Most of the time, it's perfectly logical to tune out the tomfoolery in Washington and focus on more immediate things, like your kids' homework, the price of gas, or the Charlie Sheen self-implosion tour. But the growing battle over America's mounting debt is one matter worth paying attention to.
The debt debate has all the usual hallmarks of glaze-over politics: Indescribably large numbers in the trillions, overwrought scare tactics by Republicans and Democrats, and jargon that seems designed to obfuscate rather than enlighten. But the gargantuan U.S. debt will eventually become every American's problem, and understanding the issue now could help you prepare for a future when government is less generous and citizens need to contribute more. Here's a cheat sheet highlighting five things all citizens ought to know:
The debt is a real problem that won't solve itself. The national debt has been a big worry before, such as in 1992, when Ross Perot mounted an independent presidential bid based largely on his plan to get federal spending under control. The problem went away over the next eight years, mainly because of modest changes in spending and a booming economy, culminating in the dot-com boom. But the debt is far bigger now and will continue to get worse, even under the rosiest scenarios. In 1992, when Perot was mounting his crusade, the total national debt was about $4 trillion, which was about 64 percent of annual GDP. By 2001, the debt had shrunk to 56 percent of GDP. But it has mushroomed since then and is now more than $14 trillion—slightly more than 100 percent of GDP. Without action it will only get bigger, largely because of automatic spending increases for Medicare, Medicaid, and Social Security. Healthcare spending in particular is bankrupting the government, because the cost is rising far faster than overall inflation—or government revenue.
Ratings agency Standard & Poor's, which grades big borrowers' ability to pay back their loans, recently issued one of the strongest signals yet that America's debt load is becoming unsustainable. While S&P still rates U.S. Treasury securities as AAA—its highest rating—the firm has now put the U.S. government on "negative watch," which means it may downgrade America's debt rating in the future. If that happened, it would trigger a cascade of problems. The government would have to pay higher interest rates to borrow, which means more and more tax revenue would go not for government services, but for interest on the debt. That would probably force abrupt tax hikes and spending cuts, and roil global stock and bond markets.
The United States isn't broke. Not even close. The problem isn't that America is running out of money, it's that the government spends far more than it takes in. This year, tax receipts and other forms of revenue will only cover about 57 percent of what Washington spends. The government will borrow, by issuing Treasury securities, to cover the other 43 percent. America remains a wealthy country, and if a crisis required it, there would be plenty of ways to raise the money needed to balance the federal budget. The reason there's such a big battle over deficit spending is that nobody wants to be the one to pay more in taxes or give up benefits. We all want somebody else to pay.
There are plenty of solutions. The ugly battle in Washington makes it seem like reducing the debt is an intractable problem. It's not. The politics might be intractable, but there are plenty of well-understood ways to make Uncle Sam solvent again. The fiscal commission that President Obama set up last year proposed a mix of tax reforms and spending cuts that would do the trick, with about one-third of their solution consisting of tax increases and two-thirds coming from spending cuts. Another panel, led by budget experts Alice Rivlin and Pete Domenici, came up with a different set of solutions comprised about equally of tax hikes and spending cuts. And for years the nonpartisan Congressional Budget Office has published detailed "spending and revenue options" for solving the problem. Washington politicians have ignored virtually every sound idea for managing the debt, preferring to finance unsustainable spending with indefinite borrowing. The problem isn't a lack of solutions, it's craven politicians unwilling to do anything that might upset voters.
The debt problem will affect most Americans. This is why people need to pay attention. Most politicians are still trying to tell their constituents that somebody else will bear the cost of paying down the debt. That's sophistry. The debt is so big that nearly everybody who gets some benefit from the government is going to have to give up something. There aren't nearly enough wealthy people to solve the problem, no matter how high taxes went on the rich. That means there will almost certainly be fewer deductions or even outright tax hikes for middle- and working-class Americans. Medicare and Medicaid recipients will have to bear more of the cost of their healthcare, because that's where a huge and growing chunk of federal spending goes. The official retirement age for Social Security benefits will probably go up faster than scheduled, with fewer benefits for wealthy enrollees. And many people dependent on grants or subsidies or other types of federal funding will get less.
The whole political battle is over who will pay to fix the debt. Tea Partiers and Republicans, led by Rep. Paul Ryan, the House Budget Committee chairman, want to slash spending with few or no new taxes, which would put the burden on practically everybody who receives some government benefit. President Obama and most Democrats favor a mix of new taxes and spending cuts. In the end, a compromise will probably require the pain to be spread widely, with most constituencies giving a little and some giving more. But that will only happen after a rancorous, high-stakes battle that could ignite years of class warfare.
It doesn't need to happen immediately. Spending cuts and tax hikes don't need to happen this year to prevent a crisis, and the coming fight over raising the "debt ceiling"—a self-imposed limit on how much the U.S. government is allowed to borrow—is merely a proxy for the much bigger brawl over spending and taxes. Here's what does need to happen: Policymakers need to develop a bipartisan debt-reduction plan with inviolable targets for reducing the debt over the next decade. A little bit at a time would work, as long as the plan were passed into law and inoculated against the usual lobbying efforts that generate special loopholes for favored groups.
Standard & Poor's, in its warning about U.S. debt levels, hinted that 2013 might be the make-or-break year that an alarming debt downgrade could happen, if there's no plan in place by then. Some budget experts are encouraged that Republicans, led by Ryan, have finally proposed a set of fixes making it clear that Medicare and Medicaid, no matter how popular they are, are unaffordable. Obama countered with his own plan for protecting the most cherished benefits while asking for a bit more sacrifice from everybody. But nobody has yet asked voters to accept specific cutbacks, and it seems unlikely that Congress or the president will seriously consider any big changes before the 2012 elections. So voters should probably prepare for two years of brinksmanship and a tense down-to-the-wire drama. This time, it's for real.
Clarified on 4/18/11: This story has been clarified to indicate that Standard & Poor's ratings apply to borrowers.