Well, we just kicked the can down the road again, to quote President-elect Barack Obama, who developed into an expert can kicker during his eight years in the White House.
Under the agreement, the federal debt will grow by $1.7 trillion or so over the next decade, estimates the nonpartisan Committee for a Responsible Federal Budget. (The spending figures announced by congressional leaders are smaller because they mostly cover only two years. But it strains credulity to think Congress will soon reduce the spending it has just increased.)
Now, recall that Congress recently passed the Republican/Trump tax program, which may add $1.5 trillion to annual deficits over the decade. All these deficits come atop the preexisting deficits that the new president, whoever won, was set to inherit. This figure is nearly $11 trillion, estimates the CRFB.
Altogether, we face cumulative deficits of about $14 trillion over the decade. These can’t be blamed on an economy operating at less than full capacity. Just the opposite: The economy is close to “full employment” with a 4.1 percent unemployment rate.
Deficit financing has become the mother’s milk of politics. Compromise occurs by mutual forbearance. “Each party is giving the other its wish list with all the bells and whistles included and asking future generations to pick up the tab,” notes the CRFB’s Maya MacGuineas.
Of course, last week’s agreement has some virtues. You can’t spend so much money and get nothing in return. We may be spared another government shutdown over the budget, because the agreement sets spending levels for two years. Similarly, the agreement suspends the federal debt ceiling — how much the government can borrow — through early 2019. This presumably postpones another self-destructive debate over whether the government should default on its debt, damaging its credit rating and flirting with a financial crisis.
In truth, much of the spending authorized by the agreement is desirable. Future deficits have been wildly underestimated because projections for defense and nondefense discretionary spending were unrealistically low. On defense, President Obama’s budgets reduced readiness, left the services too small and made it harder to counter new technological threats, most notably cyberwarfare. There was a similar squeeze on many vital domestic agencies, from the Internal Revenue Service to the National Park Service.
To some extent, the new agreement represents a catch-up from this stringency. Meanwhile, so-called entitlement programs such as Social Security and Medicare — for which people automatically qualify — were largely untouched. They represent about 70 percent of federal spending. Together, costly entitlements and expanded discretionary spending produce enormous deficits, exceeding $1 trillion a year, as far as the eye can see.
That’s a huge gap — roughly 5 percent of our gross domestic product — to close or shrink. Most politicians are can kickers. They want nothing to do with the necessary tax increases or spending cuts, including possible reductions in Social Security, to curb the out-of-control deficits.
Ignoring them seems to involve few economic or political costs. The extra borrowing caused by deficits hasn’t sent interest rates sky-high. Indeed, after the Great Recession, deficits helped the economy recover. Now, despite our political and social problems, foreigners still seem happy to hold U.S. Treasury securities as “safe” financial assets. In general, the public doesn’t seem aggrieved by big deficits, especially when compared with the alternatives.
All this feeds a culture of nostalgia in both parties: They act as if nothing’s changed. Republicans congratulate themselves on new tax cuts; Democrats are always eager to increase social spending — witness the Affordable Care Act.
So why should we worry about escalating debt? The answer, in a word: prudence.
We don’t know how much federal debt is too much. It could be “a lot more” or “not much more.” What we do know — from previous financial crises in many countries and at many times — is that once investors, traders and speculators lose confidence in a country’s debt, the economic, social and political consequences can be devastating. Interest rates may soar; inflation may surge; governments may raise taxes sharply and cut spending deeply.
But once you cross that line, it’s hard to get back to the other side. The prudent thing to do is never to get close to the line. We aren’t being prudent.
Read more from Robert Samuelson’s archive.