WHEN THE Great Recession hit in December 2007, the United States’ publicly held debt amounted to less than 40 percent of gross domestic product — well within the normal range since World War II, when the figure temporarily, and necessarily, soared above 100 percent. Consequently, the federal government was well-positioned to fight the plunging growth rate by spending more and taxing less; it had ample “fiscal space.”
If a similar emergency — war, recession or some combination — struck now or in the next decade, the United States would begin its response burdened with a debt-to-GDP ratio above 70 percent, roughly twice the postwar average, according to the most recent Congressional Budget Office projections. “Fiscal space” would be correspondingly narrower.
We do not suggest that such a situation is likely or that the U.S. economy would collapse if it occurred. Nor do the debt projections prove that the Obama administration’s fiscal response to the Great Recession was too large; much of it, in fact, consisted of long-established “automatic stabilizers,” such as unemployment benefits that rise (as they should) during a downturn. Our purpose is simply to take note of one reason, among many, that it is far too soon to declare victory over the nation’s budget problems.
Yet that is pretty much what a growing chorus of policy experts close to the Democratic Party are urging President Obama and Congress to do. “We have already made enormous progress toward debt reduction, and the long-term problems are not nearly as dangerous as previously thought,” says a new report from the liberal Center for American Progress. “No more calls for an ever-elusive grand bargain.”
It’s true that tax increases and spending cuts to date, coupled with an unexpected slowing of health-care costs, have caused the CBO to reduce its 2020 deficit forecast by nearly half. But these lower forecasts result in large part from an ill-advised set of across-the-board spending cuts that should be at least partially reversed, lest they eviscerate discretionary non-defense and defense spending. Here’s what has not been accomplished: structural change to the out-of-whack tax code or to the entitlement programs — Medicare especially — that drive the long-term deficit.
Worrying about those unsolved problems does not constitute a call for growth-killing “austerity.” To the contrary: Deficits and debt pose a risk not only to the country’s economic future, but also to policy goals that progressives cherish. It is not equitable to continue transferring net resources from young to old, especially when so many of the latter are well-off compared with many of the former. Without entitlement reform, the squeeze on the discretionary budget, and all the important public purposes that budget serves (from research to education to nutrition), cannot realistically be relieved. And then there is the problem of what might happen if economic and political conditions do not remain as benign as CBO forecasts necessarily assume.
Moderating health-care costs and other pleasant fiscal surprises should be cues to redouble efforts at a long-term fiscal fix, not to relax. After all, if the debt problem has become smaller, it follows that the solution has become less painful. And the best time to start negotiating it is still now.