By Robert J. Samuelson
Monday, August 31, 2009
The problem of the burgeoning government debt is mainly political, but the adverse consequences may be economic. The trouble is that we don't know what those consequences may be, when they may occur or even whether they will occur. Without some impending calamity, politicians of both parties recoil from doing anything unpopular that might bring the budget into balance over, say, the next six or seven years. The idea of anticipating and preempting future problems is not on their agenda.
Although the recent surge of budget deficits -- the annual gaps between outlays and revenue, resulting in more federal debt -- reflects the savage recession, the true cause is political. Deficits allow liberals and conservatives to maintain self-serving public positions. Liberals claim we can have more government (more health care, more education, more transportation) without taxing anyone but "the rich." Conservatives promise that taxes can be cut without depriving anyone (retirees, veterans, cities and states) of existing government benefits.
Neither claim is remotely believable under the assumption that, over the long run, government benefits and programs ought to be paid for with taxes. The truth is that government, again under both parties, has promised far more in benefits than can be covered by existing taxes. Only borrowing could reconcile the rhetorical claims with underlying economic realities. There have been 43 deficits in the past 48 years.
Until recently, the borrowings, though usually undesirable, were not alarming. But the recession and an aging population signify that we have crossed a threshold where actual and prospective borrowings are so huge that no one can foresee the consequences. The best measure of debt burden is its relation to the nation's annual income, or gross domestic product. The same approach applied to a household with $25,000 of debt and $50,000 of income would produce a debt-to-income ratio of 50 percent.
In 1946, after World War II, the ratio of publicly held federal debt to GDP was 108.6 percent. Since then, the economy (our income) has generally grown faster than the debt. In 1974, the debt-to-GDP ratio reached a post-World War II low of 23.9 percent, and even in 2007, it was only 36.9 percent. That was manageable.
By contrast, today's prospective colossal borrowings dwarf likely economic growth. The Obama administration's latest projections, released last week, show nearly $11 trillion of borrowing from 2009 to 2019. In 2019, the debt-to-GDP ratio would be 76.5 percent. This could be too optimistic, because it assumes some spending restraint and tax increases. A projection by the Concord Coalition, a watchdog group, adds about $5 trillion in borrowing in that period. In 2019, the debt-to-GDP ratio could be roughly 100 percent.
Because such borrowings would be unprecedented in peacetime, they might go badly. It's easy to imagine problems. Some might become full-blown crises. It might be impossible to refinance maturing federal debt (average maturity: 51 months) except at much higher interest rates. The Federal Reserve might be pressured to inflate away the debt by buying boatloads of Treasury bonds; high inflation would be ruinous, as it was in the 1970s. The mere fear of uncontrolled deficits might trigger a flight away from the dollar on stock, bond and foreign exchange markets.
But none of these calamities has yet occurred. Precisely the opposite. Low interest rates on 10-year Treasury bonds, about 3.5 percent, suggest ample investors. Though huge deficits pose long-term hazards, cutting them sharply now might threaten economic recovery. Any action -- spending cuts or tax increases -- ought to be prospective. Facing few insistent pressures to confront deficits, politicians don't.
What unites Democrats and Republicans is an unwillingness to have a serious debate about how big government should be. Spending is the crucial issue, because it determines taxes and deficits. If they become too large, the resulting depressed economy may make paying for government even harder. Ideally, liberals would see that spending needs to be cut substantially; if it isn't, tomorrow's tax increases or deficits will be horrendous. Ideally, conservatives would accept that taxes must ultimately rise; no plausible spending cuts can bridge the gap between government's promises and its tax base.
There is no sign of this. Liberals and conservatives agree to evade. Spending for the elderly dominates the federal budget, but no one discusses who among retirees deserves government subsidies and at what age. Liberals would increase spending (a.k.a., President Obama's health proposal) even before addressing existing deficits. President George W. Bush and congressional Republicans could have curbed spending. But they increased it even while cutting taxes, and Obama would keep most tax cuts except for people making over $250,000.
Placid deficits have abetted all these evasions and inconsistencies. As the path of least resistance, they encouraged permissiveness. But with deficits swelling, this easy road may soon close. We may learn how much debt is too much.