As the Republicans write their $1.5 trillion tax cut legislation, they would do well to stay inside their budget. Even factoring in dynamic gains, the Treasury will suffer some revenue loss, and without cuts in federal spending be forced to borrow more—something it can scarcely afford to do.
Just like Greece and other profligate nations when they approached credit crises, the United States suffers from slow growth, a ballooning welfare state — in the particular case of the United States, a terribly inefficient health-care system — and growing public debt to support them.
Entitlements and interest payments now consume more than 60% of the federal revenue, and those are on track to take it all by 2027.
Households and businesses save a great deal but not nearly enough to finance both private investment and the federal appetite for debt. Consequently, the nation consumes more than it produces through a $500 billion annual trade deficit and by selling foreigners private assets — for example, choice real estate in New York, equities and corporate debt — and government bonds to finance it.
Net of what Americans own abroad, private citizens and Uncle Sam have more than $8.3 trillion in IOUs out to the rest of the world. That’s about 45% of gross domestic product, and it should easily surpass 60% by 2027.
In recent years, no nation has seen its indebtedness reach that level without a reversal of its trade deficit — and often an accompanying financial crisis and wrenching internal adjustments — as foreign investors lost confidence in its government’s ability to raise money to service its debt.
Of course, the dollar is the reserve currency — foreign central banks hold dollars and Treasuries to back up their currencies — and the United States, unlike other big debtor nations, can print dollars to service its debt.
This has created a false sense of security among politicians and most economists. Many conservative Republicans and pundits talk about big tax cuts and ignore CBO and private scorings that show those could not possibly be financed solely by the additional growth generated.
