Ballooning U.S. budget deficit is killing the American dream

The government’s deficit problem is creating an income problem for Americans, economists warn.

Last week, the Congressional Budget Office raised its estimate for the government deficit this year by a whopping 27%, or $408 billion over its February forecast, to $1.9 trillion.

Paying for that debt can divert money away from private investment, which in turn may dampen wage growth, economists say.

“The exploding debt could cause as much as a 10% reduction in wage income within 30 years,” said Kent Smetters, a University of Pennsylvania Wharton School professor and faculty director of the Penn Wharton Budget Model.

Based on the median household income of about $75,000, that’s as much as a $7,500 reduction in income in current dollars for the average household every year, he said.

How does national debt hurt salaries?

The increased national debt estimate is due partly to student-loan relief measures, higher Medicare expenses, and Ukraine aid, CBO said. Additionally, CBO sees the deficit in the decade ahead rising to $22.1 trillion, $2.1 trillion more than its last forecast.

To pay for increasing spending, the government issues debt like Treasuries and bonds with higher interest rates to attract investors. When investors put money into government debt, they do so at the expense of more productive private investments – what economists refer to as the “crowding out effect.”

Private investments might include the development of new products and technologies, construction of buildings and roads through loans, or buying company stock or bonds

CBO estimates that for every dollar added to the deficit, private investment loses 33 cents, which diminishes economic growth and wages over time.

CBO expects federal debt held by the public to rise from 99% of gross domestic product in 2024 to 122% in 2034, surpassing the peak of 106% reached in 1946, immediately following World War II.

READ MORE HERE