The headline numbers from the Congressional Budget Office’s newest debt and deficit estimates: Publicly held debt will be at 100 percent of GDP in 25 years, driven by spending on health care and Social Security that will double over the next quarter century. In spite of the fact that taxes as a share of GDP will be higher than their historical average, the debt will continue to grow — and interest payments on that debt will more than double from their current levels.
That’s the best-case scenario.
The more realistic outcome is that each of those measures of debt and spending as a share of GDP will in fact be considerably worse, because our GDP will grow more slowly. We have entered the realm of the vicious circle: Debt and deficits will slow down economic growth, and slower economic growth will make our debt and deficits worse.
Our growing debt slows down economic growth by sucking up capital that could have been used for productive investments. Today’s investors pay higher taxes to fund yesterday’s spending — at the expense of tomorrow’s workers, taxpayers, and entrepreneurs. As the CBO puts it:
The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. . . . Increased borrowing by the federal government would eventually reduce private investment in productive capital, because the portion of total savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income in the long run than would otherwise be the case.
The cost of government spending isn’t just the total in the column marked “total disbursements” on the great Washington cash-flow statement. It is that plus the economic growth forgone as a result of that spending.
The CBO, to its credit, has attempted to get a handle on how heavily that growing debt will weigh upon economic activity in the next 25 years, and the answer is worrisome: Taking into account the economic effect of those deficits, instead of our debt hitting 100 percent of GDP in 25 years, CBO estimates that it will hit something closer to 200 percent of GDP — or 250 percent under the least sunny scenario. (There are even less-sunny scenarios, but the CBO does not believe that it can model them reliably.) Note here that these estimates also assume that the sequester and other deficit-control measures remain in place, which would consequently mean that spending on everything outside of Medicare, Medicaid, Social Security, and debt service — everything else the government does — will be reduced far below current levels, in fact reverting to pre–World War II levels as a share of GDP. That is unlikely to be the case. Assume, then, that those spending and debt numbers look worse to the extent that the ladies and gentlemen in Washington lack the brass to resist demands for more domestic spending — and more military spending, too. The loudest and most insistent critics of the sequester have been defense contractors and the cluster of politicians in Maryland and Northern Virginia most sensitive to their complaints.
This is not just a balance-sheet problem; it is a problem of values and a problem of philosophy. On the one hand, we have the traditional conservative view that the role of government is to protect property and enforce contracts. The traditional antagonist to this view has been socialism, and in a sense it still is, though the old-fashioned Marxist analysis has been supplanted by what we might call the “Hey, the government invented the Internet!” school of economic analysis.