US debt sinkhole: How did it get so deep and how deep will it get?

October 26, 2013

Washington  (Oct 26)   Most economists agree that the current pace of U.S. spending is unsustainable in the long run, but how did it get this bad?

How did the U.S. manage to spend its way out of a surplus and into massive debt in roughly a decade, putting itself 17 trillion U.S. dollars in the hole? Moreover, as nations worldwide eye Washington's debt nervously, how will the world's largest economy pay it off?

The issue grabbed headlines earlier this month after a tense standoff between Democrats and Republicans that brought the nation to the edge of a debt default. After the dust cleared, U.S. Congress voted to raise the debt limit, enacting no significant budget cuts, once again putting off dealing with the problem until a later date.

A little longer than a decade ago, no one imagined the United States would find itself here. During the tech-led economic boom of the 1990s, federal revenues exceeded spending for the first time in decades, creating a surplus. And in April 2001, the federal budget hit a peak surplus of 2.61 percent of the GDP, according to Wells Fargo, a U.S. bank and financial services holding company.

Jobs were plentiful and unemployment was low. Young college grads jumpstarted their careers amid a booming economy, and the tech sector fueled a surging stock market. The future seemed bright.

But then came the Sept. 11 terror attacks on New York and Washington in 2001 that triggered costly wars in Iraq and Afghanistan, and military spending began to chip away at the surplus, Wells Fargo noted.

Several years later, a second crisis hit when the U.S. economy took a nosedive. That led to the 787 billion U.S. dollar stimulus package signed into law in 2009, which caused the big jump away from the surplus and into negative territory, noted Michael Brown, an economist at Wells Fargo, during an interview with Xinhua.

Brown said entitlements will drive the debt going forward, adding that net interest expenses will also be a factor.

The Congressional Budget Office (CBO), a non-partisan federal data providing agency, forecast that debt will grow to levels not seen since World War II, when the U.S. shouldered the massive cost of sending 16 million armed services members to fight in Europe and the Pacific.

The CBO estimates that from 2014 to 2023, Social Security will cost around 11 trillion dollars. Medicare is estimated to cost 8 trillion dollars over the same 10-year period and Medicaid, a healthcare program for low-income Americans, is projected to hit 4.3 trillion dollars. That makes a total bill of 23.3 trillion dollars, not counting other government expenses.

Much of the spending -- although not all -- will be driven by the roughly 80 million baby boomers born between 1946 and 1964, who are now retiring.

U.S. Congress has extended the debt ceiling to February, and more Congressional fireworks are expected in the lead-up to that deadline, but analysts foresee no major breakthroughs on long-term debt.

While Republicans continue to blast the Obama administration for what they bill as profligate spending, neither the Republicans nor Democrats have taken any clear steps toward cutting entitlements.

Indeed, that would be a bad political move for most members of Congress, analysts noted.

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