- - Tuesday, October 23, 2012


The end of his fourth year is a good time to see what President Obama hath wrought on the nation’s finances. It’s not a pretty picture.

It is said that demography is destiny. There’s truth in that. But it’s also true that debt is destiny. Debt enables some actions today, but has serious consequences for tomorrow, creating new risks and limiting options.

In four years under Mr. Obama, the federal government will add about $5 trillion to its debt. Under his predecessor, President George W. Bush, the nation added about $3 trillion over eight years. That’s about 66 percent more for Mr. Obama than Mr. Bush over half as many years. Expressed another way, Mr. Obama added an eye-popping average of some $1.2 trillion a year, or three times as much as Mr. Bush’s $0.4 trillion annual average.

Given this performance, it’s stunning to recall that Mr. Obama ever had the temerity to criticize Mr. Bush’s fiscal policy, but he did. In the 2008 campaign he called Mr. Bush’s deficit and debt policies “irresponsible” and “unpatriotic.”

Before that, Mr. Obama called America’s rising debt under Mr. Bush “a sign of failed leadership.” He went on to say “increasing America’s debt weakens us domestically and internationally. Leadership means that the buck stops here.”

Mr. Obama stands condemned by his own words — irresponsible, failed leadership — but what does it mean for America’s destiny, and what would it mean to continue these policies?

The most obvious consequence is the federal government’s interest expense will balloon. Owing in part to today’s weak economy, the interest rate paid on government debt is amazingly low. That won’t continue. Under the president’s own assumptions, interest rates will more than double over the next few years.

Combine rising debt with rising interest rates, and the result is rapidly rising interest expense. Mr. Obama’s own forecasters expect the federal government’s interest expense to rise from $218 billion this year to $804 billion in 2022. That’s nearly a fourfold increase.

What does that mean for the future? Under Mr. Obama’s debt-accumulation policies the federal government will soon spend about as much on interest expense as on national security and half again as much as on Medicaid. Soaring interest expense will make it vastly harder to balance the budget, keep taxes from soaring, assure an adequate national defense, make the “investments” in infrastructure and education Mr. Obama praises without ceasing, or any other priority the nation may have.

It gets worse. The projected increase in interest rates reflected in White House and the Congressional Budget Office (CBO) assumptions are to historical norms. But the rise in government debt will eventually also mean a permanent increase in interest rates well above the historical norms.

In rough terms, federal debt as a share of the economy has jumped from a postwar norm of around 40 percent to around 75 percent. Estimates of how rising debt affects interest rates are all over the map, but a fair rule of thumb may be that each 10 percent increase in the debt share means a 0.3 percentage point increase in the entire interest-rate structure.

Using this rule of thumb, Mr. Obama’s debt surge to date suggests the 10-year Treasury bond rate would eventually rise not to 5 percent as the CBO now projects, but to around 6 percent. At a minimum, this rise in interest rates means the federal government’s interest expense will increase much further even than the scary projections now available.

But the rise in interest rates owing to Mr. Obama’s debt surge means much more. At the very least, it means a restructuring of the U.S. economy away from those activities most reliant on capital, as these are most affected by interest rates. Obviously, this means housing and home values will be hit hard, again. But so, too, will be capital-intensive industries such as manufacturing.

American manufacturers have a tough enough time competing on the world stage under the burden of antiquated federal taxes and heavy-handed government regulations. Add to these a vastly higher cost to financing their domestic activities, and they will have no choice but to flee.

What does Mr. Obama’s debt surge really mean for America’s future? The obvious answers are higher interest rates, higher interest expense, and fewer options for meeting future needs. The less obvious, but perhaps more critical, answer may be that under Mr. Obama’s debt surge, America and its manufacturers may have a painful parting.

J.D. Foster is a Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.

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