Two years ago, the United States experienced its worst financial crisis since the 1930s. The crisis began on Wall Street, where misguided bets on risky mortgage loans resulted in enormous losses that few anticipated.
More than 4 million jobs were lost in just six months after the peak of the crisis. There is hardly one Main Street in America not still feeling its effects.
Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington, D.C.
Total federal debt has doubled in the past seven years, to almost $14 trillion. That's more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.
Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today's dollars.
Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.
Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035.
Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations.
Recent proposals by the co-chairmen of the National Commission on Fiscal Responsibility and Reform and by the Bipartisan Policy Center represent credible first steps toward recognizing and addressing the nation's fiscal problem. The proposals include reducing and capping discretionary spending, enacting comprehensive tax reform, reducing mandatory spending on health care and other programs, and ensuring the long-term solvency of Social Security.
Fixing these problems will require a bipartisan national commitment to a comprehensive package of spending cuts and tax increases over many years. Most of the needed changes will be unpopular, and they are likely to affect every interest group in some way. We will want to phase in these changes as the economy continues to recover from the effects of the financial crisis.
Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.
Excessive government borrowing poses a clear danger to our long-term financial stability. All of us must work together now as Americans, look beyond our narrow partisan interests and show the world that we are prepared to act boldly to secure our economic future.