration that added $6 trillion to the national debt.

Agreeing that spending should not continue at the same rate, Mark Zandi, the chief economist at Moody’s Analytics, disagreed on the effect of the large federal spending bills passed over the last three years.

“The pandemic rescue packages, beginning with the Cares Act that was passed three years ago March of 2020 through the American Rescue Plan passed in March of 2021, have gone a long long way to restoring the economy to full employment,” Zandi said.

Noting that the unemployment rate is now at 3.6 percent, which is considered full employment, Zandi said, “That would not have happened without the very aggressive muscular response.”

Nevertheless, the level of U.S. debt will create serious problems in the future, especially by driving up interest rates, and must be addressed, according to Zandi.

“I do think it does require both tax increases and government spending restraint to be able to do that going forward,” he said.

Others more urgently advocated for deep cuts in federal spending.

Scott Hodge, president emeritus at the Tax Foundation, called for the elimination or privatization of a number of federal programs.

“Many of these budget problems are being driven by entitlement programs that are already bankrupt on a cash basis and must rely on a massive infusion of general revenues to keep them afloat,” Hodge said.

“The federal budget is still running failing business enterprises such as the Tennessee Valley Authority, Amtrak, the Corporation for Public Broadcasting, and the U.S. Postal Service.

“These and many more federal assets should be sold off and the proceeds used to pay down the national debt.”

Agreeing in principle that the debt should be reduced, Boyle questioned the plan endorsed by a number of Republicans including Speaker Kevin McCarthy (R-Calif.) to balance the federal budget in 10 years without raising taxes or cutting Medicare or defense spending.

That approach would not be successful, according to Zandi. “It would require a complete cut of all discretionary, non-defense spending,” he said.

“It would be the fodder for a recession and … the fallout in terms of jobs and unemployment would be quite significant. So I don’t think that proposal is at all feasible or realistic.”

Planned Future

Expert witnesses were aligned in their opinion that the United States needs to be guided by a clear fiscal policy rather than moving from one spending program to another.

“The plain and simple and hard truth is the United States is [a] declining great power, and China is rising,” said David Walker, former comptroller general of the United States.

“Today, America is flying blind in mountains of debt, and without about navigation system,” Walker said, urging the committee to work toward a long-term financial strategy rather than simply approving an annual budget.

John Taylor, professor of economics at Stanford University and former undersecretary of the Treasury echoed the idea.

“Going forward, I think we need a renewed set of principles. Based on experience as well as economic theory, I recommend this alternative, a stimulus mantra: permanent, pervasive, and predictable,” Taylor said, meaning the government should deal with the nation’s finances in a comprehensive and stable manner.

“With uncommon courage and common-sense economic policies, we can stave off a debt crisis. We can strengthen America’s balance sheet and we can save the Union,” Arrington said.

“We have different views on how to do that. And I hope that we can at least agree that this current path is completely unsustainable.”