Magazine | November 21, 2016, Issue

A Fiscal Collision Course

The asteroid will hit our economy in 2021

The Vox gang has a little trouble peering into the future, but its members are immune to the acquisition of humility. Matt Yglesias: “Laying down the marker — Obamacare implementation’s going to be great and people will love it.” Not quite. Ezra Klein: “I can’t believe the White House’s strategy on Syria is working out this well.” Gary Johnson has been more convincing, and he can’t find Aleppo on a map. From 2015: “The Memphis Grizzlies will win the NBA championship.” Out in the first round — nobody ever sees Portland coming. “Tyri­on Lannister will narrowly escape death at Dany’s hands.” Etc. So you might want to take it with a whole Salzburg’s worth of NaCl when Klein declares, as though it were a self-evident truth: “Things that are not a problem right now: the national debt.”

Things that are a problem right now? “Climate change,” he insists.

How much would you bet on the proposition that the national debt is not a problem?

The unpleasant fact is that we have made a very, very large national wager on that, which is both foolish and dangerous. We might end up coming out of our current fiscal mess unscathed. People also do win the lottery and games of Russian roulette — but that does not make either of those a very intelligent retirement plan.

That the annual federal deficit and government debt have momentarily re­ceded from the forefront of our national politics is the result of one of those Republican political successes that the lively and imaginative ladies and gentlemen on cable news and talk radio insist do not exist. In 2008, the voters of this country unwisely gave the Democratic party total control of the elected branches of the federal government: President Barack Obama, Speaker of the House Nancy Pelosi, and Senate Majority Lead­er Harry Reid had effectively uncontested power over all federal policy, including taxes and spending. As the fight over the Affordable Care Act made clear, even a totally united Republican front was in­sufficient to stop the Democrats’ doing what was important to them. What was important to them was spending money and converting health insurance into a welfare benefit.

The fiscal attitude of the George W. Bush years, with Republicans largely in charge of congressional purse strings, had hardly been austere. But even with 9/11, the Afghanistan and Iraq Wars, and the large jump in the deficit (to $459 billion) that accompanied the beginning of the 2008–09 financial crisis, annual budget deficits ran on average about $250 billion a year from 2001 to 2008. In 2007, the deficit was just 1.1 percent of GDP, or what technical economists refer to as “essentially zilch.”

One-party Democratic rule turned that around ricky-tick. Democrats like to talk about jacking up taxes on the rich, but, being elected officials, they are in reality much more eager to spend than to tax, and the significant but relatively modest deficits of the Bush years quickly ballooned: to $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, $1 trillion in 2012.

Republicans regained control of the House in the 2010 elections and of the Senate in the 2014 elections, and right back down went the deficit: $680 billion in 2013, $485 billion in 2014, and $438 billion in 2015. In 2015, that meant a deficit equal to about 2.4 percent of GDP; in fiscal year 2016, that number jumped up to 3.2 percent of GDP. That doesn’t sound like a very large jump, but it is. Most economists calculate that a sustainable U.S. deficit — which is to say, a deficit that remains fiscally manageable in light of the growth in our economy — is somewhere between 2 percent and 3 percent. You can run that same 2007 deficit of 1.1 percent of GDP over and over indefinitely; that 2009 deficit of 10 percent of GDP, repeated annually, will put six feet of dirt on top of your economy pretty quickly.

Right now, deficit policy is more or less on autopilot. During her presidential campaign, Hillary Rodham Clinton claimed, repeatedly, that her big-spending plans would not add a dime to the national debt. There was plenty of reason to be skeptical about such claims — the so-called Affordable Care Act was deficit-neutral, too, if, like Ezra Klein et al., you foolishly took as gospel (or at least pretended to) the ludicrous political assumptions underpinning the associated fiscal projections. But even if we were to take Mrs. Clinton at her word, that is far from good enough. Mrs. Clin­ton was not claiming that the national debt would not increase under her fiscal policies; she was promising ing that it would not increase more than it already is projected to increase under current policy. The Clintons have always ex­celled at setting very low standards for themselves, and Mrs. Clinton’s great boast during the 2016 campaign was that her economic program would, if everything worked out according to plan, simply not make things any worse fiscally than they already are.

The problem is that things are considerably worse than they seem.

With all due appreciation for what congressional Republicans have been able to accomplish — reducing the deficit in real terms is a genuine victory — the tools they have used and the solutions they have enacted are oriented toward the short term. It is good to do short-term things; fiscal reforms put off to the misty future have a way of failing to materialize. But the real spending problem is long-term. Under current Congressional Budget Office projections, we can expect to see deficits in the range of 3.0 to 3.6 percent through 2021, and then a jump to deficits above 4 percent — and getting uncomfortably close to 5 percent — through 2026, the last year for available projections, when the deficit is projected to hit 4.9 percent of GDP.

From there? Up, probably.

Those projections rely on assumptions about spending and revenue that probably are too optimistic. For example, the fiction that Obamacare will reduce the long-term debt is based in part on assumptions about controls on health-care expenses that are unlikely to materialize and, more immediately, on promises about revenue generated by the taxes, fees, and penalties associated with the Affordable Care Act. The problem is that most Democrats, and many Republicans, do not wish to collect those taxes. Both Mrs. Clinton and Senator Bernie Sanders, the Vermont socialist who vexed her throughout the primary, proposed repealing the “Ca­dillac” tax on generous and expensive health-care policies such as those typically enjoyed by the highly paid public-sector-union workers who make up the Democrats’ most important constituency. Anti-tax Republicans want to kill that Cadillac tax, too.

The Cadillac tax raises money in two ways: straightforwardly, by putting a levy on health-care benefits above a certain threshold, and indirectly, by encouraging employers to shift compensation away from untaxed medical benefits and into taxable ordinary income. The CBO has been scaling back its revenue estimates from the Cadillac tax considerably, but the levy still is estimated to be on track to produce $87 billion in revenue over a decade. Repealing it would put a dent in the budget about the size of adding an extra Commerce Department or EPA.

In the long term, deficits will be driven by health-care programs and Social Security, to the exclusion of most other spending. The combined Social Security retirement and disability trust funds (OASDI) have been in decline since expenditures began outpacing revenue in 2010. In 2015, OASDI benefit payments totaled $877 billion, but revenue payments (excluding pro forma “interest” on trust-fund “loans” to the general fund) were only $786 billion. In fiscal year 2015, Social Security payments exceeded Social Security revenue by 9 percent; in 2040, that number will be 40 percent, the CBO estimates, and rising. Under current projections, the disability trust fund goes broke in 2021 and the retirement trust fund touches zero in 2030.

What happens then? Under current law, benefit payments can be made only out of the trust funds or Social Security revenue, which means that all of those retirees and people on disability will — best-case scenario — see their benefits cut roughly in half beginning one fine day early in the administration of whoever wins the next presidential election.

Remember what a little turnaround in U.S. housing prices did to the world economy a few years back. Now imagine cutting a few dozen million U.S. household incomes by a third or by half.

Is that a problem “right now”? It depends on how you think about time. Imagine that NASA’s Near-Earth Object nerds were to report that an asteroid was going to hit Earth in 2021. Would that be a problem “right now,” or a problem only in 2021? Given the difficulty of preparing a mission to keep that asteroid from crashing into the planet — or bracing ourselves for the impact — and the time it would take to make such prepa­rations, it certainly would seem like a right-now, shoulda-got-started-on-that-yesterday-if-not-sooner type of problem.

Reforming federal finances is not very much like the plot of Deep Impact or Armageddon or any of those other asteroid movies. It is harder, because nobody is getting a check from the Didymos binary system.

And there are other risks, too: The interest rates on U.S. public debt have been at historically low rates for a long while. A return to the long-term average would be catastrophic, a $1 trillion–a–year expenditure or more.

From the fall of the Berlin Wall until 9/11, we had a “holiday from history,” they said. That ended badly. In reality, there is no holiday from history — or from accounting, either.

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