The Corner

Obama’s Risky Debt

Robert Samuelson of the Washington Post has a great but depressing article this morning where he explains how much debt this country has, and how much will soon be added to that amount thanks to the lack of spending restraint of our dear leaders (all of them, present and future leaders — have contributed and many of them still contribute to the problem, with the exception of the newly fiscally responsible Republicans).

Let’s see. From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that’s atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.

But wait: Even these totals may be understated. By various estimates, Obama’s health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. From 2008 to 2019, total federal spending would rise 75 percent, but defense spending would increase only 17 percent. Unless foreign threats recede, military spending and deficits might both grow.

Where does that this leave us?

At best, the rising cost of the debt would intensify pressures to increase taxes, cut spending — or create bigger, unsustainable deficits. By the CBO’s estimates, interest on the debt as a share of federal spending will double between 2008 and 2019, to 16 percent. Huge budget deficits could also weaken economic growth by “crowding out” private investment.

At worst, the burgeoning debt could trigger a future financial crisis. The danger is that “we won’t be able to sell [Treasury debt] at reasonable interest rates,” says economist Rudy Penner, head of the CBO from 1983 to 1987. In today’s anxious climate, this hasn’t happened. American and foreign investors have favored “safe” U.S. Treasurys. But a glut of bonds, fears of inflation — or something else — might one day shatter confidence. Bond prices might fall sharply; interest rates would rise. The consequences could be worldwide because foreigners own half of U.S. Treasury debt.

And as Samuelson concludes:

The wonder is that these issues have been so ignored. Imagine hypothetically that a President McCain had submitted a budget plan identical to Obama’s. There would almost certainly have been a loud outcry: “McCain’s Mortgaging Our Future.” Obama should be held to no less exacting a standard.

Read the whole thing here

My latest Reason column on whether deficits matter is here.

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