Three years ago a debt-hawk U.S. senator, a Republican, offered me this can’t-miss prediction: The American economy was only a year or two away from a second major financial crisis. But unlike the one in 2008 caused by a burst housing bubble, the one in 2011 or 2012 — at the latest — would be caused by a collapsed bubble in U.S. federal debt. Fearing either default or surging inflation or both, investors would sell Treasuries and dump the dollar. The bill for Washington’s years of profligacy would finally come due. The day of debt reckoning, the senator warned with absolute conviction, was nigh.
A permabear, gold-hawking, doom-and-gloom investment-newsletter writer couldn’t have outlined a darker or more depressing depiction of a nation just minutes from fiscal midnight.
Nothing like that has happened, of course. The national debt is bigger, $17 trillion today versus $13 trillion then. And zippo has been done to break the approaching tidal wave of entitlement debt. Subtract projected future taxes from promised future government expenditures, as economist Laurence Kotlikoff does, and you arrive at monstrous long-term fiscal gap of $205 trillion.
But interest rates on long-term Treasuries and the value of the dollar against other major currencies are almost exactly the same today as when that senator unleashed his jeremiad. If investors are worried about a debt crisis or dollar collapse any time soon, it’s awfully hard to tell. One theory: The Fed is suppressing interest rates through its bond-buying program (“quantitative easing”). But despite all those bond purchases, it holds roughly the same share of marketable Treasuries today as it did over the past few decades. What’s more, there is actually some good news on the debt front: The federal budget deficit is falling so quickly that there’s a reasonable chance of a slight surplus in 2016. For the time being and for many years to come, the growing American economy can easily handle its debt burden.
None of this is to deny that the longer-term debt picture remains daunting. According to the Congressional Budget Office, publicly held federal debt is expected to climb as high as 250 percent of GDP by 2038 when you factor in the potential economic damage caused by such a large debt burden. And then the agency adds this kicker: “In CBO’s judgment, the agency’s model cannot provide reliable estimates of the economic impact of debt exceeding that magnitude.” So certainly better to do entitlement reform now and avoid draconian spending cuts and tax hikes in the coming decades.
But the GOP policy agenda must be about more than debt and deficits. Politically, a message heavily weighted toward debt reduction and spending cuts would seem to lack wide appeal. In a CNN poll in September, 41 percent of Americans put faster economic growth as their top priority, while the deficit came in fourth, at 13 percent. More recently, in a CBS poll, the economy and jobs came in first, with 26 percent of respondents putting them at the top of their list; the budget got 13 percent.
Sound economics also demands a broader, richer economic-policy agenda. While there are lots of frightening numbers about debt, there are plenty of scary stats about other things, too. Here are a few: The U.S. economy is roughly 8 million jobs short of full labor-market recovery. Just to get back to where we were in 2007 would take an additional 4 million full-time jobs. The share of Americans with any job has barely budged from recession lows. Median household income before taxes, benefits, and non-cash government transfers, according to the Census Bureau, fell by 8 percent between 2007 and 2012 after adjusting for inflation. More than 4 million Americans have been without a job for 27 weeks or longer. The smartest U.S. kids have only a one-in-four chance of reaching the top fifth in income if their parents were in the bottom fifth. The three biggest U.S. banks now hold more than half of bank assets, up 25 percent since before the financial crisis.
The American economy needs more growth, more jobs, more take-home pay, more mobility, more affordable education and health care, and less crony capitalism. Corporate tax cuts, Medicare reform, and Obamacare repeal are insufficient responses to the challenges posed to working Americans by automation, globalization, and the aftermath of the Great Recession.
Figuring out smart, pro-market policies in 2014 to deal with 21st-century problems would be a great New Year’s resolution for Republican lawmakers.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.