Just how bad will the economy get?

If the sale of treasury bonds produces the money required to cover over spending and old debt, how will the national debt every decrease when the only way to cover the maturing debt is to create more bonds/debt to cover them?
— Scott, Michigan

It’s not the only way. The other way would be to take in more in taxes than we spend. At the end of the 1990s, the budget was balanced and there was even a little extra to pay down the debt. That prompted many people to say “Wait a minute, the government is taxing too much.”  So we got tax cuts, and now we’re back to running up the debt.

At the very least, the first step would be to have the federal government go back to the “pay as you go” spending rules used in the 1990s. The idea was pretty simple: don’t spend more than you take in. That means if you cut taxes, you have to cut spending by the same amount. And if you want to spend new money – whether on a war or a Medicare program to pay for prescription drugs — you have to raise taxes to pay for it.

Raising taxes to pay off the debt isn’t necessarily a great idea. In any case, with the economy faltering, now is not the time to raise taxes. In fact, if Congress and the White House could just balance the budget indefinitely, the debt as a percentage of Gross Domestic Product would gradually decline.

This would be roughly equivalent to a young person starting out with a big, interest-only student loan. As their income goes up over time, the debt shrinks relative to that income. As long as they don’t borrow more, the interest payments on the loan make up a smaller and smaller part of their budget.

The same thing is possible with the national debt. If you balanced the budget forever — and froze the debt at current levels — the debt becomes less of a problem over time as the economy grows.

The real long-term problem is the multi-trillion-dollars worth of promises made by the Social Security and Medicare programs. As us Baby Boomers retire and start consuming more government-funded health care, the burden on the budget will get bigger. As it stands now, those plans are financially unsustainable over time - unless they’re fixed.

That’s not to say they can’t be fixed, just the way the Reagan administration, with the help of a commission lead by former Fed Chairman Alan Greenspan, did in the 1980s. Just like any retirement plan, you need to make mid-course corrections along the way. With a relatively modest increase in taxes or cut in benefits – or both – those plans could be put back on a sound financial footing.

But so far, no one has been able to get Congress and the White House to agree on a fix.

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