Why are the US and Israel drowning in debt?

After then-prime minister Yair Lapid’s visit to the White House in July 2022, a joint communiqué was issued. Among other things, it stated: “The United States and Israel affirm that among the values the countries share are an unwavering commitment to democracy, the rule of law, and the calling of ‘Tikkun olam,’ repairing the world.”

Tikkun olam? Seriously?

President Joe Biden and Lapid omitted one shared value. Both Israel and the US love to spend money they don’t have, by borrowing it – along with a hundred other nations. And now both countries, indeed much of the world, are in deep hot water as a result.

The US debt crisis is far more serious because the US is the leader of the free world, and its currency – the dollar – serves as the world’s currency. But for us who live in Israel, our borrow-spend-borrow habit spells big trouble.

Let’s begin with the US.

America’s debt crisis

The US is in deep fiscal trouble.

A recent Congressional Budget Office report on the government budget includes projections of future developments. It shows that the fiscal outlook for the US based on current trends is unsustainable.

• In fiscal 2022, interest payments on the national debt amounted to $475 billion, the highest amount ever.
• Interest costs on the national debt grew by a third last year and will grow by another third in 2023. The Federal Reserve is raising interest rates not only for households and businesses but also for the government. 
• By the year 2030, only seven years away, interest costs on the national debt will reach 3.3% of GDP, higher even than the previous high in 1991.
• Within 10 years, net interest costs will exceed federal spending on crucial programs like Medicaid and national defense.
• Within 30 years spending for net interest (not including principal) on the national debt will become the US’s largest “program,” outpacing Medicaid and Social Security.

There are several reasons why creating this growing mountain of debt is a march of folly. As profligate high-spending families know, paying massive interest payments on credit card debt crowds out other, more worthwhile, spending on education, healthcare and training. It is equivalent to giving up on the future.

Consider spending on infrastructure and human capital. Studies show that the real return on such spending is at minimum 10%, and in some cases as high as 25%. In contrast, the real return on borrowing that funds consumption is zero because it is not productive.

The US lags far behind its international competitors in infrastructure spending, according to a study of the Council on Foreign Relations, and despite the massive Biden infrastructure bill.

The US is projected to spend only 1.5% of its GDP this year on infrastructure investment compared with, say, China’s 5.1% and Indonesia’s 4.1%. And that 1.5% figure is an illusion because it represents gross investment. Deduct depreciation (capital consumption – replacing worn-out bridges, communications networks, roads and schools), and you find that net infrastructure investment is negative and will continue so.

Airports, roads, bridges, highways, schools, and other social capital will continue to rust and decline. Because paying off the mounting interest on the national debt will dominate.

Currently, the US government budget deficit is 11% of GDP. In fiscal balance, the US ranks 141st in the world among the nine worst spendthrift governments in the world and just slightly ahead of Cuba. The global average budget deficit is 4.3% of GDP. The US is nearly three times that level.

The US national debt is 129% of GDP, second-highest among the big-spending large economies only to Japan, whose debt is a staggering 227% of GDP. The global average is 65%.

Why has the US borrowed so excessively? Because it can. And because it is convenient politically to spend now and worry about paying the piper later.

The US dollar is the world’s key currency. Because the US is regarded as a safe haven for money, US Treasury bills and bonds have been easy to sell. There are some $25 trillion worth of such bills and bonds in circulation, a sum equal to the US GDP.

The US borrows a lot because it can. Cuba’s national debt is only 50% of its GDP, not because it is so thrifty but because it is far harder and more expensive for Cuba’s government to borrow than America’s.

The US debt problem is not confined to public debt. Consumers are also in trouble. As of December 2022, US homeowners owe some $12 trillion in mortgage debt. A significant part of that debt is variable-rate mortgages, which soar as interest rates rise. Credit card debt too has soared, carrying astronomical interest rates of 18% -20 %. And student loans total $1.6 trillion, with the Biden plan for forgiving such loans stalled in the courts.

So far, the US has avoided recession, and unemployment rates remain low. A recession will become a crisis for many who lose their jobs, and many economists predict a US recession is imminent. Last year, GDP fell for two straight quarters.

Israel’s debt crisis

On the face of it, overall, Israel is not drowning in debt. In 2022, a windfall of tax revenues brought the first government budget surplus in 35 years. This year, the 2023 and 2024 budgets project small deficits of less than 1%  –  though that is based on overly optimistic tax revenue forecasts. The global average government budget deficit is 4.5% of GDP.

Israel’s public debt is 61% of GDP, about half that of the US and roughly equal to the global average. Israel’s debt burden has fallen steeply over the past two decades.

Leave it to me, an economist, to find cause for losing sleep. I am concerned about the finances of us, the people.

A study by the investment house Meitav shows that only a third of Israeli households save money, while 38.5% just break even, and over a quarter of all households spend more than they earn. As a result, household debt has risen from about 27% of GDP in 1992 to today’s 45%.

Bank of Israel data show household debt growing by 7.9% annually. On average, Israel’s two million households owe nearly NIS 400,000 each, or about three years of the average monthly pre-tax wage.

Two-thirds of household debt is for mortgages. Monthly mortgage payments have soared by 25%, as interest rates rise. For a million-shekel mortgage, the monthly payment is now NIS 5,000.

At the same time, the cost of living is rising. April Consumer Price Index figures show an 0.8% rise, double what was expected, as inflation erodes household purchasing power.

And even before that, Israel was already an expensive place to live. According to the daily Haaretz, the cost of living in Israel is the seventh-highest in the world, above such expensive locales such as Singapore, Luxembourg and Hong Kong.

As the pro-democracy protests continue, Israel’s economy is sinking. Many are already feeling the pain.

To summarize: Both Israel and the US are drowning in debt.

In the US, it is mainly the government that is drowning. What this means for the average citizen is best summarized by a leading US economist, Douglas Holtz-Eakin, who said, “There’s going to be a generation of [American] voters who can’t get anything they want because all the money has been spoken for [by payments on the soaring debt].”

A century ago, in 1921, Herbert Hoover, later US president, remarked cynically, “Blessed are the young, for they shall inherit the national debt.” And indeed they have, and they will.

In Israel, it is households and families that are drowning. They are sandwiched between soaring prices and stagnating incomes, after buying overpriced apartments with giant mortgages and seeing their monthly payments soar while the value of their apartments begins to decline.

This, while the Netanyahu government focuses on its judicial reform, fiddling while household debt soars and inflation “burns.”

Nero would have felt right at home at a Sunday cabinet meeting. ■

The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com.