Deficit Size: U.S. Debt is Decreasing, But Nowhere Near Fast Enough


On Tuesday, the CBO released updated projections to its 10-year budget outlook which shows an improved short and medium-term outlook on deficits and the overall debt. Good news for some, but only part of the story for millennials.  

Deficits decreased by 1.3% of GDP and 0.3% of GDP over the next 10 years. These declines are mainly due to higher-than-expected corporate tax revenue, a slowdown in Medicare and Medicaid spending, and payments from Fannie Mae and Freddie Mac. This is welcome news, especially the slowdown in healthcare cost increases, though there is still some debate as to the cause and whether the situation will continue. But just as in CBO's February projections deficits would rise toward the end of the decade. Millennials in particular should pay attention to this CBO warning:

"Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges."

Adding to the threat of increased levels of federal debt, millennials hold an average of $26,000 in student debt and suffer from an unemployment rate of 16.1%, not including those who are under-employed. We will be feeling the effects of the recession for decades, as many of us will not see expected wage growth, most of which occurs in the young workers' 20s and early 30s. In fact, almost two-thirds of your lifetime wage growth happens in the first 10 years of your career. The result will be lower savings and fewer of us with the ability to make large purchases such as homes and cars, two areas we are already behind in.

As of 2012 just 36.8% of Americans under 35 owned a home. That may seem good, but consider 6 years earlier when that number was 43%. Those of us even attempting to get a home dropped to 9% between 2009 and 2011, compared with 17% a decade earlier. Traditionally Americans have held most of their wealth in their homes, resulting in a generation with less wealth then those before it.

On top of this, Congress's inability to deal with long-term deficits has lead them to reduce the deficit at the expense of discretionary spending. That means in an era when global competition is  increasing we have decided to spend less on education, infrastructure and research ... the very things that make us more competitive. I recently heard a comment from Bill Gates that sums up our situation. He pointed out that by far our biggest cost driver is health care, yet both the sequester and Budget Control Act have cut funding to the National Institutes of Health. That's the agency we would rely on to come up with many of the innovations that decrease the cost of health care.

The bottom line is that our generation will have less wealth and savings. Combine that with increasing federal debt and decreasing investment, and the future does not look so great. We may not have much control about the effects of the recession but we do have control over our spending path. Let's not waste the opportunity we have now, while the debt is toward the top of the policy agenda, to make the long-term changes that will ensure a strong future for our generation and others to come.