Robert E. Rubin, a co-chairman emeritus of the Council on Foreign Relations, was U.S. treasury secretary from 1995 to 1999.
At a panel I recently moderated in New York about our country’s unsustainable fiscal outlook, someone asked a simple question: So what? Nothing bad has happened despite immense fiscal deterioration — our debt-to-GDP ratio has more than doubled in less than 20 years, from 33 percent in 2000 to 78 percent today , and is on course to reach nearly 100 percent in 10 years and continue rising — so why worry now?
These are good questions, and they reflect a precept I learned years ago: Substantive fiscal policy work is essential, but all the good policy thinking in the world won’t matter unless the politics works. Without good politics, the policies won’t be implemented. And the politics of fiscal discipline have not been effectively addressed by too many of those who are deeply concerned about our country’s economic future — including me.
Panels such as the one I led bring together the converted. Now, the imperative must be to develop a political strategy, and, in that context, a narrative, that persuades the broad American public that its economic well-being depends on getting our fiscal house in order. And that, hopefully, will impel elected officials and candidates to change their approaches to fiscal matters.
There are many better qualified than I to devise the political strategy and narrative. But it seems to me we should begin by answering the two questions posed at the panel: So what? And why now?
Despite rising debt, interest rates have remained low, and a fiscal crisis has not occurred. That is because private demand for business investment has been sluggish in a slow recovery, the Federal Reserve has provided liquidity through its unconventional monetary policy, and financial markets often ignore unsustainable fiscal conditions for an extended time. Our ability to borrow in our own currency doesn’t eliminate these risks.
Similarly, our diminished fiscal resilience hasn’t mattered because of the absence of economic or geopolitical emergencies. Business confidence has not been affected because businesses often ignore unsustainable fiscal conditions for a lengthy period before losing confidence. Vitally needed public investment — everything from infrastructure to education and lifelong learning — might be deficit-funded, like the misguided 2017 tax cuts, but ultimately the fiscal pressure to scale back investment will be intense.
These adverse effects have not been felt for a long time, masking our fiscal reality and reducing pressure to act. But, while the “when” is uncertain, the “if” is not. Also, the longer we wait, the greater the damage — and the harsher the response needed.
The European financial crisis that began in early 2010 shows how markets can ignore unsound conditions for a long time — until they don’t. For many years, Greek sovereign bonds traded at virtually the same yields as their German counterparts, which made no sense. Then, when the bond markets suddenly focused on the fiscal problems plaguing Greece and the other weaker countries, interest rates spiraled into crisis.
In the United States, refusal to confront a longer-term fiscal threat is not new. In the late 1980s, a senior Democratic House member told me I had long warned of the effects of deficits and nothing bad had happened. Sure enough, in 1990, increasing deficits and debt (as a percentage of the economy) over many years contributed to higher interest rates; a lessening of business confidence due to uncertainty about future policy and a concern that our political system could no longer meet our challenges; and, ultimately, the 1991 recession.
Two long-standing tenets of our major political parties impede our ability to reestablish sound fiscal conditions. Republicans believe low taxes are key to growth, and Democrats believe that maintaining entitlements is necessary to protect our people. But if the public understands our current trajectory will undo us, there are practical steps forward that can honor both views.
Tax revenue as a percentage of gross domestic product is expected to be 16.5 percent next year. The long-term average in a full-employment economy is 18.5 percent of GDP; if revenue were at that level for the coming decade, debt would be $3.2 trillion lower and the 10-year fiscal gap would be halved. Returning to past revenue levels, however, will be inadequate over time, because an aging population will increase Medicare and Social Security costs. This need not pose a problem: Revenue was roughly 19 percent of GDP in the late 1990s, and economic conditions were excellent.
On the entitlement side, reforming our national health-care system to greatly reduce what economists call “excess cost growth” would stem the rise of federal health-care expenditures and significantly reduce the fiscal gap — likely without reducing benefits. Health-care costs are 18.2 percent of GDP in the United States, compared with 10 to 11 percent in other developed economies. But we must summon a long-absent political will.
The politics of all this, and whatever else might be considered, is obviously very difficult. And that goes back to the basic proposition that, while more can and should be done on the substantive side, think tanks, fiscal-policy organizations, analysts — everyone concerned with our fiscal condition and its powerful threat to our economic future — must now draw on communications and political expertise to develop a narrative and a strategy that will spur action by elected officials. Nothing short of our economic future depends on it.