The Deficit Is Not Fixed
The debt crisis is solved — if you ignore most of the debt.


Kevin D. Williamson

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.

What does that mean? CBO again:

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?