The White House’s 2019 Budget is pure fantasy, but it assumes a deficit in the year to October 2019 of $984 billion. However, Congress’s 2-year Budget deal has added at least $80 billion more spending, pushing the deficit well over $1 trillion. Since we are at the top of a business cycle, with unemployment around 4%, this is very disquieting. However, the driver of current deficits is more a past lack of productivity than a burst in profligacy, and it is there that we must look for a solution.

Even with the deficits above, the Budget is said to be too optimistic, because it assumes a growth rate of 3% per annum over the next 10 years, considerably higher than has been achieved in the last decade. We are almost bound to get a recession over the next few years, which will push the deficits much higher, probably over $2 trillion.

The United States is still a considerable way from the brick wall of bankruptcy. Debt held by the public is around 80% of GDP, and if rapid growth happens as the White House predicts, will not rise much in the next decade. However, there is also debt held by the social security trust fund, which will all be needed by the time the trust fund runs dry in 2033; include that and debt rises to about 110% of GDP. Nevertheless, even if the White House is somewhat over-optimistic, 110% of GDP is a long way from the highest level that has ever been successively dealt with, around 250% of GDP, brought down to lower levels by Britain after 1815 and after 1945, and the level at which Japan’s public debt stands today.

These excessive deficits should not be blamed on any great profligacy on the part of President Trump, or even on that of the Obama Administration in 2009-17, both of them aided by an irresponsible Congress. Both Trump and Obama are too fond of spending money, and Congress is grossly irresponsible, but Presidents have been profligate and Congresses irresponsible for several decades now. However, the United States’ deficit problem has recently been exacerbated by two factors: the destabilization of Social Security and Medicare through the retirement of the baby boomers and the last decade’s excessively slow productivity growth.

The social security “bulge” has been a known problem since the social security reform of 1983, which increased the retirement age from 65 to 67, starting in 2027. It is actually a combination of two problems: the “bulge” from the retirement of the baby boomers and the gradual extension of life expectancy. The “bulge” problem was nearly but not quite solved by the 1983 reform; by 2033, the youngest cohort of the baby boomers will be 69, already mostly retired, and the oldest cohort will be 87, already mostly dead.