Standing before Congress and 43 million TV viewers last week for his state of the union address, President Barack Obama reached half a century into the past to convey the challenges facing his country in the future. “This,” he said, “is our generation’s Sputnik moment.” But if the space race, kicked off by Sputnik’s launch in 1957, was the signature challenge of a generation, it’s the rebuilding of American economic might that is the challenge now. And the enemy isn’t the Soviets, it’s the country’s towering mountain of debt: US$14 trillion and counting.
Whether Obama’s speech writers realized it or not, something else quite remarkable happened in 1957 that, while long forgotten, is far more relevant to the debt debate today. That year America balanced its books for the second year in a row. It would mark the last time the U.S. would post back-to-back budget surpluses. Instead, the U.S. has sunk deeper into debt with every passing year, save two rare exceptions: 1961 and 2001, when the dot-com bubble artificially boosted tax revenue that year.
For half a century America has lived far beyond its means. In the same way overextended households, which recklessly used the equity in their homes as ATM machines, finally collapsed under the weight of their mortgages and triggered the Great Recession, the U.S. has mortgaged its future to pay for wars, lavish health care and social security programs, government employee pensions and ever lower taxes. But many economists believe there’s a limit to how long Washington can go on borrowing before it faces a sovereign debt crisis of its own, plunging markets into chaos and triggering a crisis that will make the Great Recession look like a minor stumble. We’re already seeing several heavily indebted U.S. states like Illinois, California and New Jersey pushed to the brink—New Jersey Gov. Chris Christie has talked openly about the state going “bankrupt.”