Deficits and Denial
Welcome to Debt Anonymous: Why America Needs to Act Now
Overspending less is still overspending. Can Obama now do something about our problem? By Mark McKinnon.
“If we are worried about health-care costs in the year 2025, why do we have to worry about it now?” So said the king of the debt-deniers, economist Paul Krugman, last week on Morning Joe.
We don’t have a spending problem like an alcoholic doesn’t have a drinking problem.
“Our nation is on an unsustainable fiscal path.” That was the opening line in The Moment of Truth (PDF) report delivered to President Obama more than two years ago by his own fiscal commission, when the nation’s publicly held debt was $9 trillion, or about 63 percent of the gross domestic product, the value of all goods and services we produce in the economy. Today, our publicly held debt is nearing $12 trillion, or about 76 percent of GDP. The path has gotten worse, not better.
In his State of the Union address, the president claimed $2.5 trillion has been cut from the deficit (planned overspending), more than half of his 10-year goal of cutting $4 trillion. But overspending less is still overspending. And overspending less does not decrease the current debt; it still adds to the debt.
Debt is a drag, a reality you may experience with every credit-card bill you open. But for a corporation or a government, it can be even more of a drag—on economic growth and job creation.
Yes, at times moderate levels of government borrowing can be good medicine, helping to spur a weak economy and reduce unemployment. And sharp increases in deficit spending are expected in extraordinary times—during a war or in an economic crisis. But sustained irresponsible deficit spending leading to long-term high levels of debt is damaging.
The best explanation I’ve seen of this, from economist John H. Makin, suggests that government debt is like chemotherapy. It is a necessary evil to stop the spread of a disease and improve the health of the patient, but it is intended for short-term use. To take his metaphor one step further, extended use of the radical treatment can do more damage than the cancer itself. And it may eventually kill who or what you are trying to save.
No one knows for certain how much debt is too much, but we know that more is worse and that we’re in the danger zone now. Some experts argue the threshold of damage, or economic contraction, is when government debt reaches 85 percent or 90 percent of the nation’s total economic output. Again, as I noted above, debt held by the public is already about 76 percent of GDP, in the danger zone. For perspective, at the end of fiscal year 2008, publicly held debt was 40 percent of GDP.
That public-debt figure does not include money the government owes itself (that’s how we get to the $16.5 trillion in total debt), nor does it include unfunded liabilities for Social Security, Medicare, and federal employees’ future retirement benefits, which currently exceed $86.8 trillion.
The warning signs are there. The CBO expects unemployment to remain above 7.5 percent through next year, for the sixth consecutive year, and for the longest period in the past 70 years. And we feel it in our wallets: food prices, gas prices, and health-care costs are continuing to rise.
Of course, we are not alone in debt, but that is little comfort since our roommates in intensive care include Spain, Ireland, Portugal, and Greece.
We are in substantially better shape than the euro zone, however, because our cost of borrowing is still low—at least for now. The Fed is helping to keep that cost down by buying up our own debt. So the sky is not falling. Yet.
And because of our size and our unique status of having the world’s reserve currency, the U.S. may be able to sustain more debt than some of our European counterparts.
But these are not excuses to continue being reckless. The Congressional Budget Office warns (PDF) of the dangers of ongoing high and rising levels of debt: continuing high unemployment, depressed wages, increasing interest costs, less flexibility to respond to unexpected challenges, and the increased risk of another sudden fiscal crisis.
Yes, overspending less is a step in the right direction. And, yes, the annual deficit is shrinking as a percentage of GDP. But that means we’re adding less to the debt, not that the debt is getting smaller. The CBO still projects the public debt to grow to an astonishing $20 trillion in 10 years.
Beyond binge spending, here’s one big reason why: while entitlements are already nearly 62 percent of total federal spending, in 2027 Medicare, Medicaid, Social Security, and interest on the debt will consume all tax revenue, according to the Government Accountability Office.
That means we’ll have to borrow money to pay our troops, care for our veterans, secure the borders, fund cancer research, protect the environment, protect the nation from terrorists, and other essential functions of the federal government.
And the more money the government borrows, the more money that is taken out of the private sector that could otherwise be invested in business and job expansion.
But, you say, we have to borrow more, to spend more, to grow more. And you say, “austerity” isn’t working in Europe.
Yes, look at the euro zone. It waited too long to admit that its member nations had a problem (recovery step No. 1 for alcoholics). And, is their definition of austerity ours? Take heed: the euro-zone austerity solution—slashing spending AND raising tax rates—has further slowed growth while increasing debt, social unrest, and market uncertainty.
And then look at Sweden, which has cut spending and halved its public debt, pushing it from a deficit to a surplus, and is cutting corporate tax rates and changing its pension system from defined-benefit to defined-contribution with automatic adjustments for longer life expectancy.
We are not Europe. Yet. But procrastinate at your children’s peril.
The American solution to stop the debt spiral is:
• Act now.• Stop overspending.• Demand a balanced budget.• Make necessary structural changes to Social Security, Medicare, and Medicaid.• And reform the tax code.
These actions will encourage business and market confidence, spur job growth in the private sector, and actually increase revenue to help pay down the debt.
But admitting you have a problem is the first step. Doing something about it comes next.