People have been worrying about U.S. debt basically ever since there even was a U.S. “The accumulation of debts is a most fearful evil,” Thomas Jefferson wrote in 1787. At the time, U.S. debt was around $40 million. Today, it’s closer to $40 trillion. At the same time, the U.S. economy is bigger and more powerful than Jefferson could have ever imagined, and things are looking pretty good: unemployment is near record lows, inflation is under control… so what’s the problem?
“Part of the problem is it’s been this kind of ‘boy who cries wolf’ type thing, and people just get tired of it,” says Kent Smetters, an economist at Wharton, who has been crying wolf about the debt for years. He started to wonder: What exactly happens if the U.S. just doesn’t deal with its debt? He got a few economists and mathematicians together to build a computer model of the economy to play out scenarios.
They made a model of the entire U.S. economy, which required a lot of computing power. “This math problem was a big one,” Smetters said. “And the model computations are about 20,000 times bigger than our standard model.”
Smetters borrowed some computing help from Amazon and NASA and then he and his colleagues then fed the entire U.S. economy in all of its complicated glory into this mega-model. And the U.S. economy… could not compute.
“Their economic models crashed when trying to project out the economy over the long term,” said Jessica Riedl, an economist with the Manhattan Institute who studies the budget. “We cannot even model out a functioning long-term economy under current debt projections.”
The crash itself: not super cinematic, said Smetters. No flashing red letters, no skull and crossbones, no lightning bolt, just a few words that make a macroeconomist’s blood run cold:
Model not converging.
“The model’s trying to find what’s called a fixed point where everything just adds up, everything’s consistent, and it’s not able to do that,” Smetters explained.
In other words, if the debt keeps rising at its current rate and we just do not deal with it, even thousands of NASA and Amazon computers all working together cannot get the math to math.
“Really, it’s a question of how far can we go before the bond market says, ‘I just don’t believe that you’re gonna pay us back,’” explained Smetters.
Bonds are like little loans. And the U.S. government sells billions of dollars worth of bonds every week. The interest rate it pays on those loans? Super low. Because people know the U.S. is good for the money.
If this were “The Simpsons,” the U.S. would be like Mr. Burns taking out a loan. The bank would very likely give him a really good interest rate: he’s rich, he’s got a great job, he’s got a big house. The bank could feel pretty sure it’s not going to lose its money.
Homer Simpson on the other hand, with his credit card debt, modest income, and some (donut related) impulse control issues would probably have to pay a much higher interest rate for the same loan.
Economist Jessica Riedl said the U.S. might be entering its Homer Simpson era. The country’s got so much debt that’s it’s outpaced what the economy earns.
“The debt is projected to go from $30 trillion to $200 trillion over the next 30 years,” said Riedl. “That will cause interest rates to rise. Within a decade, interest is going to be one third of all of your taxes, and in a couple decades, interest could be 80% of your taxes.”
If most of the country’s money is going to paying interest on the debt, it can’t be invested into growing the economy, or filling potholes, or improving schools. It’s just going to pay interest. In cases like that, an economy will typically start to shrink: Services shut down, things stop working, businesses stop growing, they start laying people off.
So how long do we have before this happens? According to Kent Smetters’ model, about 20 years.
”The good news is we can actually make decisions now today that actually would stabilize the amount of debt relative to the size of the economy,” said Smetters.
Smetters and his colleagues published a list of suggested reforms that they think could help to fix the budget: raise the retirement age to 70, add a carbon tax, reduce social security benefits.
The chances of the government doing all of that? Smetters put it at about 5%. Not great, he said, but still better than the odds of our current path working out, which Smetters put at 0%.