It was reported in March that U.S. consumer credit card debt exceeded $1 trillion for the first time. Just how big is one trillion? A trillion is one million million. It would take 31,709 years to count to one trillion if you didn’t stop to eat or sleep. Imagine your dad back in 1968, piling the family into the station wagon for a road trip to the Grand Canyon. As you pulled out of the driveway, he cheerfully suggested that you count to a trillion as a way to pass the time. Had you stuck with it for the 50 years since, you would have only reached 1.6 billion by now.
In April, the Congressional Budget Office (CBO) reported that the federal deficit will surpass $1 trillion per year in 2020. With the national debt already at $21 trillion and growing, the CBO projects interest on the debt to reach $800 billion by 2027. Several non-partisan estimates put interest on the national debt in excess of $1 trillion per year by 2030. It’s almost as if we’ve reached a point where $1 trillion no longer seems like a lot of money.
There is an economic school of thought that deficit spending makes sense when expenditures in excess of revenues are targeted at investments with the promise of increasing productivity to generate wealth, stimulating the economy to grow faster than the costs associated with the mounting debt, or when recovering from a serious recession. Far less compelling arguments can be made for continuous borrowing to make ends meet in the country’s annual operating budget and red flags should appear when a household or a government borrows money to pay the interest on previously acquired debt.
With annual budget deficits roughly equal to the interest on the national debt, it’s hard not to say that the federal government is borrowing money to pay the interest on existing loans. The country has moved from purposeful capital investment to pure deficit spending, annually consuming more than we bring in. Countries can raise taxes to pay off their creditors; middle-class households cannot.
Perhaps reflecting the fiscal policies in Washington, or maybe in part because of them, American consumers have engaged in unprecedented personal deficit spending. In the last year alone, credit card debt increased by $92 billion or roughly $730 per household. Home mortgages and school loans, each representing a significant financial burden for the middle class, may fall under the “purposeful investment” category, analogous to federal deficit spending targeted at long-term productivity and wealth creation. Credit card debt is more akin to federal borrowing to make ends meet with respect to current consumption. To the extent that medical expenses are generally not the consumer’s first choice when dreaming of discretionary spending, it is safe to assume that health care expenditures, when they occur, tend to crowd out other options. It is worth considering to what extent health care costs may be contributing to the observed acceleration in consumer debt.
In 2016, health insurance premiums (employer and employee contributions) plus out-of-pocket medical expenses averaged $26,000 per middle-class working household. The government’s Office of the Actuary projects those expenditures to increase by 4.9 percent per year over the next 10 years. If wages increase over the next 10 years at rates comparable to the last 10 years, annual increases of approximately 2 percent could be expected. By rising faster than wages, incremental health care expenses outpaced income by approximately $625 per middle-class household last year. Health care costs do not account for all new credit card debt – many healthy households increased their credit card debt last year – but it’s safe to say that they are contributing to the problem for families that experience illness.
The phenomenon of increasingly leveraged household debt points to an inescapable reality: Americans are spending more money than they make. For a household or a country already spending beyond its means, if health care expenses increase faster than income, the incremental expenditures by definition add to the accumulated debt. Patients will face hard trade-off decisions – or fall deeper in debt – when health care expenses compete for limited resources that already fail to cover consumption. Until now, consumers (like the government) have leaned toward “and” rather than “or” when competing purchasing options exceeded income. It is not clear that deficit spending is a bottomless cup…we may be approaching the time when difficult “or” decisions are unavoidable.
We’d all like to think that we left the world better than we found it, but as my generation – the baby boomers – reaches back to hand the baton to the generations coming behind us, a troubling fact is hard to ignore. The millennials are the first generation in the country’s history to be worse off financially than their parents were. By 2024, millennials will outnumber baby boomers among eligible voters by an almost 2-to-1 margin, and 60 percent of millennials favor a single-payer health system. Saddled with tens of trillions of dollars in federal debt and health care costs that have consistently risen faster than wages throughout their lives, millennials face the prospect of tough consumer choices in the years ahead. For anyone comfortable with the status quo, there are a trillion reasons to worry.
