The Corner

Controlling the National Debt: Chess, Not Checkers

Paul Ryan’s widely discussed budget proposal prominently features several charts designed to emphasize the severity of our budget problems. It’s easy to remember these long-term forecasts by using a lot of 80s: in 2080, government spending is projected to be a little less than 80 percent of GDP, and accumulated debt is projected to be over 800 percent of GDP.

The one thing that I can state with some confidence about these specific forecasts is that they are wrong. In the real world, something — either more prudent management of our federal fiscal affairs, or else a painful and destabilizing crash — will intervene.

The long-term forecasts, however, illustrate the crucial point that we are sitting on the mother of all bubbles. Many, probably most, Americans anticipate a stream of consumption that will be provided for them into old age by the government (i.e., other taxpayers). Unfortunately, most American taxpayers do not anticipate the kind of enormous increase in taxes that would be required to pay for this stream of benefits. One or both of these expectations will not be met. Americans as a whole are simply less wealthy, in the most useful sense of rationally anticipatable future material consumption, than they think they are. And the size of this disconnect is vastly greater than, for example, the size of the housing-price bubble that just popped.

The only good news is that most of this unfunded spending anticipated under current law is decades away. This matters a lot. If we faced a total collapse of our economy 75 years from now, but could keep pushing the deadline out by about one year per year, it would remain theoretical.

But the bad news is that, in this instance, the combination of the debt we have just put on our balance sheet, plus the deficits that are scheduled to be created by these programs over the next 10 to 20 years, means that we need to confront this problem soon. We have increased public debt from about 40 percent of GDP in 2005 to about 70 percent of GDP by the end of this year; and we are projected to exceed the historical peak debt of about 100 percent of GDP (achieved at the close of World War II) within the next 15 years; thereupon we enter uncharted territory.

The borrowing capacity of the U.S. government is vast, but it is not limitless. At some point that nobody can predict, we will not be able to borrow enough to continue spending n the manner that current law assumes without extremely large negative effects. This is the way the bubble will very likely pop, if we let it come to that: a funding crisis for the U.S. government. This is very unlikely in 2011, or 2012 or 2013; but over 20 years, we are playing with fire. In essence, we don’t need to care that much about the projections for 2080, because long, long before that, we’re going hit the wall, unless we somehow address the problem.

The rational goal is to push the point of crisis out well beyond the current planning horizon. There is no “long-term solution” that can ever be achieved by any budget deal. In the end, the ballast in the entitlement and budgeting system that prevents it from going haywire in the long run is the good sense of the American electorate. That’s why neither the conservative emphasis on the character of the people, nor the progressive focus on maintaining social consent for the capitalist system, is entirely misplaced.

The ball we need to keep our eye on is not so much the theoretical ultimate cost, as how much time we have left before we crash. We should want a set of entitlement rules that we believe to be sustainable in perpetuity, but we need to push out the date at which we would have a crisis.

As a result, I think that a lot of the discussion of the Ryan plan, and of President Obama’s speech, has missed the point because it has been excessively focused on statements about what “we” will do many years from now. Setting a general direction and showing that it is possible to get tax receipts to equal expenditures is helpful in creating political momentum. It is also useful in that, on the margin, it can get lenders to the U.S. Treasury to be more comfortable with the safety of their investment.#more#

But beyond this, long-term targets are mostly a sound-and-light show, because we can’t really control today what spending and taxation levels will be in 2065 or something, as each future Congress can change whatever it wants. These out-year targets are very much like proposed laws that would “guarantee” that carbon dioxide emissions will be 80 percent below today’s level in 2050. They will, unless and until that future electorate decides that they don’t want to forgo the economic consumption that this would require any more than we do in 2011.

A real plan to address our debt problems, then, should focus on two key elements: (1) putting in place mechanisms for influencing future legislatures that we cannot command, and (2) enacting structural reforms that will simultaneously encourage general economic growth as they do this.

One thing that helps to address the first requirement is to try to establish enduring public opinion, which is the primary real benefit of the debate and long-term targets that I referenced above, as this will hopefully have some effect on the political landscape confronting Congress for years. Another is to force some real spending cuts now, not just in the future, which affects both the future baseline and mindset. But the most important thing is to change the rules of the game. That is, to tilt the playing field so as to bias the system toward reducing deficits as compared to the current system each year. Of course, there are no absolutes — anything can be changed by a future Congress, or if necessary, via constitutional amendment. The goal of the policymaker who wants to deflate the bubble is to make it much harder to do this than simply by passing a budget with X instead of Y dollars for some purpose. Paul Ryan is a skilled budget technician, and seems to me to have prioritized a number of features that will help to serve this purpose. This is the boring, nerdy-sounding stuff like “Create a budget point of order against legislation that would increase net mandatory spending beyond the ten-year window of the budget resolution,” and “Close the loophole that allows discretionary limits to be circumvented through advance appropriations” that form much of the guts of the plan.

The second requirement is that the plan should look hard for two-fers that create structures that both help the deficit problem, but also help growth in the long-term. One example of this is to get the tax code simpler and broader. Reducing or eliminating a large number of deductions (business and personal), convoluted subsidies and so on, not only helps with the short-term debt problem, but should help the economy grow over time by getting rid of distortions. This is a major emphasis of the sensible Bowles-Simpson report, and there are numerous (too timid in my view, but I don’t have to get elected to anything) instances of this in the Ryan plan, such as reform of the corporate tax structure, eliminating some agricultural and energy subsidies, and winding down government sponsorship of the mortgage lending business. Another example is decentralizing decision-making through exactly the kind of block grants of Medicaid and “voucherization” (in the conceptual sense, via premium support) of Medicare that Ryan has proposed. Rates and spending levels can always be changed back in the face of inevitable future “crises,” but structures are much harder to undo. Again, this can be used to get costs down short-term, but their major benefit is helping growth decades out. The silver lining of this crisis is that by being honest with ourselves about our current situation, we can hopefully establish a practical platform for future growth and prosperity.

Paul Ryan’s willingness to stand up and provide a comprehensive and understandable projection of balanced total inflows and outflows for the U.S. federal government is what marks him as serious about this problem; but the specific proposals to reduce spending now, to change the rules of the game, and to restructure the welfare state in ways that will encourage long-term growth, are what make the Ryan plan serious.

Ideally, these various strands would be combined by a national leader into an overall program that combines a long-term vision, sustained public support, changed rules of the game, and institutional structures designed for the 21st century rather than the 20th to partially lock-in a program over a long period of time. A great model for doing exactly this is the combination of FDR’s brilliant political messaging, the creation of powerful rent-seeking constituencies, and laws that set benefit changes on autopilot unless Congress proactively changes them (rather than, for example, demanding “zero based” budgeting for Social Security each fiscal year), that created the entitlement system that we are now trying to reform. All products of human agency have a finite lifespan. Like the FDR vision of the entitlement state that now appears to be in its death throes, whatever we put in place will eventually become antiquated and have to be replaced. Our job is to make sure that this happens 75 years from now, not 10 years from now.

Jim Manzi — Jim Manzi is CEO of Applied Predictive Technologies (APT), an applied artificial intelligence software company. Prior to founding APT, Mr. Manzi was a Vice President at Mercer Management Consulting where ...

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