The Debt Deniers’ Fantasy
Prominent liberals are now insisting that we face no debt problem at all.


Michael Tanner

Moreover, by cutting off the trend line in 2022, the debt deniers ignore the enormous unfunded liabilities of Social Security and Medicare, the costs of which will kick in mostly beyond this limited budget window. According to Social Security’s board of trustees, the discounted present value (the amount that would have to be set aside today, earning 3 percent interest, in order to pay future shortfalls forever) of that program’s unfunded liabilities is more than $20.5 trillion. And, according to the most optimistic estimates by the Obama administration itself, the discounted present value of Medicare’s unfunded liabilities is more than $42 trillion. And that is an estimate that assumes Obamacare actually reduces health-care costs.

True, those obligations represent the “softest” form of debt. But “soft” does not mean debt that can be completely dismissed. According to generally accepted accounting principles (GAAP), by which private corporations abide, promises to pay future benefits are generally categorized as debt. After all, those benefit payments are called for under current law, and it would take congressional action to change them. Unless and until Congress reforms Social Security and Medicare, those obligations exist, but debt deniers are especially vehement in their opposition to precisely such reform. By their very failure to reform Social Security and Medicare, the deniers harden the program’s future liabilities.

If we include all this debt — public debt, intragovernmental debt, and unfunded liabilities — we currently owe at least $79 trillion, 500 percent of GDP, and perhaps as much as $127 trillion, 800 percent of GDP.

That said, these future liabilities will be paid not out of today’s but out of future economic production, which will inevitably be larger. Measurements of the discounted present value of future liabilities are extremely sensitive to assumptions about future interest/discount rates. Therefore, a better way to calculate the true size of the national debt might be to measure the share of a country’s future GDP that will be required to finance that debt. By this measure, the United States faces a debt equal to an additional 9 percent of its future GDP forever.

However, this may underestimate the tax burden required to pay the debt, because a country’s tax base is only a fraction of its GDP. Accordingly, the tax increases required to pay the debt would need to be much larger as a percentage of the current tax base than as a percentage of GDP. For example, the payroll-tax base equals slightly less than one-half of GDP, implying that the 15.3 percent U.S. payroll-tax rate would have to be more than doubled to pay our debt. Similarly, the income-tax base is roughly 36 percent of GDP, meaning that revenue from income taxes would have to more than double, requiring massive rate increases just to pay what we owe.

Taxes at such levels would almost certainly depress both investment and consumption, substantially slowing economic growth.

Indeed, the debt is likely reducing economic growth already. The International Monetary Fund looked at the relationship between debt and economic growth, concluding that, from 1890 to 2000, countries with high debt levels have consistently experienced slower economic growth than those with low debt levels. Similarly, economists Carmen Reinhart and Kenneth Rogoff concluded that countries with debt totaling more than 90 percent of GDP have median growth rates one percentage point lower than countries with lower debt levels, and average growth rates nearly four points lower. The slow economic growth that the United States has seen coming out of the recession is likely due in part to our high levels of government debt.

Perhaps this was all thought up by President Obama’s Muslim Kenyan overlords to hide the Mossad’s role in 9/11, but I sort of doubt it. The debt deniers’ argument is about as unrealistic.

— Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.