There has been an unfortunate outbreak of deficit naivety in the past few weeks. Ezra Klein declared the deficit “pretty much solved, at least for the next 10 years or so,” Daniel Gross greeted the news as a “bombshell,” and others have echoed that sentiment. He cites a recent Congressional Budget Office report on the subject, but the report itself is considerably less cheery, as is CBO director Doug Elmendorf, who has been bracingly honest in his dismissal of the happy talk that we can get the deficit under control without either cutting the benefits collected by middle-class Americans or raising their taxes.
That deficit that is “pretty much solved” for the next decade is the primary federal budget deficit, the Baby Deficit that adds to the Baby Debt, i.e., the official federal debt, which excludes the trillions upon trillions of dollars in unfunded liabilities related to Social Security, Medicare, and other entitlements. The deficit does look relatively small — only a few hundred billion dollars! — if you don’t count the real liabilities.
And if you take only the short-term view. The current reductions in the deficit are partly the result of unexpectedly large payments from Fannie Mae and Freddie Mac, which cannot be counted on to continue. They are also the result of recent tax increases and the modest brake on spending imposed by the sequester. Which is why Elmendorf is not dancing with Pollyanna, instead saying:
Federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. . . . Such high and rising debt would have serious negative consequences: When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.
So the takeaway is not “Problem solved!” or even “pretty much solved.” What are the lessons to be learned?
1. Austerity works. Our little experiment with the most modest kind of austerity — small tax increases, the sequester — has produced the desired results, also modest. (Our approach has been so modest, I’m not even sure I’d call it “austerity,” though I like the sound of the word.) The enduring claim by some on the right that the negative economic effects of tax increases undercut their value as a tool of deficit reduction does not seem to be borne out. Conservatives do not like tax increases, but conservatives also do not like defense cuts or deficits. You can prioritize that list however you like, but your chances of avoiding all three are pretty slim. So far as I can tell, the only people really complaining about the sequester are a platoon of federal lifers and a handful of defense contractors in Virginia. They’re all nice people, I’m sure, but if it’s their interests or the national interest, my preference is that they start looking for a paycheck not financed by taxpayers. Can we afford more defense cuts? I suppose that depends on how you feel about a war with Syria. Can we afford real cuts in non-defense spending? Of course. But neither of those is going to get it done until everybody admits that . . .
2. Entitlement reform is not optional. Social Security and (especially) Medicare will be the major drivers of debt going forward. Left unreformed, those programs will, simply put, consume the federal budget and destroy the American economy.
3. We can’t forget about cities and states. Last week I had a conversation about matters budgetary with some congressional budget leaders (I gave them the short version of The End Is Near And It’s Going to Be Awesome), which was encouraging to me but would have been discouraging to California and Illinois if they had been listening in, and a few other states, too. California and Illinois are badly upside-down when it comes to retiree pensions and other obligations, and there is no obvious way for them to get out of the hole they have dug for themselves — save one. Members of Congress already are girding themselves for the bailout requests they expect to receive from insolvent states, and the answer they are preparing to give is: “No,” possibly “Hell, no!” Their people may elect jackasses, but the Port of Los Angeles, Silicon Valley, and Chicago are big pieces of the American economic picture. If something is not done about our worst states, and done soon, they will make the federal picture that much worse — not because Washington is likely to bail them out, but because . . .
4. Growth matters. A lot. The Obama administration has, unsurprisingly, failed to deliver a robust and sustained recovery from the 2009 recession. There are many reasons for this, and scholarly tomes will be written about the sorry economic history of the Obama years. The relevant fact for deficit hawks is that slow growth means fewer jobs, which means fewer people paying taxes and more people supported by them. It is a national scandal that work real employment rate — the labor-force-participation rate — is down to levels not seen since the Carter years. I remain skeptical of dessert-first conservatives who think we can grow our way out of this mess without serious spending cuts, entitlement reform, and changes in tax policy, but better growth does have to be a part of the solution: a necessary but not sufficient condition for the restoration of fiscal sanity.
I am pleased that CBO is forecasting deficits that will be measured in the middle hundreds of billions of dollars range than in the low trillions range, but if you think that this is an occasion for breaking out the Veuve Clicquot and the 23-carat-gold-dusted chocolate-covered bacon (how do you celebrate?), consider this via Kyle Wingfield: On our current trajectory, spending on health care will double by 2023 to nearly $2 trillion per year; Medicare spending will double; Obamacare subsidies will cost $1 trillion; Social Security will nearly double; interest on the debt will double, meaning that it will be the third-largest item on the budget, behind health care and Social Security.
So, unless you intend to spend the next ten years pretty much solving your problems by emigrating to Switzerland or Singapore, there is little if any cause for celebration.
— Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.