Panel: A Sobering Look at Today's Federal Debt
Economics experts from Stanford GSB and beyond explain why there are no easy solutions to the estimated $14 trillion debt.
Stanford Graduate School of Business students who came to the Schwab Center on Jan. 19 to learn about the perils facing today’s economy got a sobering history lesson.
At the end of World War II, the United States had accumulated substantial debt. But our country’s economy still took off, fueled by soldiers returning home to join the workforce and by new manufacturing technologies honed during wartime that could instead be used to more efficiently build consumer goods. With the productive capacity of other nations weakened by war, the United States quickly became the go-to source for cars and other products.
Compare that scenario to events playing out today.
The nation again has a hefty debt; it has reached $14 trillion according to the federal government. But this time, U.S. products are facing stiff competition from abroad. On top of that, there’s a lingering global recession. And many highly trained Baby Boomers are taking their much-needed professional talents with them into retirement.
“This is not your grandfather’s economy,” Joseph Minarik, senior vice president and director of research at the Committee for Economic Development public policy organization, told students. “This is not an economy that could grow out of an enormous debt at the end of World War II. This is an economy that will have to struggle to turn the situation around.”
Minarik was part of a panel of seven economic experts from the GSB and beyond who discussed their agenda-setting ideas during “The Federal Budget and an Innovative Economy.”
Spending policies designed to reinvigorate the flat U.S. economy have only added to the nation’s economic woes. Minarik said debt has reached an amount equal to 60% of the Gross Domestic Product, which describes the value of all goods and services the nation produces.
That spending has placed the United States alongside some other developed countries that are struggling with ballooning debt rates - nations including Portugal, Italy, Ireland, Greece, and Spain. “That shows the degree of risk we face,” he explained.
When the economy improves and the current low interest rates rise, so will the government’s obligations on that debt. By the middle of the century, Minarik warned, “We are not going to collect revenues that will be enough to even pay the interest on the federal government’s accumulated debt. That’s how bad the federal budget outlook is.”
However, the panel also proposed solutions.
Boosting productivity is a mandatory step to strengthen the economy, said Lenny Mendonca, director in the San Francisco office of management consulting firm McKinsey & Co. The program was sponsored by the Public Management Program at Stanford GSB, student leaders of the GSB’s Public Management Initiative, and the Washington, D.C.-based Committee for Economic Development policy research group.
That won’t be easy with a shrinking labor force, said Mendonca, who received his MBA and certificate in public management from the GSB in 1987. “In the next decade, we will be two million technical and analytical workers short of what we will need for even the modest growth we expect,” he said.
An alternative could be boosting productivity in areas that have not yet shown productivity gains. For example, while growing international competition has forced private sector businesses to become more productive, areas including education, health care, and the public sector have remained productivity “laggards,” Mendonca said. “It’s a big drag on the economy.”
New technology isn’t needed to increase productivity levels for those areas, he said: “It’s applying technologies that we have today more broadly and sharing best practices.”
Other strategies include upgrading the nation’s outdated infrastructure to be more energy efficient, enabling goods and services to be transferred more cheaply. “It’s hard to move the full economy when we have these four very large anchors - health care, education, the public sector, and energy infrastructure - dragging behind us,” Mendonca said.
Controlling corporate salaries would also have a positive impact, said Daniel Van Dyke, senior vice president and risk manager for Wells Fargo Bank and another panelist. Mortgage brokers might not have pushed risky investments that nearly brought down the economy if they’d “had some skin in the game” that linked their personal earnings to their investments, he said.
Darrell Duffie, Dean Witter Distinguished Professor of Finance at the GSB, agreed. Rather than trying to control compensation, he recommended not awarding it all at one time, holding out some payments until several years in the future. “Corporate executives - in particular, financial firm traders - need to know that simply because they appear to have made a profit in the short run, they need to know it has to be a good trade for the long run.”
That approach has an added benefit, Duffie said, providing companies with extra capital to absorb the shocks from bad trades or unforeseen economic shake-ups, “which is a further way to align the incentives of the firm with the economy.”
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