A report released this month by the Cato Institute suggests that the United States growing publicly held federal debt could lead to another financial crisis. The debt, which has doubled in the last seven years, now totals more than $13 trillion. Publicly held debt, or the amount of the federal debt which is held by non-government businesses and individuals, is now at $107,000 per US household. Cato says that the financing of government debt through tax collection creates distortions as much of the government spending goes to subsidy and benefit programs serving to reduce work incentives and savings. According to economist Edgar K. Browning, who was making this point back in 2008, “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”
Growing debt might also cause a reduction in private investment and saving, the report adds, saying “businesses may be reluctant to make long-term investments if high and rising debt creates fears of tax increases down the road.” The publicly held debt is a different measure from gross debt, which now stands at more than $18 trillion. Two-thirds of Americans believe tackling the debt should be a priority for Congress, according to a recent survey. As a federal shutdown looms and the Chinese economy continues to contract, the report highlights the necessity of tackling the debt before another crisis hits. It says “America may face unforeseen military challenges or endure another deep recession in coming years, which would make deficits worse than the CBO currently projects.”
The report says that, historically, debt has always risen in times of war before being “trimmed back” in peacetime. It adds that “Recently, however, deficits have been chronic and official projections show a nonstop gusher of red ink in coming years. When measured as a percent of the economy, federal debt has never been as high during peacetime as it is today.”
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US Economic News, US Government Waste