Exchequer

CBO: Here Is What a Debt Crisis Looks Like

Jonathan Huntley of the Congressional Budget Office’s Macroeconomic Analysis Division has performed a public service, producing a lucid report on the state of the national debt that is as clear and informative an analysis of the subject as one could hope to discover from a government source. He places our debt in its historic context, considers the constraints a growing debt will place on national action, measures the possibility of a critical public fiscal crisis, explores debt-related fiscal crises in three other countries (Ireland, Greece, Argentina), considering the ways in which the U.S. government-debt situation is comparable to them and the ways in which it is different. For an eight-page report, this is a lot of ground to cover. I do recommend reading the whole thing.

Particularly refreshing is the realism of CBO’s “alternative fiscal scenario.” The official version, the false gospel, is the “extended baseline scenario,” the static analysis that simply extends all current policy out into the future, assuming that there are no changes to the laws that affect our taxing and spending. The “alternative fiscal scenario” incorporates the things that are going to happen that nobody really wants to talk about: Doctors’ payments are not going to be cut under Medicare, and the “doc fix” will live on and on in legislative limbo; most of the 2001 and 2003 tax cuts will be retained and the alternative minimum tax will be indexed to inflation; tax revenues will not climb much above or fall much below 19 percent of GDP. Etc. Under that scenario, the national debt, measured as a portion of GDP, will soar. Get a load of this steeply rising dotted line:

That graph looks like your blood sugar level after an hour at the dessert buffet. But, as usual, things that look really bad on paper turn out to be a lot worse in reality. That’s because even the CBO’s realistic scenario does not account for the effects that all of that debt is going to have on economic output. In truth, the debt as a share of GDP probably will be much heavier than even this analysis predicts. The CBO report itself is careful to point that out:

By 2020, debt would equal nearly 90 percent of GDP. After that, the growing imbalance between revenues and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push federal debt to unsustainable levels. Debt held by the public would exceed its historical peak of about 110 percent of GDP by 2025 and would reach about 180 percent of GDP in 2035. Indeed, if those estimates took into account the harmful effects that rising debt would have on economic growth and interest rates, the projected increase in debt would occur even more rapidly. Under the alternative fiscal scenario, the surge in debt relative to the country’s output would pose a clear threat of a fiscal crisis during the next two decades.

In short, the CBO is ringing the church bells, sounding the klaxons of alarm, and basically belting out a whole Götterdämmerung of fiscal angst, in its quiet, wonky way. In other words, pay attention, Congress.

Another useful observation in this report: We really do not have any experience to guide us in this matter. While debt as a share of GDP was similar during and just after World War II, the economic situation of the late 1940s is not really comparable to the economic situation of 2010. And we do not have a good indicator of how much public debt will trigger a fiscal crisis. Ireland, Greece, and Argentina had very different levels of debt before their fiscal crises. And the U.S. economy is always a special case, as the report argues:

The United States may be able to issue more debt (relative to output) than the governments of other countries can, without triggering a crisis, because the United States has often been viewed as a “safe haven” by investors around the world, and the U.S. government’s securities have often been viewed as being among the safest investments in the world. On the other hand, the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors.

So, which is it? Unhappily, there is no way to know. Or, there is a way to know: but you don’t want to find out that way. While the Obama administration continues to promise a fundamental transformation of American society, the conservative values of prudence and caution are what’s called for instead.

The CBO report emphasizes that making changes in our spending policies, particularly in our entitlements, will be much less painful if we starting doing so now, rather than when we are in a true crisis. Early action gives people, businesses, and policymakers time to adjust — and that time is a precious commodity rarely appreciated until it is needed. Sober present action can forestall future dangers — if anybody in Washington has the guts to make that happen.

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