There is a new genre of journalism in full flower, the “there is no debt problem” column, a recent example of which can be found under the byline of Matthew O’Brien of The Atlantic here, headlined: “Sorry, deficit hawks, the debt crisis ended before it could begin.” The species deserves to go extinct.
Arguing that the debt has been brought to heel for the next decade, Mr. O’Brien writes:
The debate is over, and the deficit hawks lost. After years of warnings about trillion dollar deficits as far as the eye could see, it turns out they just couldn’t see far enough: the budget is moving quickly — too quickly — towards balance even without a “grand” bargain.
In other words, we are not Greece. The debt doesn’t need to be “fixed.”
Even if Mr. O’Brien were correct and the debt had been brought under control for the next decade, that would hardly constitute solving the problem — not when at the end of that decade the projected deficits climb right back into existential-crisis territory. Consider the Congressional Budget Office’s projections under the “alternative fiscal scenario,” i.e. the more realistic projection in which Medicare payments are not radically cut and in which “federal spending as a percentage of GDP for activities other than Social Security, the major health-care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level.” Working from those assumptions, the CBO projects that our current course is a fiscal beeline for disaster.
Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.
That is not off in the Buck Rogers future — that’s around the time kids being born today get out of college.
And, of course, it’s worse than that. Mr. O’Brien bases some of his optimism on a CBO estimate that we will spend about $600 billion less on Social Security, Medicare, and Medicaid in the next decade than had been projected under the last forecast. But even if that comes to pass, Mr. O’Brien is ignoring the biggest piece of the entitlement picture: the unfunded liabilities. There are basically three important pieces to the fiscal picture when it comes to the entitlements: money in, money out, and future benefits promised. The CBO has indeed forecast that the money-out picture for the entitlements is $600 billion better than under its last projection, which is great — but which is dwarfed by the accumulation of unfunded promises of future benefits under those programs during the same time, which amounts to trillions of dollars a year. As Chris Cox and Bill Archer put it:
When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.
The no-problem-here argument also ignores the problem of state and local debt — and how’s that working out for Detroit?
Put another way, the debt crisis is solved, if you ignore most of the debt. Of course our entitlement promises are not formal debt in the sense that Treasury bonds are, and of course it is a certainty that they are not going to be paid out at their present value. But that does not mean that we have a get-out-of-fiscal-jail-free card up our national sleeve. We experienced a very nasty recession in 2008–09 because Americans saw some $7.5 trillion in home equity disappear. (The vanishing equity caused the recession, not the other way around.) Americans thought they had $7.5 trillion more wealth than they had, and they had made economic plans (about working, saving, and consuming) based on that belief, and businesses had made plans of their own to accommodate them.
Similarly, Americans currently believe that they have some claim to entitlement benefits that are underwater to the tune of more than $60 trillion in unfunded liabilities. If a $7.5 trillion hit caused the Great Recession, imagine what a $60 trillion hit is going to do. It does not matter that no American in his right mind should have a rational belief that he is going to collect promised entitlement benefits; nobody in his right mind should have believed that the home prices were going to keep going up forever, either.
Another point to consider is that economists talk about “stabilizing” the debt in terms of its proportion to the national economy. Surely that is the most important measure, and possibly the only relevant measure for a smaller country. But the United States accounts for about one-fifth of the entire world’s economy. The market for sovereign debt is large, but it is finite. Even if we ignore the unfunded liabilities and just look at the cash deficit, the United States is planning to borrow at least 1 percent of the entire world’s economic output, year in and year out, for the foreseeable future, just to finance the federal budget deficit. Environmentalists love the formulation: “The United States has only 5 percent of the world’s population but consumes X percent of . . . ” The annual U.S. budget deficit is at present about the size of the world’s steel industry ($600 billion per year). It is very likely that the world’s investors will find competing uses for that money.
To extrapolate from current CBO projections that the deficit problem is solved is to ignore the total sum of factors, to say nothing of the CBO’s own dire warnings. Just as the errors in Reinhart and Rogoff’s debt study caused a great many commentators to dismiss “austerity” policies out of hand — as though Reinhart and Rogoff’s work had been the only part of the argument, or even the most important part of the argument — the CBO’s latest projections will provide a handy excuse for ignoring our debt problem, especially for those already looking for an excuse to ignore it.
— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.