It’s a Deal

10.09.13

Dirty Debt, Done Dirt Cheap

They screwed up the shutdown, but Republicans are right to insist that any increased borrowing today should require spending less in the future, says Nick Gillespie.

Can anyone other than doctrinaire Democrats and members of his immediate family keep a straight face when President Barack Obama insists that he is “prepared to negotiate on anything” while simultaneously saying that “until we make sure that Congress allows Treasury to pay for things that Congress itself already authorized, we are not going to engage in a series of negotiations”?

Or when Treasury Secretary Jack Lew announces that the government “cannot be put in a position of having to choose which commitments it should meet,” as if picking between, say, paying interest payments to avoid default and buying half a billion dollars worth of useless cargo planes is a contemporary version of Sophie’s Choice.

However much House Republicans may have Mr. Belvedered themselves when it comes to the government shutdown, they are absolutely right to insist that any increase in the amount of money the government can borrow today should be tied to firm commitments to spend less in the future. Think sequester, which promises to cut just somewhere between 1 percent and 2 percent of overall annual spending, on steroids. And the future should be defined as “the day after the debt-limit increase goes into effect.”

Reining in the national debt is not an accounting fetish, especially when we’re talking about being in the hole to the tune of 100 percent of GDP when it comes both to debt held by the public and intra-governmental IOUs. Sustained and massive levels of debt foist obligations on future generations via future taxes and inflated currency; they also correlate with slower average economic growth. Indeed, even critics of the influential “debt overhang” thesis propounded by Carmen Reinhart, Kenneth Rogoff, and Vincent Reinhart grant that “the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is…2.2 percent,” an amount actually below what Reinhart, Rogoff, and Reinhart found in a 2012 paper detailing debt’s correlation with reduced growth. Debt has a habit of spiraling out of control and thus “fragilizing systems,” as Nassim Taleb puts it. When an increasing amount of your income is going to pay down loans taken out by your dead grandparents for stuff that was gone before you were born, you’ve got less cash for your own future.

Access to credit can be a great thing, but it can also become a deadweight around your neck. You’d think that Obama—who never misses an opportunity to shed a tear for the 32 percent of college students who take out loans in a given year—would understand that being in hock up to your eyeballs constrains your future prospects. Constantly borrowing money to cover basic expenses also forestalls adjusting or abolishing programs—think Medicare and Social Security—that everyone recognizes as unsustainable in anything like their present forms. As the Congressional Budget Office (CBO) warns, “increased borrowing by the federal government would eventually reduce private investment in productive capital” while also increasing the risk of a fiscal crisis spurred by jumpy investors worried about the ability or willingness of the feds to pay back lenders.

Video screenshot

GOP lawmakers have been blaming Democrats for a refusal to negotiate.

“Obama and Boehner recognize that change must come, and we can see the beginning of a debt-limit deal. But it’s going to be dirty. In fact, in an ideal world, it will be positively filthy”

None of this is controversial. Indeed, back in 2008, Candidate Obama was pretty eloquent on the need to “break that cycle of debt” created by Republican government under George W. Bush.“we’ve lived through an era of easy money,” he crooned in one of his stump speeches, “in which we were allowed and even encouraged to spend without limits; to borrow instead of save.” And what was it he used to say about increasing the debt ceiling when he was just a wet-behind-ears senator? That raising the debt limit signaled “a failure of leadership” and “reckless policies” that were “shifting the burden of bad choices today onto the backs of our children and grandchildren.”

But today, all Obama can talk about are “clean” CRs and “clean” debt-limit increases. This is what my colleague Matt Welch calls “junky logic,” the sort of magical thinking particularly strong among addicts who are always “gonna kick tomorrow”. Really, man, this is the last time.

President Obama has shown only that he always swings for the fences when it comes to spending. Where the latest House budget called for spending $3.5 trillion in fiscal 2014 and the Senate called for spending $3.7 trillion, the president’s budget dreams of shelling out $3.8 trillion and increases the amount to a whopping $5.7 trillion in 2023. This is not the work of a person interested in “curbing spending,” as Lew argues. And when he notes that his boss “has already worked with Congress to shrink our deficits by more than half by the end of this year,” he never seems to mention the role played by the dreaded sequester in helping to keep government spending flat. To the extent that the Obama years have seen a flattening of real per capita federal spending, it’s been in spite of the president’s efforts to jack up outlays, not because of them.

But here we are, just a week and change from yet another deadline and the feds are running light in the wallet again. Contrary to Obama’s claim that debt-limit increases rarely come with conditions, it turns out that a majority of the 53 such hikes since 1978 have been “dirty.” That is, they’ve been passed not as stand-alone, no-strings-attached actions but as part of larger budget bills, continuing resolutions, or paired with legislation that has nothing to do with spending.

So the whole idea that tying an increase to conditions would set a “dangerous precedent”which might paralyze future presidents is as convincing as the idea that Obama really, really wants to “curb spending” right after he gets a big fat bump in his borrowing capacity.

What might an effective debt-limit deal include? The first thing to recognize is that the threat of blunt, automatic cuts absent any sort of other agreement worked perfectly well the last time. Next, Obama needs to give the threat of default a rest. The government brings in nearly  10 times the revenue per month it needs to make interest payments and thus avoid default. Only a true nihilist would make no payments if he can’t make all payments. The GOP in turn has to shut the hell up about Obamacare for a while, which is showing every sign of early failure that its harshest critics predicted.

The target of the deal must be to bring gross national debt down to a specific figure—perhaps the 60 percent of GDP level favored by the European Union—over a specific time period, with regular milestones that trigger reward or punishment. Absent a long-range cap, there is simply no way to forge any sort of meaningful deal. It would be like trying to diet without specifying a target weight.

Since the shutdown and debt-limit have effectively run into each other, sign a continuing resolution that funds the government at current levels for three months and bumps the debt-limit to cover expenditures for the same period. During that time, the government should gets its best and brightest—and failing that, members of the House of Representatives and the Senate—to come up with and vet a plan to keep spending constant through 2016 and a commitment to have passed a plan to reform entitlement spending by the start of fiscal 2015. The downside of this is that it would help lock in near-record-high levels of spending. The upside is that it would give markets a measure of stability and legislators time to figure out how to spend less money and move toward  the accepted debt target.

The key to success is to cut spending from its projected upward path, period. The latest Long-Term Budget Outlook from the CBO drily notes that federal outlays as a percentage of GDP are already well above average levels for the past 40 years and will only spike higher if current trends continue. By the same token, even while projecting tax revenues that are two percentage points higher than recent averages, deficits and debt pile up massively over the next 25 years.

CBO estimates that under the rosiest of scenarios (which include highly unlikely cuts in reimbursement rates to Medicare providers), spending as a percentage of GDP on federal health care programs and Social Security will double between now and 2038. In fact, if current trends continue, spending on just Medicare and Social Security alone will account for half of all federal outlays by 2030.

Both Republicans and Democrats acknowledge as much. President Obama’s willingness to use a “chained CPI” in his budget to reduce growth in Social Security payments is one sign. So is the blunt language used by Speaker John Boehner (R-Ohio) in a recent interview with George Stephanopoulos on ABC News. “We know [Medicare and Social Security] are important to tens of millions of Americans,” said Boehner, who also noted that the mass retirement of baby boomers will continue for another 22 years. “If we don’t address the underlying problems, they are not sustainable.”

In Obama’s and Boehner’s shared recognition that change must come, you can at least see the beginning of a debt-limit deal. But it’s going to be dirty. In fact, in an ideal world—one in which today’s young and those not yet born inherit a world of opportunities rather than one littered by their elder’s IOUs—it will be positively filthy.