Deficit Dreams
Liberals like Paul Krugman are blissfully ignoring the risks of our rising debt.


James Pethokoukis

America’s massive deficits and debt are terribly inconvenient for the Left. Dreams of continent-spanning bullet trains, clean-energy Manhattan Projects, and bailouts for underwater homeowners can be nothing more than fantasies when liberals have to, you know, find the dough to pay for them — and without raising income taxes on the middle class. Just look at all the scams and schemes Democrats had to cook up to pay for Obamacare — or at least create a reasonable impression it’s paid for. An investment tax here, a medical-device tax there. Stealthily siphoning nearly a trillion dollars out of Medicare. Unfortunately for progressives, their desire for bigger government is endless, but their bag of fiscal tricks is limited.

If only President Obama could issue an executive order disappearing the national debt. If only Harry Reid and Nancy Pelosi could simply wish the deficits away. They can’t, of course. But that doesn’t mean some on the left aren’t trying anyway. For instance, last Friday economist and New York Times columnist Paul Krugman wrote that “neither the current deficit nor projected future spending deserve to be anywhere near the top of our political agenda . . . [there’s] no big problem in the medium term, no strong case for worrying now about long-run budget issues.”

The way Krugman sees it, much of the hard work has already been done. He notes that, thanks to the Budget Control Act’s budget caps and the recent $620 billion tax hike, the debt-to-GDP ratio “will be only modestly higher in 2022 than it is now.” Good work, Washington, let’s call it a day.

But inconveniently for Krugman, the U.S. Treasury last week released the federal government’s annual financial report. It doesn’t paint a pretty picture of USA Inc.’s finances. If the United States were a company, it would have a balance sheet from the circle of corporate hell where also resides Enron, MF Global, and Lehman Brothers. As of September 30, 2012, Uncle Sam had roughly $2.7 trillion in assets, half of which were property, plant, and equipment. (The Fed’s printing press is off balance sheet, presumably.) On the other side of the ledger were a whopping $18.8 trillion in total liabilities, including $11.3 trillion in federal debt held by the public and $6.3 trillion in federal-employee and veteran benefits payable. After those scary stats came this chillingly understated addendum: “As budget deficits continue to occur, the Government will have to borrow more from the public. Instances where the debt held by the public increases faster than the economy for extended periods can pose additional challenges.” Quite right.

But if America’s finances seem shaky today, they’ll look far worse tomorrow. Like Krugman, Treasury forecasts that the ratio of publicly held debt to GDP will head a bit higher over the next decade, to 78 percent in 2022 from 73 percent in 2012. But unlike Krugman, Treasury keeps counting: “[The debt-to-GDP ratio] under current policy is projected to grow to . . . 145 percent in 2042, and 395 percent in 2087.” Treasury concludes that such a trend is “unsustainable.”

Every year we wait to deal with the long-term debt problem, the more drastic the fixes will need to be. That’s the good news, as it were. But what if economic disaster strikes again? In 2007, the federal government had a budget deficit of $161 billion, or 1.2 percent of GDP, while publicly held debt was $5 trillion, or 36 percent of GDP. Last year, the budget deficit was over $1 trillion for the fourth consecutive year, and publicly held debt was 72 percent percent of GDP. Could the economy survive another debt doubling from another Great Recession?


Also at the end of last week, the Federal Reserve released transcripts from its 2007 policymaking meetings. The ones from December 2007 were particularly telling. December, of course, is when the Great Recession officially began. But during that pivotal meeting, the Fed’s chief economist, Dave Stockton, told the governors and regional bank presidents that the economy would likely continue to grow at a so-so pace in 2008 and 2009, despite “all the financial turmoil.” (He jokingly assured the gathering that the Fed’s economic team was not “under the influence of mind-altering chemicals” but “came up with this projection unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies.”) Stockton then cautioned that his GDP forecast might even be a tad on the low side given the “generally firm conditions in labor markets.”

But we shouldn’t be too hard on the guy. The business cycle is hard to predict. Good times can quickly turn to bad. You just never know — which is why responsible policymakers should work to reduce the debt and reform entitlements, not just kinda sorta assume the debt will stabilize at a historically high level. Liberals may wish to stay asleep a while longer and continue to dream that those trillions in debt don’t matter. But they better hope they wake up before global financial markets do.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

EDITOR’S NOTE: This article has been amended since its original posting.