The United States still has the economic muscle to shape important aspects of the international environment, but high government debt in the future may undermine its economic instruments of power and its ability to influence global conditions through nonmilitary means, according to a new report from the RAND Corporation.
A persistently high level of government debt may threaten future economic growth and may constrain the ability of the government to act in pursuit of both international and domestic goals, according to the study. Efforts to reduce the debt will further constrain government outlays and action. However, if the United States does not act to reduce its debt, the result may be a U.S. economy that is smaller than it could have been and declining U.S. influence globally.
“The principal basis for U.S. economic power is the size of the U.S. economy,” said C. Richard Neu, lead author of the report and a senior economist at RAND, a nonprofit research organization. “Evidence is accumulating that high levels of debt can slow economic growth, especially when gross general government debt surpasses 85 percent or 90 percent of the gross domestic product. U.S. government debt crossed that threshold in 2009, and the negative consequences of high debt may still be in the future.”
History suggests that countries rarely grow their way out of burdensome debt, Neu said. If the United States wants to reduce its national debt, it’s going to have to increase government revenues or constrain spending — or do both.
However, the report found that high debt levels to date have not had clearly negative consequences for U.S. international influence, nor could he and his RAND colleagues attribute losses of international stature or influence that the U.S. may have suffered in recent years to unsustainable fiscal policies. While there are some economic indicators U.S. policymakers should be concerned about, there are also counter examples of continuing strength.
For example, voting shares in major international financial institutions such as the International Money Fund and the World Bank are tied to shares of global output and trade. So as U.S. global output has fallen, its influence has been reduced.
In addition, the U.S. has been conspicuously absent from international plans to increase the resources available to the IMF while potential rivals for international influence — China, Russia and Saudi Arabia — have pledged support. On at least one occasion, policy advice from senior U.S. officials to eurozone governments was rejected with sharp references to U.S. inability to control its own borrowing. Fiscal constraints also have diminished U.S. capacity to resolve important domestic issues such as high costs for poor health care outcomes, weak public education systems and growing income inequality.
On the other hand, the United States has led successful economic sanctions against Iran, for example, in an effort to encourage that country to curtail its nuclear program. The United States also is a leading force in creating new arrangements for trans-Atlantic and Pacific Basin trade.
The United States also has made significant contributions to international financial regulation in the wake of the last financial crisis. U.S. regulators have led international efforts to enforce prohibitions against money laundering, illegal tax avoidance schemes and violations of trade sanctions on the part of international banks and companies.
And despite recent U.S. defense cuts, defense spending is expected to stay above the level it was before the Sept. 11, 2001, terrorist attacks and well above the historic lows of fiscal years 1978 and 1999, in constant dollars.
Reducing the deficit will not be easy, Neu said. Discretionary expenditures — both for defense and nondefense items — account for less than 7 percent of GDP — less than half the share of entitlement spending.
Constraining entitlement spending will minimize the need to reduce outlays that contribute directly to U.S. international influence, such as defense, international representation and assistance. Cuts also could constrain future productive capacity, such as investments in infrastructure, research and development, and education. Unfortunately, the Budget Control Act makes entitlement spending exempt from cuts.
“When you begin to look at entitlement spending, you’re talking about things like Medicare and Social Security,” Neu said. “Reining in the growth of these programs is extremely difficult politically. But across-the-board cuts in discretionary spending aren’t in the best national interest either.”
