The Inevitability of a U.S. Government Default

Barb Wire

By David R. Henderson and Jeffrey Rogers

“Countries don’t go bankrupt.” ~ Walter Wriston, former head of Citibank, quoted in Benn Steil and Robert Litan, Financial Statecraft

There is a myth that floated around the banking community not many years ago that governments do not go bankrupt. I cannot imagine who dreamed that one up.” ~ Gordon Tullock, ‘Thoughts on the National Debt’

There is a ticking time bomb in the U.S. government’s fiscal structure: growing government spending, which, if unchanged by policy, will result in growing government debt. This is not the short-run problem that we hear so much about in the news when Congress gets to vote on increasing the ceiling for the U.S. federal debt. It is the long-run problem that economists such as Laurence Kotlikoff (Kotlikoff and Burns 2004; Kotlikoff 2011; Jagadeesh Gokhale and Kent Smetters 2006), among others, have been writing about for years.

The problem is this. Three components of the federal government budget—Social Security, Medicare, and Medicaid—are highly likely to take an increasing share of gross domestic product (GDP). Overall federal government spending, including interest on the debt, could exceed 40 percent of GDP by 2050. For more than sixty years, overall federal revenues as a percentage of GDP have almost always been within a narrow range. They have never gone over 21 percent of GDP and have almost never gone below 17 percent. Even during the crisis years of World War II, they never exceeded 22 percent of GDP (White House 2013). The result, if the government does not change policy, will be annual deficits of approximately 20 percent of GDP. This is unsustainable.

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The question then becomes: What will change? This is difficult to predict. But we give the following predictions in decreasing order of certainty.

First, federal government revenues are unlikely to be more than 22 percent of GDP for more than a few years.

Second, well before spending reaches 30 percent of GDP, the federal government will face a renewed, more serious fiscal crisis.

Third, likely cuts in the growth of Medicare and Medicaid spending would at best delay, but not prevent, this crisis.

Fourth, the probability is therefore fairly high that the federal government will be forced to default on some or all of its debt.

Fifth, outright default on the federal debt will occur despite any increasing inflation.

Read more: Independent Review

The opinions expressed by columnists are their own and do not necessarily represent the views of Barb Wire.

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