The current financial condition of the United States is not sustainable. Absent policy action, the pressures of health care cost growth and demographics – the aging of the population – will combine to drive deficits and debt to unsustainable levels. According to GAO simulations, if we hold appropriations constant as a share of GDP, extend all the expiring tax provisions, and keep Medicare, Medicaid and Social Security unchanged; by 2040 the federal government will produce enough revenue to cover only the interest cost on the federal debt. Nothing will be left for defense, Social Security, Medicare & Medicaid, or anything else. Faster economic growth could help, but it will not solve the problem. Tough choices need to be made involving spending – mandatory and discretionary spending as well as on entitlement programs – tax policy and enforcement. GAO notes that the dire results of this simulation could not, in fact, happen. We, however, should care about how it doesn’t happen – do we take action or do we wait for a crisis?

While 2040 may seem like a long way off, some observers have said that a crisis could come a lot sooner. In recent years the United States has become a debtor nation. The current account balance – the amount we owe other nations minus the amount they owe us – recently reached a deficit of record proportions. What if other nations decide they don’t want to hold so much U.S. debt? For the last three years, the dollar has steadily slid in value relative to foreign currencies. Is the decline in the dollar a warning? If the United States were not such a powerful nation with such a large and stable economy, these conditions would likely have already produced a financial crisis.