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PUTNAM INVESTMENTS |
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I think we all know in our bones that America is at a critical inection point. We reallydo ace a choice between decline and renewal. I we want to keep the Americanpromise o a better lie or our children, we absolutely must make a transition awayrom public debt, leverage, and excessive debt-ueled consumption to a neweconomic model based on higher personal savings, public solvency, more invest-ment, more exports, more new business ormation, and more rapid job creation. Thatwon’t be easy, but the alternative is worse. The status quo course we’re on right nowis dangerous and unsustainable.
The road to insolvency
Since the turn o this new century, America’s scal health has taken a drastic turn orthe worse. Back in the good old days o 2000, the Congressional Budget Oce [CBO]projected that by 2011 ten years o record ederal surpluses would turn the ederaldebt into a net surplus o $2.3 trillion dollars — that’s the alling debt line we see inFigure 1 as the national debt is paid down past zero! You may remember that somepeople actually worried about what might happen i the ederal government didn’tneed to issue any new debt. Well, we’re not losing sleep over that anymore, are we?
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America’s debts haveput us on the road toinsolvency
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Our workplaceretirement systemprovides a great base forincreasing our savings
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Now the target of budgetscrutiny, retirementsavings incentives canactually help keep theAmerican promise
November 2011»Putnam perspectives
Savings, Solvency, and theAmerican Promise
Robert L. Reynolds
President and Chie Executive Ofcer
I we want to keep the American promise o a better lie orour children, we absolutely must make a transition away rompublic debt, leverage, and excessive debt-ueled consumptionto a new economic model based on higher personal savings,public solvency, more investment, more exports, more newbusiness ormation, and more rapid job creation.
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NOVEMBER 2011 |
Savings, Solvency, and the American Promise
Figure 1. A “lost decade” o decits uels a surge in America’s national debt
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($) 108640PUBLICLY HELD FEDERAL DEBT ($T)
Actual debt 2000–2011$10.2 trillionCBO projected debt-$2.3 trillion
(CBO, January 2001)
debtsurplus
2200020052011
$12.5T
Source: Pew analysis o Congressional Budget Oce (2001–2011) data.
What happened? History took us by surprise. Insteado big surpluses, we had a decade o decits, liting thenational debt held by the public to over $10 trillion by2011, $12.5 billion more than the CBO had projected atthe start o the new century. There were multiple causesor that, including:
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Tax cuts under both Presidents Bush and Obama
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9/11, the wars in Aghanistan and Iraq, and other new deense costs
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Major new spending on discretionary programs
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A new drug entitlement program or seniors
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Massive stimulus spending to try to end of another depression ater the crash o 2008
But the single most damaging cause o these decits,shown here in red and accounting or more than aquarter o total decits — twice as much as the Bushtax cuts — was the lower revenue ows caused byslower economic growth, which was well below what theCBO had projected. In other words, economic growth, orthe lack o it, is the most powerul variable in America’sscal health.
Unsustainable decits
Today, ederal decits already claim a large share oour economy, much more than that claimed by top-rated peers like the United Kingdom, France, Canada,Australia, and Germany. Our total national debt — andthis includes internal government debt like the SocialSecurity trust unds — is on track to reach $15 trillionby the end o this year. Fiteen trillion dollars is a mind-boggling number and dicult to imagine.
The single most damaging cause o these deicits … was the lower revenue lows caused byslower economic growth … In other words, economic growth, or the lack o it, is the mostpowerul variable in America’s iscal health.
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Figure 2. America’s decits now rank among the world’s largest
2010 budget defcit as a percentage o GDP
U.S.U.K.FranceCanadaAustraliaGermany10.6%10.4%7.0%5.5%4.6%3.3%
Note: IMF calculations or the U.S. dier rom Congressional Budget Oce gures, which put the U.S. decit at 8.9% GDP.Source: International Monetary Fund. All inormation as o December 31, 2010.
As shown in Figure 3, $15 trillion measured in $100 bills would stack up into a solid block o hundreds bigger than a ootballeld and more than hal as tall as the Statue o Liberty.
Figure 3. Total ederal debt could reach $15 trillion by year-end 2011
And the orward outlook is worse. The Congressional Budget Oce advises us that President Obama’s most recentbudget would raise total national debt held by the public rom roughly 63% o GDP today to more than 90% by 2020, withno end in sight! That is a debt-to-economy ratio that America hasn’t seen since World War II.
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