Written by Dr. Ernie Goss
There is at least one thing that Democrats and Republicans agree on: higher federal spending. Since President Trump took office in the first quarter of 2017, federal spending has expanded by a compound annual growth rate (CAGR) of 3.9 percent, while tax collections have advanced by a more modest 0.9 percent CAGR.
As a result, the federal debt exploded by a CAGR of 4.6 percent to an estimated $21.6 trillion in the third quarter of 2018, representing 104.8 percent of the nation’s annual output, and the highest since the last quarter of the Obama Administration.
Both Democrats and Republicans signed on to this spending growth with Democrats resisting tax cuts, but embracing spending increases. The federal debt will only get worse. With more than 10,000 boomers retiring each day, Social Security payments are soaring at a CAGR of 4.6 percent, and Medicare benefits are exploding at a CAGR of 5 percent.
Furthermore, ultra-low interest rates allowed the federal government to borrow needed funds at historically low rates. Since December 2016 to the present, the yield (interest rate) on U.S. Treasury bonds has risen by three-quarters of one percentage point. As a result of rising interest rates and a larger federal debt, interest payments have climbed by a CAGR of 5.0 percent. Should rates on U.S. Treasury debt rise to the 1990-2007 average, annual federal interest payments would grow by $160 billion to $200 billion, annually.
Without spending restraints, Gen-Xers and Millennials will face higher taxes, elevated interest rates, rising inflation or all three of these “evils.” Former Colorado Governor Richard Lamm summed it up quite well saying, “Deficits are when adults tell the government what they want, and the kids pay for it.”
Dr. Ernie Goss is currently the Jack MacAllister Chair in Regional Economics at Creighton University in Omaha, Nebraska, as well as a research associate of the Craig School of Business at Fresno State. His blogs can be found at economictrends.blogspot.com.