Americans intuitively understand that debt is bad.
In our personal lives debt can lead to big monthly payments that eat away at our ability to do the things we want – go out to dinner, buy a new car, or save up for a down payment on a house. If we don’t pay that debt things get even harder. Our credit score gets dinged, making it more difficult for us to buy things in the future; our possessions get taken; and we ultimately may have to file for bankruptcy.
Most of us also appreciate that similar things happen to the federal government when they rack up enormous debts.
Eventually other nations won’t trust that we’ll pay back our debt and will demand higher interest rates; credit agencies may downgrade our sovereign debt rating, putting upward pressure on bond yields; and finally the United States is forced to default.
But one of the lesser-known impacts of the national debt is its impact on the economy. Although many on the left will tell you that deficits are needed to prop up falling consumer demand, it is an unavoidable economic fact that over time deficits hurt the economy.
Unfortunately, President Obama’s latest budget utterly fails to tame the deficit. Despite massive tax increases, Obama’s unwillingness to deal with the primary drivers of federal spending – Medicare, Medicaid, and Social Security – lead to permanent deficits.
Last week the Congressional Budget Office outlined the impact Obama’s deficit-laden proposal would have on the economy:
“Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income.”
More specifically, the CBO projects that GDP would be between 0.5 percent and 2.2 percent lower over the 2018-2022 period if we pass Obama’s budget.
The reason is something called the substitution effect. Larger deficits caused by Obama’s spending spree would cause the government to issue more bonds to pay off our creditors. The money investors use to buy the bonds creates a vacuum that prevents those funds from being used by companies to expand and hire. Of course, Democrats also want to increase taxes, especially on capital, a move that would also negatively impact growth.
“CBO’s report confirms what millions of Americans already know from experience: the president’s failed policies impede job creation, stifle economic growth, and ensure a diminished future,” House Budget Committee Chairman Paul Ryan said in a statement reported by The Hill.
Ryan couldn’t be more right. This is an issue about our future.
President Obama is currently doing everything he can to re-sell young adults on his candidacy. He’s touring campuses, talking up his student loan reforms, and promising to keep loan interest rates low. What he’s not doing is focusing on the number one concern that young adults have: jobs and the economy.
That’s why the CBO report is so important. Big debt equals fewer jobs and less economic growth. If Obama was serious about addressing the concerns young adults have he’d realize the crucial link between debt and jobs that is spelled out in the CBO report. He’d realize that young adults understand that you can’t just buy jobs…or elections for that matter.